How does it work?
Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation and performance of some sort of agreement. For instance, a smart contract could be used to represent a legal contract emulating the logic of contractual clauses or a financial contract specifying the responsibilities of the counterparts and automated flows of value.
A smart contract is pretty much exactly what you think it would be: it’s an auto-executing, programmed agreement that is recorded on the Ethereum blockchain. It operates based upon an if, then logic, so that if x action happens, then y action occurs.
Smart contracts are applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.