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From Vitalik Buterin in ethereum blog: a smart contract is a mechanism involving digital assets and two or more parties, where some or all of the parties put assets in and assets are automatically redistributed among those parties according to a formula based on certain data that is not known at the time the contract is initiated.
Nick Szabo is a computer scientist known for his research in digital contracts and digital currency. Although Szabo has repeatedly denied it, people have speculated that he is the one behind Satoshi Nakamoto, the designer of Bitcoins. The phrase and concept of smart contracts was developed by him with the goal of bringing what he calls the "highly evolved" practices of contract law and practice to the design of electronic commerce protocols between strangers on the Internet.
A contract is a collection of code (its functions) and data (its state) that resides at a specific address on the Ethereum blockchain. Contract accounts are able to pass messages between themselves as well as doing practically Turing complete computation.
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