How Smart Contracts Will Disrupt Finance as We Know It

The innovation of smart contracts is one of the most exciting and talked about blockchain attributes to date. The potential implications smart contracts will have in the world of finance has made them impossible for the industry to ignore.

Smart contracts can increase efficiency while reducing cost and errors. This is of huge appeal to financial intuitions all over the world.

Smart Contracts Explained

"A smart contract is a set of promises, specified in the digital form, including protocols within which the parties perform on these promises. [...] The basic idea of smart contracts is that many kinds of contractual clauses (such as liens, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with." Nick Szabo

Simply put, a smart contract provides a conflict-free method of exchanging anything with a value, such as money, shares, or property. This is effectively done without the use of a middleman. As a result, it saves time and money and reduces errors.

The overall potential for smart contracts is huge. They could effectively replace paper contracts in the medium- to long-term. Here are some advantages of smart contracts:

• Processed in minutes rather than days
• Do not require manual remittance or an escrow
• Processed at a reduced cost without errors
• Can be completed with a digital signature
• More secure from cyber attacks due to their decentralized registry 

The Use of Smart Contracts to Date

The first real-world use of blockchain smart contracts was the Ethereum project, in which smart contracts were able to automatically pay out coins once certain pre-defined conditions were met. Following Ethereum's success, many other ICOs have used smart contracts built on the Ethereum network.

The Future of Digital Banking

The potential shift from traditional digital banking to blockchain banking is hard for banks to ignore, especially with the cost-efficient benefits blockchain banking could bring. As a result, banks are investigating ways to leverage smart contracts to advantage.

For example, Swiss bank UBS has been experimenting with smart bonds. This process would allow for bonds to be issued and distributed using smart contracts via the blockchain. This is an attractive idea for banks as it would rule out the need for intermediaries.

Blockchain banking has the potential to reduce errors and costs while vastly speeding up processing times. The decentralized blockchain also provides stronger cybersecurity which prevents fraud. This may be a more attractive alternative to the Automated Clearing House (ACH), currently in use by financial institutions.

Smart Contracts And Other Financial Services

In addition to banking, smart contracts are impacting other areas of financial services. Here are a few examples:

Global Payments: As mentioned, the removal of manual remittance is a huge advantage of smart contracts. This allows for payments to be made globally, usually within 24 hours. There are several remittance companies now providing this service.

Managing Assets: Smart contracts are changing how people manage their assets. The blockchain ledger makes the process a lot easier and cheaper. It removes intermediaries and thus also human error.

Insurance: Like banking, there is huge potential for smart contracts to change the shape of the insurance industry. Processing claims, preventing fraud, and sharing data could all be improved using the blockchain ledger.

Conclusion

In the grand scheme of things, smart contracts are still a work in progress that will take some time to develop. It is the blockchain innovation which could have the greatest effect.

This is why many of the largest financial institutions globally are exploring the use of smart contracts and blockchain technology. At this point, there is little doubt that blockchain will be the technology that disrupts the financial industry as we know it today.

Want to know more about blockchain technology and its effect on finance? Sign up for the Bitcoin Market Journal investor newsletter today!