The basic function that programs built on Ethereum perform are called smart contracts. Smart contracts are digital agreements that execute automatically based on real world data. An easy way to think of them is an “If-then statement.” IF condition A exists, THEN perform function B.

Let’s say for example Grandma wants to make sure she never forgets to give Little Billy birthday money each year. She could write a smart contract that says IF it’s Little Billy’s birthday, THEN pay him $10 from Grandma’s account. Once this contract is broadcast to the Ethereum network, it will execute automatically each year on Little Billy’s birthday.

Smart contracts have applications far beyond improving the reliability and efficiency of Grandmothers around the world. Another simple application of a smart contract is for rental payments: IF date = 1st of the month, THEN pay landlord rent amount. Processes that currently involve manual interactions between two parties can now be automated and the value can be moved in real time over the blockchain rather than settling days later as with traditional banking.

A Real World Example

Ethereum and smart contracts are a big deal because they have the ability to usher in what’s been dubbed the “smart economy” – one in which slow manual processes prone to human error and deceit are replaced with automated processes that are completely transparent and trustworthy. A real world example that typifies the new “smart economy” is a project being run by a French insurance company called AXA.

AXA offers a flight insurance product that pays out a policy holder in the event that a flight is delayed by two hours or more. It currently has a product in trial that will pay out insurance claims using smart contracts and the Ethereum blockchain. The smart contract is simple: IF flight is over two hours late, THEN pay policyholder. The smart contract is connected to a database that monitors flight times. If the database shows that the flight is over two hours late, the smart contract is triggered and the policyholder is paid automatically over the blockchain.

Without the smart contract, the policyholder would have to file a claim and wait for the insurance company’s claims department to process it, which could take anywhere from 1 to 2 weeks. With the smart contract, neither the insurance company nor the policyholder has to do anything. This also creates trust between the two parties because there are no grey areas – the customer can review the smart contract prior to purchasing the policy and feel comfortable that he will receive his claim in the event of a delay.

4 Curated Resources

A 3 part, 27 minute read, guide on Smart Contracts for complete beginners. It includes key terms, DApp Frameworks and Tooks, and a little programming near the end.

This blog post uses a bit more technical language, but if you are a developer, it makes it really easy to picture how smart contracts work. It is a very highly liked post within the Ethereum community.

A good read for those of you who do may not be as tech savy.

A guide meant for lost and confused developers who want to build a smart contract using the Truffle Development Framework.