"'Smart contracts' involve greater automation of the processes of creating, monitoring and enforcing contracts. This may be intended to increase efficiency and reduce the risk of human error.
Blockchain's digital nature has led to it being associated with smart contracts. A contract in the physical world is an agreement among parties that, upon execution of certain conditions, a transfer of assets will occur. A smart contact codifies these attributes in code, so that machines can validate that conditions are met, and initiate the transfer of assets. In addition to the parties engaging in the transaction, other users of the blockchain platform may provide computational resources necessary to process or validate the contractual transaction, thereby gaining a stake in the transaction or contributing to the verification of the transaction on the ledger.
For example, Ethereum (an open-source, public, blockchain-enabled computing platform) allows users to build smart contracts. In Ethereum, users build their smart contract and pay fees so that other users contribute computational resources to enable the smart contracts and validate the transactions.
The Blockchain section: Blockchain: Background and Policy Issues, at 7.