The new digital age has changed various facets of the finance industry. Take contracts and agreements as an example. Gone are the days when companies and their clients relied on traditional contracts that demanded intermediaries like lawyers and took forever to execute. Nowadays, things are way better, thanks to smart contracts.
With smart contracts, both consumers and organizations can enjoy everything from quick loan applications to automated supplier payments. The contracts come with lesser costs, faster transactions, and many other boons. Read on to learn more about the fundamentals of smart contracts as well as their benefits and drawbacks.
What Are Smart Contracts?
A smart contract is a digital contract that executes itself when certain predetermined conditions have been met and verified. The agreement in this type of contract is written in the code. Smart contracts rely on blockchain technologies, which guarantee uncapped trustworthiness, transparency, and immutability.
If you are a player in the finance industry, you can use smart contracts to provide and access different services seamlessly. This ranges from borrowing and lending money to trading with your peers on the reputable exchanges recommended by InvestingGuide.co.uk.
Key Features of Smart Contracts
Here’s an overview of the key features of smart contracts:
Transparency: Smart contracts rely on public blockchains that anyone can access. As a participant in one of these contracts, you will always have the opportunity to vet logic and execution instead of leaving everything to intermediaries.
Immutability: No one can alter or delete a smart contract that’s already on the blockchain. This reduces the risks of issues like manipulation and fraud. No modification of a smart contract can occur without the approval of most, if not all, network participants.
Self-executing: Smart contracts execute themselves automatically. They don’t require intervention from humans or other intermediaries, reducing unnecessary delays, high costs, and other issues.
Decentralization: Decentralized blockchains are part and parcel of smart contracts. Decentralization in this context ensures no single entity has the express authority to manipulate, modify, or tamper with a smart contract.
Trustless transactions: Where a smart contract is involved, the participants don’t need to trust each other. That is because this type of contract uses blockchain technologies to automatically enforce stipulated terms and conditions.
Benefits of Smart Contracts for the Financial Industry
If you’re in the financial industry, you should consider switching from conventional to smart contracts as early as possible. This move will allow you to enjoy the following benefits:
Lower costs
In the conventional setting, you and other participants in a contract need to hire an intermediary whose primary role is to ensure all parties respect the mandated terms. The best intermediaries for this task include lawyers, brokers, and bankers. Unfortunately, their services can cost a pretty penny.
With smart contracts, you can avoid the expenses associated with hiring intermediaries. These contracts are self-executing and enforce agreed-upon rules without requiring human intervention.
Faster transactions
A contract with multiple parties and intermediaries can take several days or months to execute. This can be highly inconvenient and frustrating. It can also discourage clients from interacting with organizations that rely on them.
Make your business or organization stand out by adopting smart contracts. They will eliminate frustrating delays common in contracts with multiple traditional intermediaries. Plus, they will automatically execute transactions immediately when conditions are met, which is incredibly convenient.
Uncapped transparency
If you’re a consumer, prioritize companies that offer smart contracts. You will be best positioned to enjoy uncapped transparency and avoid fraud, hidden fees, and other issues. Remember, smart contracts store all terms on public blockchains that are tamper-proof and accessible to all involved parties.
On the other hand, if you are a service provider, adopting smart contracts will do you a world of good. For starters, it will show your commitment to unmatched transparency, thereby helping you attract more clients and enjoy higher retention rates.
Fewer disputes
Your organization can avoid too many damaging disputes by switching to smart contracts. They will have clear, predefined rules that everyone can review before entering any agreement. These will prevent misunderstandings and constant disputes.
Plus, since smart contracts automatically approve transactions once the specified conditions have been fulfilled, they can help your company avoid disputes related to issues like delayed invoice processing and worker payment. Furthermore, they can protect your company’s reputation from parties who want to deny obligations in order to start disputes and manipulate outcomes in their favor.
Disadvantages of Smart Contracts
Before using smart contracts, note that these elements have their shortcomings, and they expose you to numerous challenges, including:
Code vulnerabilities: A smart contract is unchangeable, so any coding flaws can’t be voided or amended. If you don’t notice this issue before a contract is executed, you may lose a lot of money. Plus, a hack can exploit vulnerabilities in a smart contract’s code to make infinite withdrawals or manipulate balances.
Lack of flexibility: Once again, smart contracts are immutable. So, if new conditions or requirements become necessary, updating an existing smart contract won’t be an option. You have to create a new one and start the entire process from scratch.
Dependence on oracles: Some smart contracts rely on oracles that provide real-world data crucial to seamless execution. Unfortunately, oracles can be compromised or fail unexpectedly, interfering with the execution of smart contracts.
Limited human intervention: The absence of human intervention in smart contracts can be a major drawback. Human administrators often curb immense losses by halting transactions in traditional contracts whenever they notice any issues, including suspected fraud.
Role of Smart Contracts
Smart contracts are indispensable in the finance industry’s revolution. Thanks to these digital marvels, consumers and service providers now enjoy faster transactions, reduced costs, and unmatched transparency. Plus, smart contracts have made it easier for companies to automate their payment systems and meet the demands of suppliers, employees, and other stakeholders.
That said, smart contracts can expose sensitive transaction details to members of the general public. That includes contract logic, transaction amounts, and the receiver/sender addresses. If your business can risk this exposure level, consider protecting sensitive information with layer 2 privacy solutions or privacy blockchains.
Source: https://coinpaper.com/7489/role-of-smart-contracts-in-revolutionizing-finance