With inherited blockchain advantages, smart contracts are transforming modern banking and finance streamlining conventional processes such as KYC and insurance claims. The inherent blockchain transparency greatly helps auditing processes while the distributed ledgers facilitate transactions from one peer to another.
What are Smart Contracts?
In the simplest terms, smart contracts are programmable contracts that execute upon meeting predetermined conditions. The contracts exist between two or multiple parties, with written protocols that are visible throughout the entire distributed blockchain network.
Blockchain-based consensus contracts do not require paperwork or validation from a 3rd party. Blockchain ensures the compliance of the precoded contract terms which upon completion sets off the execution. This self-executing nature of smart contracts can significantly eliminate manual effort in several banking processes, including compliance, checking loan eligibility, and the processing of claims.
Also Read: HashCash Proposes Direct P2P Blockchain Commodity Trading via Smart Contracts
Types of Smart Contracts
There are multiple variations of blockchain-based contracts, depending on the function they perform. Common examples include:
Smart contracts can expedite legal processes ensuring compliance with predefined regulatory requirements. Once enforced, smart legal contracts can bolster crucial financial transactions and trade across several sectors including real estate. These contracts can be used across international borders too.
DAOs(Decentralized Autonomous Organizations)
DAO communities are built using blockchain architecture. Members within the network adhere to the prewritten set of rules that must be observed. DAOs are popular options for crowdfunding and platforms where smart contracts keep things in check leading to enhanced support among participants.
ALCs or Application Logic Contracts
ALCs are integral to Blockchain-IoT infrastructure. The app-specific codes function in conjunction with separate programs on the blockchain network. ALCs also assist in setting up and authenticating communication between IoT devices.
Also Read: Role of Smart Contracts for the Ticketing Industry
How do Smart Contracts Function?
As explained above, smart contracts are pre-coded applications within the blockchain platform. The pre-written program sets the terms and conditions that must be maintained between two or more parties, mediating the transaction in between.
In programming terms, they are built using conditional statements, when the parties involved can fulfill the “if-when-then” requirements. The concerned participants may also opt for anonymity if required, ensuring privacy.
Properties of a Smart Contract
To sum up, a smart contract highlights the following features:
- Self-Execution and Independence.
- Self-verification using information from external sources of data.
- Immutability and absence of intermediaries.
- Quicker Resolution than traditional processes using manual effort.
- Transparency and elimination of trust issues.
- Removal of 3rd party mediation during settlements.
- Zero-cost execution of contracts.
- Preservation of sensitive data in blockchain for future use or reference.
- Verification of participation using cryptographic digital signatures.
Also Read: Conceptualizing Smart Contracts: Things Every Blockchain Enthusiast Should Know
Use in Modern Banking and Finance
Technical innovations kicked off the digitization of financial instruments with smart contracts, cryptocurrencies, digital and virtual assets. The incorporation of blockchain-based smart contracts brings forward a transformation in the existing banking and financial services sector in several ways. US-based HashCash Consultants offer specialized smart contracts and blockchain solutions for banking and finance, supply chain, cryptocurrencies, forex, and many more.
The possible use cases of smart contracts include:
- Trade Settlement and Clearing
- Cheaper Payment Processing Options
- Documentation in Supply Chain and Trading Finance
- Process Simplification
- Enhancement in Securities
- Credit Lending with Properly Defined Conditions
- Lower SMB Entry Constraints
- Flexible Tokenization
- Structured Options for Online Donation
Smart contracts provide significant ROI for banks and financial institutions in terms of invaluable insights, streamlining, and optimizing processes. The upcoming days shall witness a deeper penetration of blockchain-based applications into the transforming banking and finance sector.