The Emergence of Smart Contracts: Revolutionizing Modern Finance
- Smart contracts are useful in financial terms with features like asset tokenization and automated transactions.
- Sophisticated transaction processes like borrowing and lending in different cryptocurrencies become easy with this contract.
Smart contract was initially introduced by the Ethereum blockchain. Later it got adopted by several cryptos developed over it and other blockchains as well. It opened various doorways to the world of decentralization. As most of the functionalities of blockchain are not governed by any central authority, Smart Contracts came onto the scene by simplifying trade and business between two anonymous parties with authenticity and credibility.
What Is a Smart Contract?
Basically, Smart contracts comprise code that self-executed predefined terms and conditions are met. These contracts are made to run over a blockchain network to maintain its authenticity, transparency, and immutability. A completed transaction based on this contract is irreversible and trackable.
It executes transactions between two anonymous parties without any centralized authority or external mechanism. It provides a real-time response among both entities. Enhanced transparency is another key feature that removes the necessity of intermediaries along with reducing the chances of human error and fraudulent activities.
In contrast to traditional contracts that involve bulky paperwork and security concerns necessitating third-party validation, smart contracts operate as computer codes adhering to a fixed protocol. These codes and compliances are backed with blockchain technology, which gets executed only when required terms and conditions are fulfilled.
Benefits of Smart Contracts in Modern Finance
Implementation of smart contracts is already done in various sectors including finance. Because of its high potential and versatility, it’s widely adopted in several blockchain networks. Purchase and selling of goods can also be leveraged with its help. Agreement between two business parties ensures shipment and delivery of the material in a legalized manner. Some more benefits include:
Gaming
Blockchain-based games like Decentraland, Cryptokitties, and The Sandbox use smart contracts. In-game purchasing of items, assets, and real estate is done with the help of these contracts ensuring safe and secure peer-to-peer transactions.
Decentralized Finance (DeFi)
DeFi is one of the most important components of blockchain-based finance which provides decentralization in financial services. Examples such as MakerDAO and Aave illustrate its potential, enabling collateral management, interest distribution, and automated transactions.
Supply Chain Management
With the help of smart contracts, the movement of goods and transactions becomes traceable as they get recorded over a shared ledger. These ledgers can be seen and verified by each participant which enhances accountability and trust across supply chains. Walmart is an example that uses contracts to track the food product’s origin and quality. This ensures customer satisfaction and cost reduction as well.
Processing Insurance Claim
Verification of a legitimate insurance claim is a hectic task nowadays. Traditional contract validation and counter-check are time-consuming. These limitations can be addressed with the help of blockchain-based contracts by automated claim and processing. Decentralized ledgers help to reduce the risks and fraudulent activities in financial institutions.
Conclusion
The emergence of decentralization possesses its own pros and cons. Lack of centralized authority is beneficial in several ways, but in the world of blockchain, surety of transactions, delivery, and receiving of products isn’t backed by anyone. A smart contract is introduced to address these limitations of decentralization by giving transparency and a trackable system. It will surely disrupt our traditional banking system by reducing operational costs and significant risks with its volatility and scalability.
