Smart contracts are programs that run on the blockchain and carry out agreements automatically. How they work, and what they are used for.
A smart contract is a program stored on the blockchain that runs automatically when certain conditions are met. It can, for example, release a payment when goods are delivered, or swap one token for another.
Once the contract is deployed, it does exactly what the code says. No single party can change or stop it afterwards.
Ordinary agreements often need a bank, a broker or a lawyer to make sure the parties keep their promises. With smart contracts, the code takes care of that.
That brings transparency, because anyone can see the rules. But it also means bugs in the code can be exploited, and there is rarely anyone to complain to.
When several smart contracts are combined, they form a decentralized application, often called a dapp. It runs on the blockchain instead of on a company's servers.
Dapps are used for trading, lending, payments and digital identity, among other things. Users connect with their own digital wallet.
Smart contracts on Ethereum can use each other, much like building blocks. A new service can be built on top of existing ones without asking for permission.
This property is an important reason why so much innovation in decentralized finance has happened on Ethereum.