Blockchain is arguably the most significant innovation since the internet with individuals, companies, and even governments embracing the technology. An appealing feature of blockchain technology is smart contracts. Smart contracts are gaining widespread use and ease of creation as global processes are becoming increasingly digitized. They serve as an alternative to traditional contracts which are often slow and expensive.
Today, smart
contracts are available to optimize many financial and business processes. In
essence, they are self-executing, self-enforcing protocols that are governed by
explicit terms and conditions.
Key features of smart contracts
Smart
contracts represent a completely different way of approaching contracts.
Instead of two parties signing duplicate copies of a paper agreement, smart
contracts ensure compliance through blockchain technology. This reduces costs
and simplifies the contract negotiation process.
A smart
contract works through an executable code that runs on top of the blockchain to
facilitate and enforce an agreement between untrusted parties without the
involvement of a trusted third party. This code defines the mechanisms of the
transaction and is the final arbiter of the terms. The readable terms of a
contract are compiled into computer code that can run on a network.
A network of
computers executes the actions once predetermined conditions have been met and
verified. The blockchain is then updated when the transaction is completed.
Once the transaction is included in a block, the smart contract is initiated
and irrevocable.
Transactions
between parties in current systems occur in a centralized form; however, this
involves high transaction fees and security concerns. Smart contracts remove
the need for intermediaries and contract enforcement.
Through
smart contracts, tokenized securities can work as programmable equity — paying
out dividends or performing stock buybacks through a couple lines of code.
Finally, putting real-world assets on blockchain technology has the
potential to usher in broader, global access to markets.
Overall,
blockchain smart contracts certainly have the power to transform the way
agreements are made across various industries, particularly within FinTech.
However, it will take some time and require more development before it reaches
its mainstream approach.
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