A key feature of blockchain is that allows smart contracts. A smart contract is a program that runs when defined criteria are met. This helps in automation of workflow or agreements. Smart contracts can be effectively used in financial transactions thanks to their many benefits as per Bahaa Abdul Hussein.

Why use smart contracts?

Smart contracts make use of ‘if .. then’ algorithms. When the defined criteria are fulfilled, the action is executed by the computer network. This leads to a transaction and once the transaction is complete, the blockchain is updated. The reasons why you should consider using smart contracts are:

  • A contract can be quickly executed and since everything is digital, it is efficient.
  • Smart contracts are executed between the two contracting parties and there is no need of intermediaries.
  • The absence of intermediaries ensures there are no time delays or extra costs.
  • Security is a key benefit. Blockchain records cannot be altered and they are encrypted making them highly secure.

Using smart contracts for financial transactions

The benefits of smart contracts make them ideal for use in financial transactions. The financial sector needs to pay a lot of importance to security and ensuring efficiency in transactions. This is where blockchain-based smart contracts would help. The following explain how financial firms can effectively use smart contracts:

  • Financial transactions involve money, and it is essential that they be error-free. This is a significant benefit smart contracts offer.
  • Time taken for transactions can be speeded up with smart contracts.
  • Processing of insurance claims can be easier when smart contracts are used. It not only ensures error-free processing, but also helps in preventing fraud.
  • Transaction costs can be reduced and this benefits both the company and the customer.
  • Digital payments can be made more effective through smart contracts. They ensure that remittance is done on a real-time basis.
  • When transactions are done manually, they involve reams of paperwork. Blockchain records all transactions automatically. This makes record keeping effective. Most importantly, they are tamper-proof and this ensures complete transparency.
  • KYC is a key process where customer identity has to be verified. Smart contracts can make this process easy. Apart from verifying identity, checking credit scores also becomes easy.
  • Distributed ledge technology allows for cost reduction since there are no third parties involved. It makes peer-to-peer transactions easy.
  • Trade clearing and settlement activities can be streamlined and made error-free.
  • Smart contracts allow transparency in online donations enabling charities to function more efficiently.

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