A smart contract is defined as a programmable contract which permits transaction conditions to be set by two counterparties, without requiring the trust of a third party for implementation.
For instance, assuming Jane wants to put together a trust fund to pay $100 to Timothy at the beginning of each month over the next twelve months, she can write a smart contract to: Confirm the present date – Automatically send $100 to Timothy at the beginning of each month – Repeat until the smart contract fund finishes.
A smart contract has enabled Jane to bypass the services of a third party mediator (escrow agents, lawyers, etc.) to send Timothy the trust fund, showing the transparency of the process to all parties involved.
The operating principle of smart contracts can be referred to as “if this, then that.” Upon the fulfilment of a given condition, the smart contract will run as intended.
The combination of multiple smart contracts to operate together gives rise to decentralized applications (Dapps), to address more complex computation and processes.