Technology has been there to automate manual work and make it easier for humans. Experts believe that Smart Contract technology is the future of traditional contracts. It automates the execution of contracts and does not require human intervention. Although blockchain technology is becoming more popular, it remains a complicated topic for those who need technical skills. This article will explain what smart contracts are and how they are executed. It will also discuss their impact on today's fast-moving world.
The internet has opened the door to a multitude of new technologies. One of these is blockchain technology. This is also the technology that underpins cryptocurrency. Blockchain is a distributed ledger technology that can be used to decentralize transactions. It is also immutable and has many other incredible features. When Blockchain was introduced via Bitcoin's launch ten years ago, very few people believed it would ever develop.
As the internet became a hub of different activities, so has the fact that blockchain technology is not just about the underlying technology. There are many uses for it. Blockchain is disrupting the financial sector. Smart Contracts are one of the many tools blockchain technology has made possible. Many sectors have seen the incredible impact blockchain technology has had. Businesses and governments are seeking to use blockchain technology to improve their operations. Despite the fact that cryptocurrency is what made blockchain popular, there are a lot of potential uses for it. One option that has attracted the attention of the banking industry is the Smart Contract.
What is a Smart Contract?
Smart Contracts are the digitalization of terms and conditions. They can act as an automated lawyer, broker, or mediator. Based on the terms and conditions of the participants, the Smart Contract executes the agreement's terms. You may be interested to know that the Smart Contract enforces itself and eliminates needing a third party. Smart Contracts, a technology that allows for decentralized distributed ledger systems, will allow us to decentralize many of our financial functions. Transfers of funds, loan servicing, lending decisions, and insurance are all possible with Smart Contracts. Smart Contracts will allow you to operate efficiently.
Programs known as "smart contracts" are saved to the Blockchain and come into effect when specific criteria are met. They can be used to automate agreement execution. They allow participants to decide the outcome immediately, without the involvement of intermediaries. Once the conditions are met, the next event is automatically triggered. According to the report, smart contracts will grow at 18.1% annually by 2026.
A smart contract is a computer program hosted on the blockchain network and executed. Each smart Contract is composed of code that defines predetermined conditions and determines the outcome when they are met. Smart contracts are distributed on a blockchain network, not a centralized server. This allows multiple parties to reach a common result quickly and accurately and is tamper-proof. Decentralized networks are those where data is stored on multiple computers in a distributed manner. Each node in the network acts as an independent authority, with its own decision-making power about how it interacts with other systems. These networks distributed computing power and workload functions among the connected servers.
All preset requirements must be satisfied and validated in order for the computer network to operate. These actions could include sending notices or issuing fines. Once the task is complete, the Blockchain is automatically updated. This means that transactions cannot be altered. This can lessen the likelihood of you being attacked online. In order to fulfill the work and meet the participant's needs, a smart contract may have several clauses. Participants must first define the format and content of the transactions and data stored on the Blockchain. Then they must concur on the "if/when...then" conditions controlling this transaction, consider all of their options, and choose a time frame for dispute resolution.
How does Smart Contract Work?
Smart contracts are based on simple statements such as "if/when/, then," which are embedded in code on Blockchain using a programming language called Solidity. Every node on the blockchain network reviews the transactions to determine if all parties have met the predetermined conditions. If not, all parties will be subject to the Contract. The Contract is executed immediately without the involvement of any intermediary if the network accepts all conditions. The amount is refunded to any parties to the Contract if the obligation is unmet.
Smart contracts automate transactions and let participants agree on the conclusion of an event without the need for a central authority. These are the key characteristics of Smart Contracts: Multisig authentication, multisig programming, escrow ability, and Oracle inputs.
- The term "smart contract" refers to agreements that execute themselves depending on pre-programmed logic.
- Multi party allows multiple contract parties to approve the execution of transactions independently. Multi-party contracts also require multiple.
- It unlocks the funds only after both parties have agreed to the terms. External inputs such as performance or prices may sometimes be required to execute a transaction. Banks can use these inputs to assist smart contracts through Oracle services.
The distributed ledger smart contracts system makes the most sense in most cases. This is a big benefit because the smart Contract will make sure that all stakeholders are connected on a safe, private, and scalable platform.
- Transacting Parties: Transacting Parties are individuals or organizations who want to be part of the Contract.
- Banks, Capital Market Participants, and Insurers: Banks, capital market participants, and insurers can operate as asset custodians and transaction validators, depending on the use case.
- Regulators: Regulators can view transaction records to monitor the system.
This smart contract model will impact all key financial service segments more. It will also be available across all value chains. It will also bring increased value in risk reduction, and efficiency.
How to Execute a Smart Contract?
Phase of Programming
All parties determine the logic of the agreement (the rules and conditions); they are hard-coded onto a blockchain platform after establishing terms and conditions. All parties can see the Contract, and it becomes part of the public Blockchain. All parties can approve the Contract.
Event Trigger
Contracts are triggered by the terms and conditions that have been encrypted and stored on the blockchain network. The Contract triggers when all parties have fulfilled the predetermined conditions, or the deadline has passed.
Execution
The terms of the Contract coded automatically transfer value between the relevant parties or refund amounts depending on completion or non-completion.
Settlement
After the Contract is signed, the value transfer between the parties is recorded on the blockchain ledgers. Every node (computer) on the Blockchain updates its ledgers to reflect the current state of the Contract. These records are not able to be altered. BNB, Cardano, and Solana are some of the most popular blockchain platforms where smart contracts can be hosted.
Smart Contracts: Why They are so Awesome?
Efficiency and Accuracy
Smart contracts require that all terms and conditions be recorded in detail. This is a key requirement. It is essential, as omissions can lead to transaction errors. Automated contracts avoid the potential pitfalls of manually filling in forms. Efficiency is a byproduct of accuracy, speed, and efficiency.
Processing Speed
Smart Contracts can be made instantly because there is no paper to fill out. The transaction is executed and settled by Smart Contracts without any third party.
Reliability
Smart Contracts can be modified only once they are created. All participants can see the transaction records. Therefore, it is not necessary to ask whether any information has been altered to gain personal advantage.
Security
Blockchain transactions are encrypted, which makes them extremely difficult to hack. Each record is linked to the previous and subsequent data blocks on a distributed ledger. Hackers would need to modify the entire chain to change one record.
Cost Efficiency
Smart Contracts eliminate the need for intermediaries to handle the transaction or prepare the documentation to settle it. It eliminates all professional and operational fees.
Transparency
You asked, "If there is no blockchain interference, how can we ensure that the conditions are properly run?". Smart contracts increase transparency by recording and copying all history to all participants. If a user attempts to add some new information to the chain, smart contracts will verify that it is correct. Only information that meets all the conditions is added to the chain. The data can be saved once saved and are indestructible against hacking or alteration attempts for malicious purposes.
Wide Applications
Given the benefits mentioned above, Blockchain and smart contracts have many applications. Some common industries have seen positive changes due to smart contract implementation.
- Venture capital and financial section.
- Logistics industry.
- Healthcare industry.
- Digital transformation.
- Entertainment.
- Real estate property ownership.
- Voting systems and legal contracts.
Smart Contracts: Application
Smart contracts are used in various industries, including financial services, insurance, and healthcare. These are just a few examples of smart contracts being used in real life.
Government Voting System
A centralized voting system has many problems when it comes to tracking votes. Some examples are manipulation of voter identities, manipulation in the counting process, and biased decision-making. To eliminate these malpractices, a smart contract was created. A smart contract can create a unique digital identity that all voters will have. The blockchain network records all votes and counts them automatically without needing any third-party intervention or dependence on manual processes. Each voter's information would be recorded on the ledger. It cannot be altered. The records can be accessed transparently on the public network for auditing and verification purposes.
Insurance
The Insurance Industry is one of the most important uses of smart contracts. It's a well-known fact that most disputes occur in the insurance industry. Smart contracts will be used primarily to automate underwriting, handling claims, and payouts. These smart contracts can significantly impact these processes, especially when used with third-party Oracles and Artificial Intelligence. Automation will result in higher efficiency and faster claims processing. However, manual processing is likely to have lower costs and human errors.
Smart contracts increase trust by automating payments and ensuring claims are paid according to contract terms. On the one hand, valid claims will be processed and paid automatically. At the same time, the technology connected with smart contracts can facilitate targeted investigations, which would allow fraud detection and denial.
Example: Insurance companies like LEMONADE and B3I use distributed ledger technology and smart contracts to execute insurance contracts. These companies will pay the claim in 3 seconds if the claims are approved. Lemonade was voted #1 among 270 companies in customer satisfaction for renter's insurance.
Crowdfunding
Conventional Crowdfunding requires the involvement of intermediaries who collect funds from investors and then transfer them to the product teams for the completion of the project. Smart Contract eliminates the need to have intermediaries because it is fully automated. Smart contracts can be programmed to hold all funds received until a goal is achieved. The investors can transfer the smart Contract. The Contract transfers funds automatically to the project's creator if the project is fully funded. The funds will automatically be returned to investors if the project does not meet its goals.
Smart Contract Limitations
Smart Contracts can have many benefits, but there are also some limitations and obstacles that smart contracts may cause.
Scalability and Speed
Blockchain platforms like Ethereum are used to deploy smart contracts. The Blockchain determines the speed at which the transaction is executed. Ethereum can process 13 transactions per second, for example. This severely limits the number of transactions the network can process per second.
Unchangeable
Smart Contracts can be tampered with, meaning that if there are any problems with the Contract, it can be difficult to fix or impossible.
Technical Problems
Auditing smart contracts requires technical expertise unavailable to common investors or end-users. This can lead to poor investment decisions, resulting in insecure smart contracts that allow hackers to steal millions of dollars.
Enforcement of The Law
Smart Contracts were created by their very nature to eliminate intermediaries. Users do not need to court to settle disputes if a contract functions as intended. These contracts are legal in some countries if there is a dispute.
Underlying Loopholes
Smart contracts can only be executed if pre-programmed conditions exist. Parties may breach agreed requirements by omitting or ambiguity certain points. Some parties may not adhere to the idea of good faith. There is always the possibility of contract loopholes. These loopholes can be difficult to spot once damage occurs. Loopholes are more frequent in smart contracts. Participants with extensive knowledge and experience in the subject might be able to detect the scams. Third parties, such as mediators and neutral consultants, are often involved in traditional contracts.
Smart Contracts in Banking Industry
Bank legal documentation can be very time-consuming and complicated, especially when bringing in new customers to meet the Know Your Customer (KYC) processes. Smart Contracts eliminate the need to waste time and deal with all the legal complications. It will also make it easier to verify customer information based on records on the Blockchain. This can be used to satisfy other conditions to unlock additional smart-contract-based services.
Clearing and settlement can be costly because transactions and payments must be matched before being verified. Smart Contracts can eliminate administrative costs because the agreements are autonomously executed.
The authorities devised a plan to replace the Clearing House Electronic Subregister System. This system, which was an electronic securities ledger, would facilitate ownership transfers among participants in transactions. There is a need for smart contract development services to assist in the automation and decentralization between parties and increase the efficiency and productivity of systems where smart contracts are implemented.
Banks Have Smart Contracts Opportunity
Banks still require commercial agreements in the digital era. Here, a third party establishes the conditions. If you pay close attention to every consumer, it might be expensive and slow down the process. On the blockchain network, where contracts are automatically carried out, these terms are present. This opens up many opportunities for banks. Contracts can be carried out using blockchain technology.
Transparent Auditing
Traditional contracts are often based on important regulations, which require the banking sector to spend a lot of time maintaining records and paperwork. Record keeping is another factor contributing to banks' sluggish digitization. Since banks provide a variety of services, including loans and other financial transactions, it is also imperative to keep track of daily activities. Cyber-attacks can manipulate data easily and result in incorrect information. Banks can use smart contracts to gain essential tools for bookkeeping on the blockchain network. Distributed solutions are used in the network to improve transparency. This allows banks to eliminate infiltration from their account records and reduces the risk of fund loss.
Easier Insurance Claims Processing
The legitimacy assessment of the claim and counter-checking of the contract terms to validate it are the requirements for the settlement of insurance claims. If one wants to avoid fraudulent claims, the traditional claim process can take a lot of energy and time. Banks can use blockchain technology-based smart contracts to process insurance claims automatically. This allows a consumer to file a claim and validates the claim using provided codes in the blockchain network. The blockchain network system can access insurance claims to validate them, verify their legitimacy, and execute the Contract's terms.
Faster and More Efficient KYC (Know Your Customers) Forms
Banks must verify that the customer is real before they offer a loan or fund trade. Banks can find obtaining information from other institutions, such as credit history, difficult and costly. Blockchain data can be utilized with smart contracts to confirm a customer's identity. By processing the transactional statement of the customer in real time, it will also satisfy regulatory obligations.
Real-Time Remittance
Banks can process multiple transactions. Piling data can slow down the process of processing transactions. Smart contracts can be implemented with remittance to the system to speed up the transfer of funds between stakeholders and customers. Smart contracts can be used to speed up settlements after the trade.
Decentralization and Disintermediation
Banks will implement decentralized consensus systems. This would include eliminating 3rd parties, especially since Smart Contracts would replace the 3rd parties that were required to input the services. The decentralization of core banking functions, such as payment systems, custodial deposit services, loan processing, and other financial services, will eliminate intermediation.
The only thing that gives banks an advantage over Blockchain is their ability to create money at will. It is important to note that Blockchain and crypto were created to decentralize the money supply. This is done by taking money from financial institutions and letting algorithms manage it. Different blockchain smart contract startups have emerged in light of this.
What's Next?
Blockchain integration in banking will decentralize ownership and eliminate the need to use traditional payment systems or institutions for deposit-taking. Transactions and user balances are stored on the distributed ledger. It is immutable and has greater security and safety benefits than the centralized database.
It is interesting to note that Blockchain for smart contracts will increase Blockchain's potential. Because cryptocurrency can perform better than fiat currency, this will undoubtedly create many new services within the banking and finance sector. It will be a win-win for both banks and users if banks integrate smart contracts. There are many possibilities in Blockchain and smart contract design. It may interest you to know that these potentials are wider than the financial industry. They can also be used in other industries.
Collaboration is Key to Shaping The Future
Smart contracts will bring significant profits to banks. Smart contracts can do so much more than simply being an intelligent way to manage different contacts. It will be easy for banks to improve their public relations with customers and provide exceptional customer satisfaction.
However, smart contracts can also be used to build a system based on the standardization of code and execution. This will allow for the following benefits: Standardization of code and execution to reduce the cost of agreements; Security of transactions through encrypted distributed ledger stored with Blockchain; Built-in regulatory compliance, new reporting models, regulatory compliance, and automation of digital currencies and financial assets flow.
Although Smart Contracts are a great way to improve your banking services, you might need help implementing blockchain technology into the system. Experts in blockchain technology can help you get the best out of your system and protect it from cyber-attacks. It will be fascinating to see how smart contracts and banking are.
Conclusion
Although blockchain technology has yet to be mainstream, it has made significant strides in the last ten years. Suppose blockchain networks can be used for a lot more economic activity. In that case, it will allow seamless interoperability among the different blockchains. This will increase the link between fiat and the blockchain economy to be a valuable innovation for everyone.
While there are many benefits to using smart contracts and blockchain services, the most important features of technological innovations are the ability to remove trust and centralization and improve the system's security. Banks and financial institutions can benefit from integrating Smart Contracts into their systems.
This will allow seamless connectivity and save participants the cost of lawyers and brokers, and also save time and effort when processing different paperwork and legal documentation. Smart contracts offer both benefits and drawbacks. This technology is still very promising. You should be prepared for any bad situations. Prevention is always better than treatment.
