What is a smart contract?
What is an Ethereum smart contract?

Unlike Bitcoin, which is designed to be a currency, the main purpose of Ethereum is as a platform for decentralized applications that other developers can use, which happens chiefly through the use of smart contracts. The idea that would become Ethereum appeared in the early 199o’s, but we’ve only had the technology to run it since the early teens of the millennium.

Smart contracts (also called self-executing or self-enforcing) execute their code on a simple “if this, then that” basis: if A happens, then so does B. They use a public blockchain to enforce, verify, and facilitate actions automatically. 

The system is useful to many companies other than banks. Its economic and security advantages over regular transactions are set to become a standard platform for developers in the future. That’s why Ethereum is so successful and its currency token, Ether, is becoming increasingly popular.

How to use smart contracts in real life?

A traditional written contract contains the information about which actions various parties agree to take in which circumstances. These days, many of the “various parties” in our lives are pieces of software, busily sending our emails, paying our direct debits, and so on. Smart contracts enable developers to coordinate diverse types of software, making them all play by the agreed rules.
At the simplest level, if you pay me on time, the software instructs a delivery centre to send your product to you. If the delivery fails, then an automatic refund is enforced. Another simple use is betting: you place your bet on time, and the bet is secured. If your horse wins, your winnings are sent to you; if not, the bookmaker keeps your stake.

Unlike a traditional contract system, there are no lawyers or other middlemen required to draft, enforce or validate the agreements in a smart contract. This has the potential to turn lengthy, expensive and uncertain processes into fast, affordable and more certain ones.

The implications of this are huge, and while paper contracts will continue to serve a purpose, they will increasingly hybridise with smart contracts.