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Financial Applications with Algorand's Smart Contracts

A financial revolution is coming, and financial institutions must wade through the increasing challenges they face and either adapt or risk being unseated by the competition. Today, money and the exchange of assets around the world are moved using complex, antiquated systems that are painfully slow and have many added fees with each intermediary. With more demands for things like cross-border payments and overseas purchasing, individuals and institutions looking to compete in the global economy need faster, scalable, easier, and safer ways to transact. 

New entrants that are FinTech companies, like Neo and Challenger Banks, are launching with the advantage of low overhead that they can pass on to their customers, changing how consumers and institutions bank, trade, finance, and offer payments. As a result, consumers, businesses, and institutions have more choices and higher expectations for fast, efficient, and reliable services. Therefore, existing financial institutions need to rethink how they do business and update outdated technologies for better customer experiences or risk losing market share. 

The disruption of the financial industry will be redesigned by new technologies, mainly led by blockchain. Blockchain offers a vast range of opportunities with the transparency that customers demand, and is poised to be leading the next evolution of financial applications. However, not all blockchains are created equal - many of the first generation blockchains are not able to scale, are centralized, and cannot support complex applications that can power financial institutions that meet consumer demands.

Enabling Sophisticated Applications on a Next-Gen Breakthrough Blockchain 

Founded by Turing award winner Silvio Micali, Algorand set out to reinvent blockchain and developed the Pure Proof-of-Stake protocol, the world’s first truly public, permissionless, scalable, and proof-of-stake protocol that does not fork, without sacrificing its core attributes as a decentralized, secure, and cost-efficient blockchain. Algorand is first to provide immediate transaction finality, opening up exciting new use-cases and applications and is delivering the speed and ubiquitous infrastructure that financial institutions require to maintain control and governance over their operations. 

Most financial transactions are based on traditional contractual agreements that typically involve paperwork outlining terms between parties, and often involve a third-party to validate the fulfillment of complex terms to be executed. Smart Contracts will replace these outdated traditional agreements as an essential blockchain functionality that allows modern, frictionless transaction methods and gives end-users more control with fewer intermediaries. Algorand’s Smart Contracts are highly reliable in that they are executed on a tamper-proof (trustless), secure and decentralized network, with no forking and offer faster, error-free, immutable applications that are cost-effective for financial organizations. Smart Contracts are basic lines of code that are stored on the immutable blockchain and automatically execute when certain predefined terms are met and are validated autonomously.  Removing the need for third-party validation provides for a frictionless exchange of value. Algorand provides smart contracts and smart signatures. Stateful Smart contracts form the backbone for building distributed applications on the Algorand blockchain. Stateful smart contracts form the backbone for building distributed applications on the Algorand blockchain. These smart contracts provide access to on-chain state values and can be combined with other Algorand layer-1 features to implement dynamic and unique applications that take advantage of Algorand’s scalability, performance, and quick transaction finality.

Having this capability opens up a vast range of opportunities for financial institutions to enhance their operational efficiency. Unlike other blockchain protocols that offer smart contract functionality, Algorand Smart Contracts are built directly into Layer-1. This allows developers to take advantage of the foundational attributes of the network and to access simplified tools and examples of custom, complex dApps that can build a wide range of applications at low-cost without sacrificing the speed, scale, and simplicity of the platform. Providing the basis for complex applications while removing the technical barriers that undermine blockchain adoption.

Why Are Smart Contracts at Layer-1 a Breakthrough?

Algorand’s blockchain is capable of handling over 1,000 transactions per second—a throughput on par with large payment and financial networks---and finalizes blocks in less than 5 seconds. Algorand MainNet has been live for over a year with no technical disruptions and has proven to have the ability to power complex applications with high performance.

Algorand's Technological Advantages

Built by an internationally renowned team of researchers, mathematicians, cryptographers, and economists along with proven business leaders from global technology companies. Algorand’s latest release continues to make it simple and fast for developers to build on Algorand’s blockchain. Adding to other capabilities that include:

  • Asset Tokenization, Algorand’s Standard Assets (ASAs) is an easy way to create customizable assets that can be used for Real-Time Gross Settlement for payments
  • Atomic Transfers simultaneously transfer a number of assets among many parties instantly in a secure manner with no need for escrow or reliance on time-locked contracts. With Truly Atomic transfers, payment latency and counterparty risks are removed, speeding up market transactions and loosening collateral requirement
  • Rekeying offers the flexibility for users and custody providers to change Private Spending Keys anytime without changing Public Addresses, giving Public address more permanence and reducing operational overhead, while allowing for account novation.

Algorand provides a common, scalable, and interoperable platform that speeds up application development, increases iteration, and results in faster deployments with more cost-efficient capabilities.

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How Algorand’s Smart Contracts Are Paving the Way for a New Financial World

Trade Finance 

Algorand’s smart contracts remove the middleman from a financial transaction, eliminating the additional costs associated with hiring them as a validator. This drives down the cost of transaction fees and improves the speed at which payments can be made since compliance is automated, leading to a faster approval process. As a result, the receiving party in the smart contract will have increased liquidity due to the ease of transfer and the impossibility of fraud. 

Trade Clearing and Settlement

Trade clearing often requires a large amount of investment in human capital as it involves various approvals and reconciliations by internal and external sources. Each of these approvals is performed by an independent party, which adds to the settlement time of transactions and increases the risk of errors that can be made by these intermediaries. Smart contracts eliminate these intermediaries and streamline settlement processes due to the blockchains transacting capabilities. Trillions of dollars in securities are exchanged every year, and it is critical that these transactions can be made in the fastest, and most cost-effective, way possible. The Algorand blockchain offers immediate transaction finality, ensuring that as long as all the conditions of a transaction are met thousands of transactions can be processed every few seconds. This drastically reduces the time it takes to process transactions and eliminates the cost of intermediaries, saving financial institutions millions of dollars in infrastructure costs each year.

Financial Data Recording

Smart contracts enable financial institutions to record accurate financial data of individuals making transactions on an immutable network, ensuring that there is a high degree of data integrity and transparency. Integrating smart contracts into financial operations also removes any potential middleman when parties need to validate transactional data between each other. Algorand’s smart contracts open the door to interoperability between legacy systems and blockchains, making it possible to cut out counterparties while maintaining the same level of insight that they could provide. 

KYC and Compliance (Digital Identity)

Today’s KYC processes are expensive and time-consuming to conduct, and as we move into an increasingly digital age the topic of protecting digital privacy has become more important than ever. Smart contracts enable individuals to own and control their personal data, as counterparties will not need to know sensitive information in order to verify transactions when a smart contract is implemented on a trustless network like Algorand. This will lead to increased levels of compliance and make interoperability between financial institutions much more fluid as there will be no need for the transfer of critical information that an individual may not want shared.

Risked Based Capital (RBC)

Today’s volatile markets and current regulatory stipulations require financial institutions to minimize asset holding risk by maintaining proper risked based capital (RBC) levels. RBC requirements have been established to protect financial institutions from asset performance risks, eg. price shocks, asset defaults, fraudulent behavior, etc. RBC is not free and has a real monetary cost to institutions. By reducing the overall risk profile of a transaction, the capital requirements placed on the firm are lessened and by definition makes any financial transaction more capital efficient and thus more profitable to the institution. The coupling of Algorand’s atomic swap functionality and immediate block finality offer a unique solution to the issue of risked-based capital requirements, as it creates a riskless settlement environment that is protected from outages and fraudulent activity. As such the requirement for maintaining capital provisions due to settlement outages is virtually eliminated. Smart contracts enable autonomous settlement, eliminating the need for a third-party custodian when taking advantage of atomic swaps and greatly reduces the cost of financial operations.  

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