A smart contract is a computer protocol intended to facilitate, verify, or enforce the negotiation or performance of a contract. First proposed by Nick Szabo in 1996, smart contracts have been made popular in recent years due to its’ implementation within the Ethereum Blockchain platform where they are known as decentralised application (ĐApp).
Where did it originate?
The phrase "smart contracts" was coined by Nick Szabo in 1996, and reworked over several years. Szabo's first publication, "Smart Contracts: Building Blocks for Digital Free Markets" was published in Extropy #16, and then later reworked as "Formalizing and Securing Relationships on Public Networks." These documents described how it would be possible to establish contract law and related business practices through the design of electronic commerce protocols, between strangers on the Internet.
With the present implementations, based on blockchain, "smart contract" is mostly used more specifically in the sense of general purpose computation that takes place on a blockchain or distributed ledger. In this interpretation, used for example by the Ethereum Foundation or IBM, a smart contract is not necessarily related to the classical concept of a contract, but can be any kind of computer program.
Why should I care?
Not only are Smart contracts used to facilitate hundreds of Dapps on the Ethereum platform processing millions of transactions, it is also woven into the most predominant of cryptocurrencies – Bitcoin. Even without any extensions, the Bitcoin protocol actually does facilitate a weak version of a concept of "smart contracts".
How is it applied in real life?
One of the most prolific example of its’ usage is when Ethereum implements what is essentially the ultimate abstract foundational layer: a blockchain with a built-in Turing-complete programming language, allowing anyone to write smart contracts and decentralized applications where they can create their own arbitrary rules for ownership, transaction formats and state transition functions.