Are Smart Contracts Changing the Financial Service Sector?
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Are Smart Contracts Changing the Financial Service Sector?

November 4, 2020      Deepshikha Gupta

The thumb rule of easy success in the finance sector is to copy the path followed by successful people. Yet it’s easy but we must say it is not the smartest way at all. For us, the smartest one is to avoid the mistakes people make and the path will itself crave out beautifully. 

The rule applies to almost every aspect of life. Whether to take an example of relationships or to learn the recipe of white sauce pasta. The smart way to succeed in both is to try not to repeat the mistakes others are doing. If you are someone afraid of committing these mistakes or trying something new then the time has come to learn what smart contracts can do for you.

No, they are not going to grow the pasta for you, not now at least. But, will help you get out of the redundant actions you take while cooking it. 

The problem is…

To understand the solution, the root of the problem is important to consider. Why is everybody talking about smart contracts? What is the problem with the existing structure of finance? How can a smart contract solve everything? 

See, the only concern that exists in the control of any third party in between. It is needed to have complete privacy and absolute security of the transaction we make. Today all of this is missing as everything is under the control of a central authority – the bank.

People don’t want banks or any other intermediary to peek into the transaction but want the utmost security at the same time. This is offered by blockchain technology.  

Smart contracts are not any sort of magic, but some codes of programming. A smart contract is essentially a digital contract that defines the conditions of fulfillment of an action. It works on the principle of if-then where if the condition satisfies, only then the action will be executed.  

An automated payment system is the first thing that comes to mind when we speak about the applications of smart contracts. There are various other benefits of smart contracts as well.  

Today, using smart contracts in blockchain technology is not new to ears. Every second person associated with blockchain knows the potential of smart contracts in multiple applications. The objective of sharing this opinion piece is to thoroughly analyze the extent of using smart contracts in the financial sector. 

On exploring the multiple areas associated with smart contracts, we came across a few major segments in which smart contracts can play a significant role. For example;

  • Taxation 
  • Banking sector
  • Insurance sector
  • Loans
  • Supply chain contracts
  • Employ contracts, etc. 
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But before diving deep into the areas, let us first see why using a smart contract can change the way for the new and old business personnel.

Benefits of smart contracts

1. Automatic: Smart contracts are a set of rules that can achieve results automatically. The coding ensures continuous and effective execution of the program satisfying all the given conditions of the agreement into it. 

2. Direct: The programming is based on logic and mathematical concepts. Therefore, smart contracts can be said as direct agreement following the conditions of if and then. 

3. Cheap: Using smart contracts for executing practical operations is not that expensive. These are the cheapest alternative to the solution of the latest technology in practical life examples.  

4. Transparent: One of the most prominent features that provide smart contracts an edge is – Transparency. Once the code is implemented on the Blockchain even the owner will lose control over it, and nobody can alter the code at any cost. 

This characteristic of smart contracts ensures transparency and decentralization in smart contracts. 

Diving into the areas of Financial Applications

Taxation

An old man running to the tax office just after the counter being closed is a source of jokes in American cartoons. But by putting the same shoes in your legs, you are unlikely to laugh. 

Tax is an indispensable part of human lives. Using automated payment smart contracts saves your time. At the same time, the records are available on the blockchain which implies that anyone can determine the transactions made. Also, the transparency of track records makes cheating next to impossible.

Paying VAT

VAT transactions are another interesting part of taxation where smart contracts are making the procedure really easier. Here is the comparison of how the VAT transactions are processed without smart contracts, and with smart contracts. You will be amazed to see how simple the whole process has become!

VAT transaction without a smart contract

VAT transaction with a smart contract. Source: Google

Banking sector

Don’t you feel annoyed standing in long queues, maintaining the social distance, to simply transfer money? No, the journey doesn’t end here. You have to pay a certain percentage of money as a Fee to the bank in order to process the transaction. 

Using smart contract woosh-away these intermediaries in between and let you transact without revealing your personal details like name and address. Another benefit you receive is the transparency of transacting records.

Insurance sector

The first thing that comes to mind as one gets into any minor or major accident is the insurance cover.  In the practical world, a few people accept their fault officially. But, this is not in the case of smart contracts. Using IoT, a smart contract can judge whether it is your fault or not. If you are in terms of the agreement, the payment will be directly transacted into your wallet.

Another important aspect of the smart contract in the insurance sector is payment. Let’s say one has an insurance cover of some x-lakh rupees. The person died an unnatural death and the family becomes the legal beneficiary of the amount. Using smart contracts the process of receiving money becomes easy and transparent. 

There is no room for corruption or any other faults that may exist in practical cases. Also, the agreement is between the two. No other party involved in between.

Loan

Smart contract monitors the borrowing conditions generated in loan transactions. Conditions such as interest calculation, submission dates, expiry dates, regulated payments, repayment requests, etc.

these contracts in the sector of loan pass all parameters of easy operation, smooth functionality, and establish trust for loan signing treaties. Since there is no participation of a third party, hence there is no room for intermediary trust over someone to ensure regulation of the process.    

Supply chain contracts

The supply chain is a set of operations used in the financing process that is associated with the increase in efficiency of the transaction between the parties. The supply chain is known to provide short-term credit, which in turn uses to give credit-rating. A credit rating ensures the transaction between buyers and sellers at a lower cost.

Applications of smart contracts associated with aspects of supply chain management revolutionize the whole technology. A distinctive feature of the approach is based on “virtual operation”. Here the control operations update their value on the blockchain. Automated information feedback, re-scheduling procedures, state control variables, etc.

What do we think about Smart Contracts?

Undoubtedly, smart contracts have limitless possibilities. But, in present times, applications of smart contracts in the financial world are more on a theoretical basis than practical. Also, the consequences are more on the theoretical side. 

Yes, smart contracts are maturing in the eyes of investors but not everyone is fully on the board. The numbers are quite dis-satisfying when it comes to the percentage of people actually investing in technologies like agreement and blockchains.

According to the data, US$ 6.2 billion are raised via implementing crowdfunding initiatives, between January and June 2018. Mind that the data is not sure about how frequently the smart contracts have been used by people and how complex the codes are!

Well…high activity is verified under 80% of cases in almost 211 institutions. 

You can think of “seasoning” as a collective group of people that has increased exposure to smart contracts. while a few have understood the abilities and drawbacks in day to day business cases. 

We believe the time has come where the interested should no longer ask only about the blockchains. But rather, should come up with a broad set of questions, reflecting what blockchain can do for them within their organizations. 

The agenda for proposing these pieces is to drive future studies in these areas. We will be back again with some new topics and help you understand it in plain English, eliminating those heavy technical words which are not elaborative enough.

#smart contract applications #smart contract in business #smart contract in finance applications #Smart Contracts #taxation and smart contracts
Deepshikha Gupta
Deepshikha Gupta

A student from a technical background, Deepshikha found Bitcoin in 2020 and has been an evangelist ever since. A B.Tech turned into a full-time crypto-writer, she tries to bridge the gap that currently exists between the crypto world and people from non-technical backgrounds, through her simplistic yet effective form of writing. She finds that her writing for cryptocurrencies can redefine the way the audience interacts with the crypto space.