Daley opened up with kicks and punches. He then found his range with a one-two combination and landed a right hand that put Smith down.
The fight went to ground before a dazed Smith got back to his feet.
Daley didn't dive in but used his jab and waited for another opening. He didn't have to wait long as Smith walked on to a stunning left hook and crashed down to the canvas unconscious. It was all over at the 2:09 mark.
Daley was also the star of the post-fight press conference.
"Coming into the fight, I was a little worried about Scott's power," said Daley. "He's a nice guy, he's a great fighter and I had to be cautious. He's been in a few Rocky moments, but this ain't no movie.
"I hit him to stay hit. 'Semtex' is for real."
Confident Daley already knows who he wants to fight next.
"I want KJ Noons," he said. "Let's sign on the dotted line. Let's get this fight done.
"Next is Nick Diaz. I ain't messing around. I'm here to be the champion and I'm going to be the champion."
Daley improves his record to 26-9-2, while Smith drops to 17-8 with one NC.
Daley didn't mind that his knockout came too late to be included in consideration for the World MMA Awards, in Las Vegas.
Mark Daley Beats Scott Smith
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