In the context of blockchain technology, Blockchain smart contracts are self-executing software programs that trigger when certain conditions, specified in their code, are met. Smart contracts improve security and trustlessness across distributed networks, automate operations in blockchain systems and make DLT protocols programmable. They are the main mechanism that enables decentralized applications to run on networks like Ethereum.
Application
Smart contracts can be used in a variety of fields, from healthcare to supply chain to financial services. Some examples are as follows:
- Government voting system
- Healthcare
- Supply chain
- Financial services
- Scientific research
- Banking
Benefits of Smart Contracts
- Autonomy and savings
Smart contracts do not need brokers or other intermediaries to confirm the agreement; thus, they eliminate the risk of manipulation by third parties. Moreover, the absence of intermediaries in smart contracts results in cost savings.
- Backup
All the documents stored on blockchain are duplicated multiple times; thus, originals can be restored in the event of any data loss.
- Safety
Smart contracts are encrypted, and cryptography keeps all the documents safe from infiltration.
- Speed
Smart contracts automate tasks by using computer protocols, saving hours of various business processes.
- Accuracy
Using smart contracts results in the elimination of errors that occur due to the manual filling of numerous forms.
Limitations of Smart Contracts
1. Difficult to change
Changing smart contract processes is almost impossible, any error in the code can be time-consuming and expensive to correct.
2. Possibility of loopholes
According to the concept of good faith, parties will deal fairly and not get benefits unethically from a contract. However, using smart contracts makes it difficult to ensure that the terms are met according to what was agreed upon.
3. Third party
Although smart contracts seek to eliminate third-party involvement, it is not possible to eliminate them. Third parties assume different roles from the ones they take in traditional contracts. For example, lawyers will not be needed to prepare individual contracts; however, they will be needed by developers to understand the terms to create codes for smart contracts.
4. Vague terms
Since contracts include terms that are not always understood, smart contracts are not always able to handle terms and conditions that are vague.
Future Outlook
Smart contracts can be bundled into decentralized applications within decentralized finance (Defi) to execute more complex functions. The validity of smart contracts in financial technology (FinTech) is becoming more and more apparent. This new form of agreement improves the accuracy and verification of worldwide transactions by combining two simple concepts into one powerful idea.
The most widespread use of smart contracts remains in the financial industry since they solve the issue of trust in conditional transactions. Payment processing, clearing/settlement of financial instruments, trade finance, as well as regulatory technology all benefit greatly from smart contracts.
Already, with fintech giants like PayPal already tapping into cryptocurrencies, we may see digital finance companies transform into something new. This can make for a potentially smart investment to consider as we may be witnessing a new generation of finance coming to light. It has been reported that PayPal plans on launching a crypto ‘Super App’, which is experimenting with smart contracts and testing blockchains to help improve payments and other transactions.
Without compromising on credibility, smart contracts offer transparency within FinTech. By decentralizing the verification of contract terms, contractual partners are more liable towards one another.
With increased transparency, platforms like WeBull or Robinhood dominate the FinTech landscape by offering access to investments that had seemed otherwise inaccessible before. However, in light of the Robinhood debacle, retail investors are opting for alternative platforms offering similar features. For example, Nasdaq-listed Freedom Holding Corp. (FRHC) has a platform that enables retail investors to purchase stocks and participate in selected IPOs — albeit at a financial threshold of at least $2,000 when it comes to IPOs. Some retail investors are turning to more traditional platforms such as TD Ameritrade, E*TRADE and Fidelity. All of these offer similar features to that of Robinhood or WeBull — only with minor differences and USPs.
Smart contracts automatically execute transactions following predetermined rules thus transactions are encrypted and stored on a distributed ledger intended to be immutable.
This has clear potential for remaking the world of financial contracts. Individuals can rest assured knowing that information has not been altered for personal benefit.
Blockchain transaction records are encrypted so security features can be integrated into a smart contract to automatically generate backups and duplicates in the event of damages, data losses to the original one or hacks. Because each individual record is connected to previous records on a distributed ledger, the whole chain would need to be altered to change a single record.
There’s also a degree of certainty involved as smart contracts execute automatically so there is no need to spend time processing paperwork or correcting errors that are manually written in the documents. Smart contracts can be executed in minutes, for a fraction of the cost.
Automating the flow of digital assets and payments can foster new products and business models within FinTech. Blockchain smart contracts decrease monitoring and enforcement costs, meaning that financial institutions do not need to rely so heavily on post-trade financial market infrastructures.
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.
Conclusion
Undeniably, the smart contract is a transformative opportunity for many industries. However, any serious implementation initiatives must stem from a solid understanding of this technology’s legal and technological possibilities.
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