Smart contracts are continuing to revolutionize the financial industry. As Blockchain continues to disrupt traditional banking models, a new uptake in smart contracts amongst several global banking institutions allows for more transparency between consumers and their money movement.
Smart Contracts can be explained as a blockchain-based technology that allows for the transparency of any transaction on its network without needing a third party. They are usually used in sectors and simple transactions that usually need an intermediary for deals and transactions to succeed.
Whether the transaction involves buying a kilo of chicken, buying a car, paying house rent, travel & hotel fees, buying a cruise ship, taking over a football club or a piece of land on mars, there is always lots of bureaucracy involved and loads of paperwork to prepare and sign. All this stress ensures that someone doesn't wake up tomorrow and start claiming our properties.
We know Nobody likes stress, and we know that trusting another man (especially on deals with heavy Worth) is risky. Trust without collateral is to raise both hands at the end of a cliff and smile at the person about to push you. Again, it's risky. If We allow you to push me off the cliff, We must at least have an anchor chained to my waste and another anchor to a very big rock that cannot fall.
Eliminating all of these middlemen and their bureaucratic processes is what the smart Blockchain is bringing to the table by offering transparency as its major marketing highlight; smart contracts development is known to be very effective and efficient in sealing deals and holding business partners or contracting parties accountable to each other.
How do Smart Contracts Work?
Smart contracts work seamlessly with Blockchain technology as its basic framework. Usually, a blockchain smart contract development platform is usually already on the ground to accommodate many users needing the smart contract service.
This means one can skip the rigorous process of building a specialized Smart Contract algorithm every time there is a need to agree. The platforms for Smart Contracts are essentially sophisticated algorithms created to enforce an agreement between the contracting parties, so it is crucial to understand this.
They are built so that for every agreement made, the parties can enter their specific terms and conditions. This means that the user can use just one smart contract development platform account to enter many agreements without their terms and conditions crossing. You can have one Facebook account and engage millions of friends simultaneously with just one account.
Once the contracting parties have logged the contract agreement, there is usually a window period of reminiscing over the agreement for the parties. They could skip it if they agree to. After the period, the parties can now click the "I AGREE" button. The Blockchain network locks in the contract after all parties have clicked the button. The agreement, as a necessity, must contain what to do if a partner in the contract becomes unfaithful to the contract.
The reward and reproach scheme is immediate without needing to file a lawsuit or digging up agreement papers to prove what was agreed upon; the partners know that the reward system is immediate and would have no choice but to comply with the agreement. And if they do not comply, they need not call on a third party to settle the breach in the agreement; the blockchain smart contract does it all.
Smart Contract and its Advantages
- Security:
Blockchain smart contract development providers use the highest level of data encryption available, the same standard used by modern crypto-currency trading or exchange networks. This level of protection makes them amongst the most certain sets of data on the world wide web.
- Efficiency:
This is a natural by-product of blockchain technology. The speed and accuracy of blockchain technology bring about higher efficiency results in smart contract operations.
- Transparency:
The visibility of the terms and conditions of these contracts makes them superior to the old contracting methodologies. There is no way to dispute the agreement once the contract is locked in.
- Guaranteed Outcome:
The most attractive feature of smart contracts may be their ability to significantly reduce or even eliminate the need for court processes and litigation since smart contracts are self-executing. Parties commit themselves to the rules and regulations of the underlying code.
- Backup and Storage:
Records of essential details in each transaction are fully stored in the network. They can easily be retrieved if they need them in the future. Anytime your information is utilized in a contract, it is permanently preserved for recordkeeping.
Smart Contract Typologies
Let's investigate the many forms of smart contracts used in IoT systems now that you have a basic idea of what they are and the advantages they offer:
- Smart Legal Contracts
These contracts can simplify legal processes and ensure strict adherence to regulatory guidelines. They apply to critical financial, international trade, and real estate market contracts. The current legal framework needs more context and support for automated contracts on the Blockchain. Nonetheless, it will be simpler to apply the laws after they are established.
- Decentralized Autonomous Organizations (DAOs)
These are contracts built for blockchain communities. The participants of these communities abide by the rules put into the contract's code. Crowdfunding platforms, for instance, use DAOs. Many smart contracts make up rules and work towards effectively policing and supervising participants. This ensures enhanced support amongst all parties.
- Application Logic Contracts (ALCs)
Suppose you have heard of the Internet of Things (IoT) concerning the Blockchain. In that case, chances are you must have come across Application Logic Contracts or ALCs. These contracts are application-specific codes that work in conjunction with other programs on the Blockchain. They help establish and validate communication between IoT devices. ALCs comprise a vital piece of every multi-function smart contract and majorly function under a managing program.
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Examples Blockchain-Based Smart Contracts
In 1994, the idea of smart contracts was first introduced. Little did people know that Blockchain technology would allow for the easy embedding of these contracts into computer code, ensuring transparency and security of all records.
These are the top Blockchain-based smart contract options:
- NXT
It is a public Blockchain platform that allows smart contracts to be developed using its ready-to-use templates. Because NXT uses a scripting language that is not Turing-complete, smart contracts created with it cannot be customized.
- Ethereum
It's a Blockchain platform that allows you to build advanced smart contracts. It employs a stack-based bytecode language that is a Turing-complete high-level programming language. These contracts are executed using the Ethereum Virtual Machine (EVM).
- Sila
It provides application program interfaces (APIs), which allow banks to integrate real-world payment functions such as KYC and ACH. You can create a smart agreement on Sila by entering the assets and requesting the code to execute automatically to deliver the assets.
Smart Contracts and the Financial World
Smart contracts are well on their way towards changing the pace and manner in which businesses operate across all sectors. The financial services sector also reflects this. These smart contracts are useful in the following financial institutions and banks:
- No Errors in Processing Insurance Claims
It cannot be easy to assess the legitimacy of an insurance policy claim. It can be tedious to check the validity of an insurance claim. Blockchain-driven smart contracts enable the filing of claims and the automatic validation of those claims through the blockchain network's decentralized ledgers. This reduces the chance of financial institutions making fraudulent claims.
- Lower Transaction Costs
Smart contracts allow transactions to be self-regulatory. This allows for low-cost record-keeping, reduces manual intervention, and significantly lowers transaction costs over the long term.
- Real-Time Remittance
Digital payment methods have increased the need for a reliable remittance system. Smart contracts based on blockchain technology make payment processing easier. They allow real-time fund transfers while still maintaining transparency and accuracy. They allow independent verification, which speeds up transaction settlements.
- Transparent Auditing
Audits can be made easier by keeping records. Banks must spend resources to manage traditional contracts, which require much more paperwork. Smart contracts powered by Blockchain can be used to support sophisticated bookkeeping tools. These smart contracts are built on the Blockchain network's incorruptible distributed codes. These solutions improve transparency and eliminate the possibility of infiltration.
- Higher Speed
Software codes can automate manual tasks and reduce transaction times. This software code automates manual tasks and speeds up banking operations.
- Streamlined KYC Procedures
KYC is an essential function within the financial services industry. Before offering loans or other transactions to customers, banks and FIs must verify the identity of each customer. Banks can make this process more simple with smart contracts. Blockchain records can be used to verify individuals' identities and credit scores. Accounting firms also can process tax returns and other compliance requirements in real time.
- Accurate Terms
Smart contracts allow transactions to be transparent and easily executed. Smart contracts reduce errors by removing human intervention. They foster trust between the parties to the contract.
- Benefits for Consumers and Firms
Smart contracts are a win-win situation for both customers and banks. Banks can reduce costs and streamline processes to comply with regulatory requirements. Customers also benefit from safer and easier transaction methods. Everyone wins!
- Smooth Peer-to-Peer Transactions
Banks are customer-centric and want to make sure that the technology they implement helps their clients and customers. Distributed Ledger Technology (DLT), used in smart contracts, eliminates third-party mediation. It simplifies and reduces the cost of transactions for people without bank accounts. Peer-to-peer payments are made possible by the retailer's adoption of cryptocurrency.
These transactions can be made without the involvement or trust of third parties using smart contracts. They provide stability and convenience. The relationship between blockchain smart contracts and the financial world can be described as symbiotic. Although not all contracts are related to finances, it is clear that at least 70% of contracts use the term "contract".
There are always financial obligations attached. Knowing that smart contracts are the original technology behind disrupting the financial system, it is important to remember that blockchain technology was the first to offer credible alternatives to fiat currency. Smart contracts could be the most disruptive technology to our financial system.
It would be an honour to create cross-border agreements between individuals and companies. Most business deals will require all parties to meet to determine what the contract should include. Smart contracts allow all parties to create a legally binding agreement in the privacy of their homes or on the sofa.
Since all smart contracts are built on the blockchain framework, which also hosts the cryptocurrency sphere, many Smart Contract Development Platforms include Cryptocurrencies in the framework. They use it as a reward or reproach tool for contracting connections. This allows for high publicity and the possibility of spreading cryptocurrency even among the top business leaders using the smart contract tool.
A lot of paperwork is required for clients to open accounts at commercial banks. However, smart contracts are faster and more easily enforceable than bank services.
Smart Contracts Opportunities in Banks and Financial Institutions
Digitization of financial instruments (smart contracts, digital assets and programmable currency) takes Blockchain's benefits to the next level. It allows for unprecedented connectivity between products and holdings as well as assets. Below are some great uses for smart contracts in decentralized finance.
- Trade Clearing and Settlement
Smart contracts powered by blockchains allow banks to simplify trade settlement and clearing activities. The process was labour-intensive and susceptible to errors because of the involvement of multiple parties for reconciliations and approvals. Smart contracts can avoid discrepancies, save money and create an efficient equity settlement process.
- Supply Chain and Trade Finance Documentation
Blockchains' decentralized ledgers streamline trade finance documentation and supply chain management. They are faster than paper-based systems, and they significantly reduce processing times.
However, digitizing bills of lading and letters of credit is impossible as there are greater chances of forgery. Blockchain allows for secure, easily accessible receipts of transactions. Digital signatures make it easier to manage workflow and document management in smart contracts. Wave, a startup platform, and Barclays Corporate Bank have recently partnered. Blockchain is used to store bill-of-lading documents. Smart contracts are used to automate payment and log changes.
- The simplicity of Complex Processes
Companies must examine their internal processes and assess the possibilities of using Blockchain to simplify complex ones. Smart contracts can be used to automate manual processes and facilitate interdependent transactions. Transparency can help corporations build trust between parties to multi-party agreements.
- Improved Securities
Traditional settlement and clearing processes for securities markets could be more efficient. Market participants must deal with opaque systems while their money is trapped for uncertain periods. Smart contracts make settlements transparent and reduce settlement time to just a few minutes or seconds.
- Lending with Well-Defined T&Cs
Legacy systems are based on the difference between the interest rates borrowers and their investors charge. Many borrowers must meet the stringent lending criteria set by traditional lending institutions. Smart contracts are used to monitor borrowers' loans. Borrowers not eligible for bank loans can borrow directly through investors using DLT. This reduces the time it takes to obtain loans.
- Improved KYC & Fraud Prevention
All banks worldwide have made it mandatory to verify customer identity, also known as KYC. It is mandatory for all financial transactions, including borrowing, trading, and lending. It takes time and effort to obtain credit history for customers under legacy systems. It is necessary to prevent financial fraud. Banks can streamline KYC processes with a smart contract system. Banks can verify customer identity using records on the Blockchain. They can also track down credit history.
- Versatile Tokenization
Blockchain is a platform that provides secure and stable processes. Tokenization allows financial institutions to avoid the risks associated with cryptocurrency and the volatility in the market that drives them. They now offer a variety of tokens, such as Stablecoins, which are transactional fractions for major currencies. They can be linked to Euros or Dollars for market stability and risk coverage.
- Efficient Online Giving
Online donations have made it easier for charities to collect donations. Smart contracts allow charities to make impact-based donations. These clauses can specify that money is transferred only if certain trigger conditions are met. These contracts increase supporter trust and improve transparency and openness. Smart contracts also reduce transactional and donation processing costs that are often excessive (and sometimes even prohibitively high).
3 Ways Blockchain Makes Payments More Secure
These words are simple in form but complicated in meaning. They highlight the differences in financial transactions today and those of the past. Blockchain allows organizations to go from a can't-be-the-evil approach to a do n't-miss-the-mark one. Financial institutions must trust and verify that a don't-be-wrong approach is valid. Verification is all that is required for a can't-be-wrong approach.
Financial infrastructure can be misused; let's face that. Blockchain gives organizations more control and security because it has an audit trail, strong authentication methods, and transparency.
Auditability
Built-in auditability is one of Blockchain's strongest features for the payments industry. It is immutable when something is put on a blockchain. It can't be altered, forged or deleted. This is crucial, as fraud often occurs when bad actors alter financial records.
Blockchain creates an immutable, cryptographically secure audit record that is unchangeable. You know that information cannot be altered once it is entered. The level of auditability it provides can dramatically change compliance and security overhead. Large bureaucracies force people to use technology in ways that are not possible with the help of technology.
Authentication
The second feature of Blockchain in the payments industry is an integrated and powerful method for identification and authentication. Security is about confirming that the person you are dealing with is who they claim to be. Blockchain is equipped with digital authentication protocols that can be used to validate that individuals and organizations are as they claim. This is how fraud can occur.
Although banks do have manual controls, particularly for larger payments, fraud can still occur. Phishing is another problem for financial institutions. Hackers can obtain personal information, such as bank logins, PINs and credit card numbers, and then use it to access accounts and make transfers.
Transparency
Blockchain is transparent, and anyone can verify certain checks and balances. However, this does not mean data or information cannot be seen. This means anyone can verify if any key actor uses the data or information correctly. Security, fraud, and compliance problems are often caused by things being in black boxes. People exploit what isn't visible.
Blockchain technology is a technology that, in some ways, sheds light on dark corners. It creates opaque transparency systems and systems. This technology improves security and compliance and ultimately leads to innovation. The difference between security standards today and the old ones is encapsulated in "Don't Be Evil, Can't Be Evil". Trust and distrust are the two main features of the old system. Blockchain is a model you don't have to trust but can verify.
How Can Blockchain Disrupt Banking?
Blockchain can disrupt traditional banking models. Banks can use smart contracts to reduce operational costs and risk. They also minimize the chance of making mistakes. Bank transparency will allow them to build long-lasting customer relationships and provide consistent, satisfactory service. Retail banking models can be empowered by smart contracts that are backed up with blockchain technology.
Banks face challenges in the broader adoption of blockchain technology, including the scalability and volatility of cryptocurrency, as well as building stakeholder trust. However, the right regulations can help to create safer banking systems and increase customer engagement.
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Conclusion
When blockchain smart contracts become a standard tool, it will make the financial world more difficult. Many financial powers (money) can move around the blockchain smart contracts, even for those trying to purchase a pencil.
Smart contracts services are a great way to gain valuable insights for financial institutions and banks and make their operations more efficient and smoother. Many apps are being developed for Blockchain-based smart contract technology. Smart contracts are the next innovation step. Smart contracts can help reduce billions in indirect costs and improve the system's efficiency. Smart contracts are easy to use.
Despite advancements in legislation and the involvement from the business sector, this still needs to be solved. Smart contracts still rely heavily on the law. Setting up a regulatory framework for smart contract operations is difficult.
