Four Steps For Financial Institutions To Get Started With Smart Contracts
Today, brands seem more willing than ever to find smart solutions to streamline processes and improve customer satisfaction. With the upgrading of the Internet and the advent of the web3 era, major companies are also changing their own development models and business processes. The same is true for financial institutions, which are seeking new ways to augment and improve a wide variety of business processes.
Smart contracts seem to be one of them. Self-executing and less error-prone, smart contracts eliminate the need for intermediaries. Importantly, since smart contracts are part of the blockchain, they also provide security advantages. While smart contracts are often overlooked by technology leaders, there are still several use cases to explore.
Eliminating the human factor — This improves a company’s performance by preventing the negative consequences of human error. For example, arclays uses smart contracts to automate payments and change transaction owners. Meanwhile, HSBC has started using smart contracts to replace letters of credit.
Gaining a market advantage — While the technology is not yet widely used, it is likely that more companies will follow Amazon, IBM and JPMorgan, which are already using the technology. As the acceptance of smart contracts increases, more people may be willing to work with innovative and progressive companies. Financial institutions that use smart contracts early on may eventually gain greater influence and market share.
Embracing the blockchain — The contracts are programs stored on decentralized blockchain technology, which provides a high level of security, transparency and speed. Additionally, decentralization helps to keep data in different places, which limits the possibility of fraud and forgery.
What are Four Main Steps For Efficient Smart Contract Development?
With advanced solutions, though, it’s crucial to explore each stage of the implementation process. To get a sense of how the process works, here are the four general development stages.
Set out business conditions: Smart contracts are executed on an “if/when” basis, meaning there’s no way to change them. The decentralization of smart contracts also means that once established, they cannot be changed. After the contract is established, it must be executed. On this basis, the interests of both parties to the contract are protected at the same time. Parties involved in a digital contract should specify precise and unalterable conditions before agreeing to the contract.
Define the architecture: Once business requirements are determined, it’s time to create all the smart contract logic. At this stage, it’s crucial to collaborate with an experienced tech partner that knows the nuances of solution development on blockchain.
Smart contract development: This stage includes the coding for one of the blockchain platforms, such as Ethereum, IBM, Hyperledger Fabric or R3 Corda.
Internal review. In order to find out whether the digital contract works properly, an internal audit might be required. Testing is first performed via a local blockchain. After that, a testnet is carried out, where an audit ensures that the digital contract functions as expected and meets all security requirements.
What are the leading benefits of smart contracts?
Arguably the biggest benefit of smart contracts is their automatic execution, as it means fewer people need to be involved in implementing them. Unlike traditional contracts, digital contracts also have some other key advantages, such as:
1. Transparency. Because encrypted records of transactions are known only to two entities, no one should be able to change information for personal benefit. Meanwhile, Since smart contracts are based on public blockchains, their source code is not only immutable but also transparent to anyone.
2. Irreversibility. A smart contract is aimed at setting stable conditions. Therefore, parties can’t make any changes once it’s published on a blockchain that guarantees the contract execution.The execution process of a smart contract is completely irreversible. Once the conditions of the contract are triggered, the program of the contract will continue. Regardless of external conditions, the smart contract will ensure that the contract continues.
3. Security. Smart contracts are based on computer code that minimizes the ambiguity of language and is presented through a rigorous logical structure. The content and its execution process are transparent to all nodes, who can observe, record, and verify the contract status through the user interface.The data is encrypted, decreasing the likelihood of hacks. Beside, since smart contracts are computer code and predefined content, there is no subjective error and all results are precise and free of human error.
4. Speed. Digital contracts do not require paperwork or time to fix errors, and the contract is executed instantly when conditions are met.Smart contracts run on code, so they can execute transactions very quickly. Saves a lot of time compared to traditional business processes. Compared with traditional contracts, disputes are often caused due to differences in understanding of contract terms. Smart contracts can avoid disputes through calculation language, almost no disputes, and the cost of reaching a consensus is very low. As a result, inefficiencies due to miscommunication can be reduced.
The potential that digital contracts currently offer is enormous. To prove a point, take a look at the expected growth of the market: The market size is predicted to reach $770.52 million by 2028 globally.
Conclusion
Smart contracts are a new way for financial institutions to make contracts and interact with their customers. Despite the fact that some businesses are hesitant to apply this solution, others have already started leveraging digital contracts to advance their business processes.
Above these elements, they decides the trends of smart contracts. Meanwhile, with the advantages of security and automatic execution, as well as the ability to be part of emerging blockchain technology, these contracts should be appealing to companies looking to simplify the verification and traceability of different transactions.
