Short answer:

Smart contracts are like paper contracts that have been digitized and automated - meaning no middle men (eg: lawyers) are required to make sure everyone is playing nice.

You set the rules of how money is to be exchanged, and smart contracts follow them.

Long answer:

Smart Contracts are like the 'If This, Then That' (IFTTT) of the crypto world. IFTTT lets you create automations between different web apps, for example, you can tell IFTTT:

'Every time I post a photo to Instagram, post it to my Pinterest as well'.

Or

'Every time I add a new file to this folder in Dropbox, log and link to it in this Google spreadsheet'.

Smart Contracts enable similar automation for your money. For example, you could create a smart contract that follows these rules:

'If Seb deposits 10 Ethereum tokens (ETH) into my crypto wallet as a downpayment, give him a loan of 20 ETH and request interest payments of 0.5%, every 28 days'.

Which is neat! But loans are just the tip of the iceberg...they don't paint the full picture of how this technology can be applied.

Let's look at it from the perspective of an app developer:

Let's say we're building a mobile app that pays you to walk (similar to Step’n).

We would start by coding the app to function just like any other fitness tracking app. It would use your phone’s GPS to track and log each walk.

We could offer a 'walk-to-earn' function to anyone that bought one of our NFTs, by integrating an Ethereum wallet into the app and writing a smart contract that said:

'If this user holds one of our Ethereum NFTs in their wallet, pay them .001 ETH (~$1.50 USD as of this writing) for every 100 meters they walk, according to the GPS. Stop paying them once they've walked 3kms and only let this smart contract be accessed once every 24hrs'.

This would allow NFT holders to track one 3km walk per day and earn ~$45 USD for doing so.

Once you start to understand how broadly smart contract functionality can be applied to existing products and apps - it gets really exciting!

Here are some other rapid fire examples:

• Earn an NFT every time you finish a series on Netflix.

• Earn an NFT when you become a top 1% listener of an artist on Spotify

• Earn crypto when you keep your screen time under X hrs per week.

• Earn crypto every time you watch/see an ad on a Web3 social network.

There're so many ways this sort of functionality can be applied!

Plus, smart contracts are permission-less!

Think of it like this…

Paper contracts are you as a kid, living at home with your parents.

Smart contracts are you as an adult, in your own place.

If you wanted to hang out with your friends as a kid, you needed to first ask a third party for permission (your mom).

If you wanted to hang out with your friends as an adult, you just…go. No permission required.

Paper contracts require the permission/guidance of third parties (eg: lawyers) to be executed safely.

Smart contracts don’t. 

Two parties decide on the goods they want to exchange (eg: cryptocurrency), they agree on the amounts/rules of the exchange - and if both parties meet them, the smart contract automatically exchanges the goods on their behalf.

Here’s a real world example for you:

If a company were to sell its research data to another business using a smart contract - they would program in the settlement time (eg. 30 days) and what is being exchanged (eg. the data files and the cryptocurrency payment). 

If at the end of the 30 days, both parties have submitted their goods for transfer, the contract would execute and the exchange would be completed.

No lawyers, agents, brokers, escrow companies etc…just an easy breezy trust-less exchange. 

Nice!