In 2015, Ethereum was launched by Vitalik Buterin. At that time, the platform brought the next generation of applications known as decentralized applications or dApps. Nonetheless, there was one other piece of Ethereum-specific technology, which boosted the platform’s popularity to the next level from the get-go; that technology’s name was smart contracts.

Most people think that smart contracts are a fresh concept, which was developed with the development of Ethereum blockchain. However, the phrase, smart contract, was coined in the mid-90s by Nick Szabo; that was much before any form of blockchain application development even existed.

Though Szabo publicly conceptualized smart contracts, the idea did not catch fire almost immediately. Instead, the concept of smart contracts remained dormant for quite a long time because there was no rock-solid technology to support them.

Then, in 2009, with the development of Bitcoin and blockchain, the implementation of a smart contract became a reality. In due course, smart contracts made their way into the financial world.

But before understanding how smart contracts will improve the financial services, let us take a deep-dive into what smart contracts are and how they work.

Smart Contracts At A Glance

When it comes to buying a new vehicle or renting a flat, contracts have become integral to every official agreement. Undoubtedly, the complexity and volume of a conventional contract can leave not only individuals but also enterprises overwhelmed. To top it all off, traditional contracts bring with them sky-high administrative costs and reliance on third-party systems.

With such a high complexity, confusions are bound to happen in between the parties involved in an agreement. As the world is moving toward digitization, the need for a digital business agreement is crystal-clear.

And none other than smart contracts will initiate the formation of the next-generation digital business agreement for reducing administrative cost and bringing down complexity levels.

Blockchain-backed smart contracts enable the involved parties to exchange property, shares, money, or anything else of value in a conflict-free and transparent way. The best part of deploying a smart contract is this: Once an agreement has a smart contract, its parties will avoid a middleman’s services altogether.

How Does A Smart Contract Work?

The idea of smart contracts stemmed from the idea of having decentralized ledgers. These ledgers could be used to self-execute smart contracts. Actually, these contracts are converted into conventional computer code that is executed automatically by computers; nonetheless, some parts of an entire contract may need human control and inputs.

These self-executed contracts could be enforced by obligation or legal enforcements of rights. Or they can be carried out by computer code’s tamper-proof execution. Here is an example for explaining how smart contracts work.

The concept of smart contracts could be likened to the working of a vending machine that self-executes and automates. When someone drops a dollar in a vending machine and press a button, they will get the candy for their liking. On observing the whole vending machine interaction, anyone will note that a program (a contract) is coded (written) in the machine; that contract ran when you pressed the button (signed it off) on the machine.

In simpler words, computer code is just like a digitized contract. So when an enterprise needs to execute a smart contract, it does not have to visit a lawyer to get the required documents; instead, the enterprise will just have to drop a token inside a vending machine (a ledger, that is) and the code will be executed to give an output.

Smart contracts have two top features that distinguish them from a run-of-the-mill contract. These two features are as follows.

Automation

A smart contract will always be able to perform partially with the help of computers. While achieving its partial performance, these contracts will not need to have any direct intervention from the involved parties. On the other hand, a traditional contract will have text or even oral communication in some cases. The execution of a conventional contract will rely on a party’s independent actions.

Enforceability

Smart contracts will be enforceable in two ways. First of all, this contract can be of the conventional legal variety (i.e., a court of law would enforce it). Second, it can be of a novel kind where a tamper-proof code will execute the contract.

A smart contract with a tamper-proof code will create a record that cannot be modified by any involved party or even a third party. In that sense, the enforceability of a contract would not necessarily be dependent on a court; enforceability, in the sense of a code-driven smart contract, means the outcome will be enforced by a completely autonomous technological process that cannot be tampered.

Now that it is clear what smart contracts are and how they work, it is important to understand how they are simplifying the financial world.

Smart Contracts Simplify The Financial World

After cryptocurrency, one of the biggest use cases of blockchain is a smart contract. These contracts are used for keeping records and managing transactions across a variety of industries. By depending on the security, trust, and accuracy of a blockchain network, smart contracts have the potential for revolutionizing the financial sector out and out.

The self-executing feature of smart contracts makes them ideal for a range of data-driven industries such as finance. In the financial world, smart contracts have already started disrupting different sectors such as trading and banking.

Making Banking Transactions Accurate

The financial services domain is one of the obvious places for using smart contracts. Why? That is because this sector generates and needs copious amounts of data for working seamlessly every day.

Smart contracts could accelerate and streamline commercial transactions and related processes in the financial sector. That way, these contracts make sure that the information is accurately transferred while enforcing every party’s obligations.

As the terms of the contract are completely visible to every involved party, its execution is known beforehand. As these contracts are self-executed, tamper-proof codes, they are bound to be executed as they are written leaving absolutely no room for error.

Most major banks have even started piloting different blockchain projects for simplifying cross-border payments, improving identity management frameworks, and enhancing the transparency of transactions.

Which is why, it is inevitable to see rapid adoption of smart contracts in the banking sector in the coming time.

Ushering In An Era Of Decentralized Trading

The best and most successful example of implementing decentralized trading can be seen in Switzerland. A blockchain-based platform for over-the-counter (OTC) trading of commodities, securities, and currencies has kick-started an era of decentralized trading.

A Swiss consortium of financial institutes is behind the implementation of OTC blockchain. Traditionally speaking, trading is conducted through a broker; and it has to face tighter money-laundering regulations. Because of so many regulations, more and more involved parties are losing their interest in this trading format.

A reliable P2P model on blockchain has the support of automatic smart contract verifications. These verifications resolve the dilemma caused by so many regulations. This setup became all the more lucrative with the implementation of a robust identity management system for identifying trading partners along with encrypted data storage outside blockchain.

OTC trading will make brokers redundant with trades taking place between trading partners. Also, through smart contracts, the legal compliance to different money-laundering rules has become automatic and auditable. The presence of smart contracts and well-built blockchain is changing trading once and for all.

Creating The First Blockchain Bond

In 2018, the World Bank gave the green light to Australia’s Commonwealth Bank (CBA) to issue the world’s first blockchain-backed bond. CBA took less than a year for developing a fully-fledged CBA bond. For developing it, CBA used private blockchain built on Ethereum.

That private blockchain is further powered by legally verified smart contracts for governing, creating, allocating, and transferring these bonds. All these activities related to bonds were carried out using an end-to-end distributed ledger technology.

The first blockchain-based bond is one of the finest examples that have accelerated the adoption of smart contracts in the coming time. As CBA is one of the biggest banks in New Zealand and Australia, this blockchain-driven bond will be available for global markets.

But what if a data-driven enterprise is just starting out with smart contracts and blockchain? How can it leverage blockchain with zero hassle for enhancing its business model? The answer lies with a trusted digital partner that can help enterprises unleash the power of smart contracts and blockchain.

Building An Enterprise Driven By The Power Of Smart Contracts

When it comes to managing the rapidly evolving capital market or the complex insurance sector, smart contracts will help. These contracts are flexible enough to comply with different financial use cases that require mature regulations and immense scalability.

Smart contracts present a transformative, exciting growth opportunity for the entire financial domain. Nonetheless, with groundbreaking innovations in the world of blockchain, the enterprises need to be very careful while leveraging smart contracts in the best possible way.

Which is why, it is essential to have a trusted growth partner that will help enterprises navigate the blockchain landscape and properly use smart contracts. Here is where Flexsin comes into play. Flexsin is a dependable digital partner that will help businesses analyze, innovate, build, and transact using blockchain and smart contracts.

From developing a critical proof of concepts to deploying tamper-proof smart contracts and private blockchain, Flexsin’s rich expertise has positioned it among reliable Blockchain-as-a-Service providers. Get in touch with Flexsin’s smart contract experts and see how this particular technology will enable any financial business to move forward.