Would you enter into a contract with someone whom you’ve never met, and therefore don’t know and don’t trust? Would you become an investor in a small company in a foreign country? Would you agree to lend money to a stranger, like a farmer in Guatemala, a teacher in China, or to a cashier in the UK? Or would you set up a legally binding contract for a 1 EUR-purchase over the Internet, like buying a song from an artist? The answer in all of the above-mentioned cases is probably no, as the cost of setting up the necessary legal contract to secure your transaction is too high. We either don’t enter into such a contract at all or use trusted intermediaries to settle such contracts, paying them substantial settlement fees for their services.

Smart contracts are potentially one of the most useful tools associated with blockchain, and they can enable the transfer of everything from bitcoin and fiat currency to goods transported around the world. Here’s what they do and why they’re likely to gain traction.