Smart contracts (Smart Contracts) in the financial markets, especially in the cryptocurrency market, are computer-generated transaction protocols.
With the introduction of blockchain technology into our lives, contracts such as transactions, agreements, legal texts between parties are written on lines of code; the intermediary brokers are removed and the bureaucratic processes of the contract interlocutors are shortened, offering both time and financial savings. The contracts established with the decentralized, open-source, effective and transparent structure brought along by blockchain technology can be verified by everyone, cannot be changed later, and are permanently recorded and recorded in the database. It also allows human error to be minimized because of the flawless writing of the established mathematical modeling, that is, the algorithm. Again, if the algorithm has a flawless structure, some users in the database can be given the opportunity to access the contract with a private key, and participants with a public key can also log in to the database, thus ensuring the security and verifiability of the contracts.
With the widespread use of smart contracts, commission, and bureaucratic costs in disputes between the parties will also be reduced. With the ease of verifiability in blockchain technology, parties such as banks and some credit institutions will not be involved in the process, and the loss of time, operational and security risks that may arise from the submission of pages of documents such as minutes, documents, files, e-mail records, and the costs that may arise due to the sharing of these are among the biggest advantages.
How Smart Contracts Work
Ethereum developer Vitalik Buterin explains how smart contracts work at a blockchain summit: “contracts are translated into computer language and stored in blocks. The parties to the contracts, which are copied to distributed ledgers, are kept 100 percent anonymous. The code snippet is ready with specific tasks and details (time limit, what goes where, from where to where, etc.). When the time comes, it takes action to fulfill the transaction, and if the necessary conditions are met, the transaction is successfully completed or canceled before completion.”
For example, let’s imagine a contract in which every time George sends money to Daisy, half of that money is automatically sent to John. This scenario is turned into a smart contract and recorded. Every money sent from George to Daisy automatically triggers the code and half of that money is sent to John. You can make this process as complex and functional as you wish.
Since smart contracts and all transactions are stored in distributed ledgers, they provide a very high level of security and immunity.
Bitcoin was the first cryptocurrency, so it is also the first example of a simple smart contract. But by its very nature, bitcoin is only used to transfer money.
This is where Ethereum smart contracts differ from bitcoin. Using the Ethereum code structure, developers can develop smart contracts that can serve much different purposes.
You can use smart contracts for lease agreements, insurance, credit, legal transactions, crowdfunding and many other areas you can think of.
Smart Contract Features
In the simplest terms, smart contracts can be defined as a self-executing computer-generated electronic script. To simplify even further, it is a set of commands that will be executed if the event in the scenario occurs.
The first development of smart contracts was Nick Szabo‘s Bitgold, a digital mechanism that included smart contracts, in 1998. Although it was an unrealized project, it embodied many of the features of today’s blockchain technology. Today, Bitcoin, Ethereum, Ripple and many other cryptocurrencies, especially Bitcoin, have an infrastructure built on different algorithms and smart contract models.
As for the use of smart contracts, governments, regulatory and supervisory bodies, and financial giants around the world, especially banks, have been wary of cryptocurrencies, but they have not been indifferent to the revolution brought about by the blockchain technology behind it. For example, the Depository Trust and Clearing Corporation (DTCC) and four major banks -Bank of America Merrill Lynch, Citi, Credit Suisse and J.P. Morgan- have successfully processed Axoni’s blockchain credit default swap using smart contracts. Russia’s Sberbank is also known to have tested the Ethereum blockchain.
If we consider the disadvantages of smart contracts, we can say that since it is a new technology, the perfection of the algorithm is subject to question marks. In addition, the difficulty of smart contracts to be audited by governments in today’s conditions is another question mark… But as this technology is perfected over time, there will be no room for these question marks and smart contracts will become a part of our lives.
As smart contracts are developed along with cryptocurrencies, they are mostly applied in the world of finance and banking. However, in addition to the financial markets, the application of blockchain technology in the fulfillment of law, real estate, health, and several public services promises a solution to prevent many victimizations, congestion and financial losses in these areas in daily life.
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