In this video, we'll define smart contracts and why they're so important to the Blockchain revolution. Contracts are part of the basic building blocks of our identity, our global economy and for that matter,society at large. Contracts set mutually agreeable rules, the terms of conditions for assets and performance incentives in the form of rewards and penalties. Chances are, you've entered into either a verbal or a written agreement with someone at some point in your life, probably recently. Even something as simple as buying something at a store and getting a receipt as proof of purchase, can be considered a contractual agreement. You pay the money, the seller gives you the product, deal done. So, what exactly makes a contract smart? How does it differ from the ones that we already used in day-to-day business life? Well, smart contract is a new concept in both law and in finance. It's software coded to mimic the logic of an agreement. It has a unique method of ensuring compliance, namely, it can automate performance. Now, how does it do that? Well, a smart contract can call an algorithms and sensors to decide whether the agreed upon conditions have been met. Programmed network is a specific control structure. This structure let you predict the contracts outcome at any point in time. What's key is, the contract can't be seized, or stopped, or redirected to a different Blockchain address, once it's set in motion on a Blockchain. No central authority or third party can revoke it. No one can override the consensus of the Blockchain Network. All you have to do, is transmit the sign transaction to any of the blockchain network nodes, and this can happen from anywhere using pretty much any medium. Let's say someone shut down the Internet, or a government agency tried to stifle communication. You could still conduct the transaction whether over satellite or shortwave radio with Morse code. All you need is someone on the other end to decode the deal and record it in the Blockchain. It's provable with mathematical certainty. Nick Szabo, the father of smart contracts, compares it to an old fashion vending machine. The simple nature of the business relationship is already programmed into the machine. Let's say the machine is selling certain beverages at certain prices. The buyer selects the beverage, inserts enough coins to cover the price. The machine then verifies the amount, dispenses the chosen beverage and makes change if necessary. Smart contract. Today there are nearly 7 million vending machines in the United States alone. We're already surrounded by these smart contracts. So, why use larger scale and more complicated smart contracts? What are the benefits? Well, they are three. The first benefit is, reducing mental transaction costs. This means the computer does more precisely and more aptly, what the human mind cannot or prefers not to solve. Consider Uber's price algorithm. It estimates the cost of driving a given route, and computes a take it or leave it price. Therefore neither the driver nor the rider needs to waste time haggling over a few extra dollars. The service would have never taken off if Uber drivers or passengers had to do the math behind every price. We can probably continue relying on taxi rates and meters. The second benefit is, increased predictability. Smart contracts are mathematical. They're enacted by machines distributed across a Blockchain Network. This enables us to measure loss and manage risk more accurately. This is especially useful in financial or legal areas, or uncertainties can be high. The third main benefit is, broad security. We need to think about the security of all aspects and functions of our business relationships. Traditional contracts tends to leave security holes and are disconnected from actual control over assets. Smart contracts directly control those assets and they can provide far ranging security in our business dealings. Now, that you've learned about the benefits of smart contracts, you may wonder if they're legally binding. There is no final answer yet. Under US common law, parties can express or imply an agreement. They needn't draft nor sign a paper contract for the terms to be legally binding. Legal scholars Primavera De Filipi and Aaron Wright, belief smart contracts honoring legal agreements, are likely enforceable under US law. Intent will be expressed through code rather than through paper. If the obligations are recurring, then smart contracts,could even serve as protocols of performance. Only time and courts around the world will tell.