A smart contract is software which replicates properties of traditional offline contracts in an online environment. Just as one can expect a traditional contract to be binding, smart contracts interact with the blockchain to enforce a contractual agreement with someone else anywhere in the world.
Smart contract functionality was not technologically possible before blockchain technology emerged. With the invention of the Ethereum blockchain, all Ethereum-based tokens (such as Augur, OmiseGo, or Golem) can interact with contracts that can be held in escrow until certain conditions are met. For example, a smart contract could be written to monitor the progress on a website development project done by a freelancer. When the project is complete, it can activate payment via a smart contract, omitting the need for third-party fund management.
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