The next innovation embodied in the second generation blockchain system called Ethereum was the “Smart Contracts”.In December 2013, a person named, Vitalik Buterin releases a white paper on what would become the “Ethereum project” – a blockchain platform with the ability to build decentralized applications (i.e. Smart contracts). Ethereum is a blockchain based distributed computing, public, open-source platform featuring smart contract facility.Vitalik was a prominent Bitcoin enthusiast for several years and was a co-founder of the Bitcoin magazine in 2012. He tried to update the original Bitcoin protocol and failed to gain agreement within the Bitcoin community, post which he gathered a team of super programmers to develop a completely new blockchain protocol featuring ‘Smart contracts’ that would allow programmers to build scripts into the blockchain which would act as contractual agreement and execute when the mentioned conditions are met. He named this new blockchain ‘Ethereum’.Smart contract is a piece of code which is stored on the blockchain network. Anything of value, like money, property or shares can be exchanged with the help of smart contract in a conflict-free , transparent way while avoiding the services of a middleman. It defines the conditions to which all parties using the contract would agree, so certain actions are executed if the required conditions are met. A smart contract is saved on each computer on the network and all of them must execute it to get the same result. In this way users can be sure that the outcome is correct.Let us try to understand Smart contracts with the help of an example:Let’s say you want to ship some goods to your friend Alice. You trust Alice, however you do not trust the trucker Bob , who will carry your pallet of goods. On the other hand, Bob does not trust you as well, may be you won’t pay him?Hence, you sign an agreement with Bob stating you would do the payment in a few days after the goods are shipped. Normally, in this process, legal papers, contracts are scanned, printed, signed for which a third party is involved.With the help of smart contracts, this can be made simpler and the rules can be added in the code.You can make a payment for shipment to smart contract on a day of loading and it would not process the payment till shipment delivery is confirmed by Alice. Then smart contract would then release the payment and the money would be transferred to Bob automatically. Let’s move a little bit forward. What if we would have a GPS tracker attached to the pallet? Then we simply could eliminate Alice from this process and just release the payment automatically, when the location rule is met.To use a smart contract on Ethereum blockchain , mini payments of Ether, the cryptocurrency for Ethereum were required. Since smart contracts are stored on Ethereum blockchain, anyone can access or inspect the contract for an bugs or irregularities since its contents are public. Additionally, no one can access the funds on the smart contracts, not even the developers.This innovation of smart contract in the blockchain system ethereum, built small computer programs directly into blockchain that allowed financial instruments, like loans or bonds, to be represented, rather than only the cash-like tokens of the bitcoin. The ethereum smart contract platform has a market capitalization of billions of dollars and has hundreds of projects heading towards the market.Ever since its launch in 2014, Ethereum has grown significantly and is now considered the second largest cryptocurrency after Bitcoin. By June 2014, the Ethereum project was funded by a crowd sale. Investors realized how Ethereum could unlock a new level of functionality for blockchains and were keen on investing in the same. It has been growing ever since.