Smart contracts were first theorized by Nick Szabo in the late 1990s, but it was almost 20 years before the true potential and benefits of them were truly appreciated. Smart contracts are described by Szabo as follows:
"A smart contract is a computerized transaction protocol that executes the terms of a contract. The general objectives are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitrations and enforcement costs, and other transaction costs."
This idea of smart contracts was implemented in a limited fashion in bitcoin in 2009, where bitcoin transactions can be used to transfer the value between users, over a peer-to-peer network where users do not necessarily trust each other and there is no need for a trusted intermediary.