usually smart contracts like this rely on other things that exist on the blockchain: transferring ownership of something, etc… this way, the smart contract can release funds to the specified parties under provable conditions
these “things” that exist on the blockchain are sometimes representations of ownership (think like a deed for property: it’s just a piece of paper that represents ownership. that could easily exist on the blockchain, where the owner of the property is the person who is assigned the deed on-chain)… the you can have a smart contract that automatically releases funds to the seller once the deed has been transferred to the buyer
there are also things called “oracles”, who are independent, trusted (or sometimes not so independent or trusted; you have to be careful!) third parties who write information to the blockchain… in this case, say for example you make a bet with someone that the global average temperature goes above a certain point between block A and block B: there’s an oracle that just writes the daily global average temperature to the chain. you both deposit into a smart contract that specifies the rules and reads the temperature from the oracle, then distributes based on the results… this situation is less ideal, because it relies on trusting a 3rd party in several ways, however it’s worth mentioning because many people see this as equivalent to the former situation when it’s really not