Applications of Smart Contracts in the Financial Industry
Sergio Velasco||Blockchain|5 min read
Blockchain is arguably one of the most important technological innovations in the digitisation of asset ownership to date.
One of the most interesting applications of blockchain technology is in the field of Smart Contracts. Smart contracts are rapidly gaining widespread use and are easy to create as global processes become more and more digitised.
What are Smart Contracts in Blockchain?
Smart Contracts are used across industries to streamline and automate business around the world.
Smart Contracts, among other things, represent a completely different approach to contracts. Instead of two parties signing double copies of a written agreement and threatening each other with legal action if the other party does not comply, in smart contracts the code is the law and is not open to subjective interpretation. In other words, once a transaction is executed within a Smart Contract, there is no going back on its outcome. The computer code that implements the contract will always execute the way it is programmed, and the result, among other applications, is a new way of making public and private agreements between individuals, organisations and even governments.
A Smart Contract is self-executing computer code that is publicly viewable, tamper- proof and guaranteed to run in a predictable manner.
The main characteristics that all Smart Contracts have are:
- Digital signatures. When a transaction is executed in a Smart Contract, it must be signed with the private key. The other participants can verify its validity by using the public key.
- Oracles. External data sources supplement the contract logics. The parties transacting in the Smart Contract rely on these external data sources for the execution of the contract.
- Self-executing. When the right conditions are met, the contract is able to execute itself automatically, without requiring any additional action on behalf of either party.
By evaluating Smart Contracts through a trusted, decentralised digital source, individuals can transact almost anything of value, from money to stocks or even bets.
Nowadays, Smart Contracts are available to disintermediate many financial and business processes. In essence, they are self-executing, self-enforcing protocols that are governed by explicit terms and conditions.
Smart Contracts in the financial industry
Smart contracts are changing the way and speed at which business is conducted in all industries. The financial services industry is no exception.
Blockchain is the perfect environment for Smart Contracts, as data from past transactions cannot be lost, modified or deleted.
This has clear potential to reshape the world of financial transactions. Individuals can rest easy knowing that information has not been altered for the personal benefit of a third party.
Smart contracts reduce monitoring and execution costs, which means that financial institutions do not need to rely as much on post-trade financial market infrastructures since everything is on the network itself.
The potential for reshaping the world of financial contracts is clear. Depending on the financial services offered by different entities, multiple applications can be found:
- Investment banking: In the negotiation and settlement of syndicated loans, corporate clients could benefit from shorter settlements, without entry barriers and with lower fees.
- Retail banking: The mortgage lending industry could significantly benefit from adopting Smart Contracts.
- Insurance: The use of Smart Contracts, for example in the personal car insurance industry, could greatly reduce claims processing overhead costs. Consumers could also expect lower premiums as insurers could transfer a portion of their annual savings to lower premiums.
Other examples could be the distribution of private equity from small and medium- sized companies through crowdfunding; the negotiation and settlement of large collateralised loans (a loan secured by a certain package of shares, which constitutes the collateral percentage of the loan) such as syndicated loans across a group of banks, mutual funds, and pension funds; the automated processing of travel insurance claims in case of events that can be automatically verified, such as flight delays or cancellations.
Now that you've seen the potential of Smart Contracts-based applications, you may be wondering: where do I start? At Exponentia we can help you implement this solution in your business.