Cost-Benefit Analysis of Smart Contracts in Banking

By Lutpin Apr 20, 2017 6:00 PM EST

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What are smart contracts?

Smart contracts play a major role behind financial services. A smart contract can be used by two or more parties via an electronic medium to agree upon specific terms and conditions in a self-regulating contract. These contracts would usually be involved in a financial transaction, which is associated with a Blockchain. The financial and banking services have realized the importance of smart contracts because of the versatility associated with them. For example, a smart contract can be used to improve Know Your Customer (KYC) processes, issue bonds and clear or settle securities among others.

How did smart contracts come into play?

Even though smart contracts gained their popularity in the recent past, they have been popular among people for a long period of time. The first concept behind smart contracts was released back in 1994. It was done by a computer scientist named Nick Szabo. According to Nick, a smart contract is a computerized transaction protocol, which has the ability to execute all the terms associated with a contract. The primary objective of creating this type of contract is to cater the common contractual conditions such as confidentiality, liens, payment terms and enforcement. In addition, they have the ability to minimize both accidental as well as malicious exceptions. By definition, smart contracts also have the ability to minimize the requirement to have trusted intermediaries. Some of the economic goals that are related to smart contracts include the ability to reduce fraud loss, enforcement expenses, arbitrations and other transaction expenses. Even though the concept behind smart contracts is more than 20 years old, it fits perfectly well for the people in todays society. Therefore, the concept can be used per definition. The only difference is the incorporation of Blockchain technology into the concept of smart

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