Blockchain and Smart Contracts – Solutions for Our Future in Finance

Dec 07, 2018 | 6 months ago | Read Time: 2 minutes | By Amrita Chakraborty

Blockchain technology has emerged as a solution to all database sorting problems. With the help of mathematics and cryptography, blockchain technology provides an open decentralized database of any transaction involving value, be it money, goods, property, work or even votes. This database holds records of ownership and transactions whose authenticity can be verified by the entire community.

The future global economy will move towards a completely transparent one having distributed property and trust, where anyone having access to the internet can get involved in Blockchain based transactions. Unimagined new networks will evolve to meet society’s needs more cheaply and potentially more securely. However, this technology might minimize the necessity of involving third party organizations in various sectors. Since a significant population employed in trust agencies like bankers to notaries will face tough challenges on price, volume and their very existence, it is difficult for government, financial and legal institutions to embrace Blockchain technology.

Why blockchain is useful for financial institutions?

Blockchain technology has innumerable uses, as indicated by scientific published research (Bharadwaj, 2016). Recent researches predict that within 10 years, it will find application in tax collection; the Federal Reserve, intellectual property, universal basic income, real estate records, etc. (Prisco, 2014). It will also become simpler for immigrants to send money back to their own countries where access to financial institutions is limited.

“Financial fraud and cases of bank account hacking will also be significantly reduced, as every transaction will be recorded on a public and distributed ledger.”

These ledgers will be accessible to anyone having internet connection, complete authentication will be maintained.

How cryptocurrency and blockchain works?

The extensive employment of cryptography, a basic feature of Blockchain network, assures authoritativeness and authenticity behind all transactions in the network, which was never possible before. Cryptocurrencies record monetary transactions in a Blockchain network and the exchange of value. Two of the most popular cryptocurrencies till date, Bitcoin and Ethereum, allows encoding scripts for processing transactions. This feature has ultimately led to the development of smart contracts (Luu, 2016). Smart contracts are self-executing contracts where the terms of agreement between the buyer and seller are written directly in the form of computer codes. This coded form of agreement resides in the decentralized, distributed Blockchain network. Smart contracts allow trusted transactions and agreements to be carried out among anonymous parties without the requirement or an intermediary, legal system, or external enforcement mechanism.These techniques render transactions traceable, transparent, and irreversible (Watanabe, 2016).

What are smart contracts?

Smart contracts were proposed by Nick Szabo (Omohundro, 2014) way back in 1993, but the then prevailing economic and communication infrastructure failed to implement the same (Szabo, 1997).

“A smart contract is a program that runs on the Blockchain and has its correct execution enforced by the consensus protocol.”

A contract can encode any set of rules represented in its programming language for instance, a contract can execute transfers when certain events happen (e.g. payment of security deposits in an escrow system). The events could be fulfillment or delivery of a product or service.

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