Feb 16, 2021
Smart contracts are poised to play an integral role in the future of global finance. In this guide, you will discover what smart contracts are, how they work, and how they will be deployed in the future of global finance.
In a nutshell:
A smart contract is a self-executing contract where the terms of the agreement between two (or more) parties are written into code, operating autonomously on a decentralized blockchain network.
Essentially, smart contracts are computer programs embedded in a blockchain that provide for the transfer of value between parties if the terms of the contract are satisfied.
Financial smart contracts are computer code-enforced agreements that function autonomously, executing financial rules without the need for a central authority. Algorand’s blockchain provides a platform enabling fintechs and financial institutions to integrate smart contracts into their operations at scale.
Cryptographer Nick Szabo was the first to raise the idea of smart contracts back in 1994, when he proposed recording contracts by using computer code. While the idea didn’t take off at the time, it became feasible over a decade later with the development of blockchain technology.
Szabo’s idea was based on the efficiency benefits offered by using a computer program to automate enforcement of contract provisions. Automating contract completion in this way provides a secure method of documenting fulfillment of a contract, removing the need to involve a third-party intermediary to validate the process.
While the technology wasn’t ready at the time, Szabo’s 1996 paper on the subject of smart contracts outlined the potential of the technology to perform basic functions, such as fraud reduction and contract term enforcement, and for more disruptive uses, such as digital cash and smart property.
Smart contracts represent a logical extension of the use of the blockchain to facilitate seamless, frictionless transactions on a global scale.
Smart contracts operate on the same principle as the if/then function of a computer program. If the conditions embedded in the program underlying the contract are met, then the action (or actions) described in the contract takes place. If they are not met, no transaction occurs.
For instance, if the buyer deposits a specified sum of money by a certain date, the goods being purchased as specified in the contract would be released on that date. If, however, either the money is not deposited or the goods are not made available by the specified date and time, no transaction occurs.
These contracts are enabled by the immutability of the blockchain – the fact that transactions recorded on the blockchain are permanent. Because such transactions are recorded on multiple network nodes, they cannot be retroactively altered by a single participant.
Smart contracts offer the following benefits:
By enabling people who don’t know each other to easily enter into agreements with each other, smart contracts have tremendously expanded the number of potential participants in digital transactions. For example, decentralized applications (DApps) include multiple smart contracts that work together to provide a service, typically with a user interface like traditional apps.
Smart contracts have found uses in real estate, insurance, healthcare, credit authorization, real estate, legal processes, and online gaming. However, arguably, the most promising area for the use of smart contracts is global finance.
Blockchains that support the development of DApps offer developers the opportunity to design innovative solutions that put smart contracts to use for a variety of purposes. DApps can offer more complex transactions than an individual smart contract, including services similar to traditional financial offerings.
Some of the most popular uses of smart contracts for financial applications include:
The following are smart contract-powered applications building on the Algorand network:
Smart contracts possess immense potential to improve existing business practices and innovate new ones. The inclusivity provided by open blockchain networks makes economic opportunities available to many people who have previously been unable to access them due to structural or logistical barriers. As a result, the new paradigm created by the combination of blockchain and smart contracts can help democratize numerous processes.
The opportunities for innovation and enhanced efficiency offered by the blockchain and smart contracts are in keeping with the five principles of FutureFi:
Smart contracts offer fintechs and financial institutions a source of innovation that can create opportunities to both improve existing processes and develop new products and services.
Doing so can not only boost these organizations’ bottom lines but also help further the democratization of finance by expanding the pool of potential users of financial products and services worldwide.
The benefits offered by blockchain-powered smart contracts hold the potential to revolutionize global finance, helping bring about a future of finance that offers the potential for significant economic expansion driven by technological innovation.
Algorand has developed the world’s first open, permissionless, pure proof-of-stake blockchain protocol that, without forking, provides the necessary security, scalability, and decentralization needed for today’s economy.
With an award-winning team, we enable traditional finance and decentralized financial businesses to embrace the world of frictionless finance.
Algorand is committed to the ongoing development of best-in-class solutions for the future of economic exchange.
Algorand has recently partnered with OMFIF (Official Monetary and Financial Institutions Forum) DMI (Digital Monetary Institute), Citi, Cypherium, GrabPay, Mastercard, Novi (from Facebook), PayPal and SWIFT - publishing a report about the Future of Payments.
Key findings in this report include: