Banking, Lending and Fintech Topics
on Sep 27th, 2018.
What is a smart contract?
A smart contract is defined as “a computer code running on top of a blockchain containing a set of rules under which the parties to that smart contract agree to interact with each other. If and when the pre-defined rules are met, the agreement is automatically enforced. The smart contract code facilitates, verifies, and enforces the negotiation or performance of an agreement or transaction. It is the simplest form of decentralized automation.”
The term smart contract was first introduced by Nick Szabo 10 years before Bitcoin appeared. Although he was rumored to be Satoshi Nakamoto, he has denied all allegations.
Benefits of a smart contract
Smart contracts are automated, i. e. they exclude human participation because everything is done by the prescribed code. Since there is no middle man, there are no extra fees to be paid for its execution, which means it cuts expenses. The smart contracts take only seconds to be in effect and all the information is registered on the blockchain so it’s transparent and cannot be altered.
1. Banking and Financial Services
As previously said, smart contracts are part of the blockchain technology and are used for faster cryptocurrency transfer. We previously discussed why banks invest in blockchain and we concluded that the most notable reason is cost saving which leads to lower prices, thus becoming more competent in the market.
In 2016, Barclays, Credit Suisse, KBC, SIX and Thomson Reuters got onboard for a pilot program led by Swiss bank UBS that will use Ethereum smart contracts to improve the quality of counterparty reference data through anonymous reconciliation. Batavia, the blockchain platform powered by IBM, went live this April and carried out two full cycles of trades: from Germany to Spain and from Austria to Spain.
At the end of November 2017, the State Bank of India (SBI) announced its plan to use blockchain for smart contracts.
Capgemini’s report on Smart Contracts in Financial Services estimates that banks using smart contracts for mortgage loans could cut costs in the range of US$3 billion to $11 billion annually. They also estimate that the mainstream adoption of smart contract should happen in 2020.
2. Prediction Markets
Prediction markets allow participants to speculate on the outcome of events like elections, sports, sales results etc. Prediction markets can speed up decisions in companies or political parties because they go beyond betting. The predictions give valuable insights about the public opinion on the matter in question.
Gnosis and Augur are one of the well-known Ethereum-based prediction market platforms. Bringing blockchain to the prediction markets opens an option fewer fees, greater accessibility, and better accuracy than other markets. The use of smart contracts ensures that the predictions of large groups are recorded transparently, and this helps for better predictions. However, these projects are still in test phase but are expected to be fully released in 1-2 years.
The main problem with insurance is the time necessary for a claim to be processed which can take up to months to be processed. By writing insurance policies into a smart contract all the manual work can be automated. All the parameters can be recorded onto a blockchain and once the requirements are met, the insurance claim is processed without human intervention.
According to Capgemini’s report, the annual cost savings globally in the personal motor insurance industry alone are estimated to amount US$21 billion.
In 2017, AXA announced to go blockchain and offer the first insurance using smart contracts. When the passengers buy delay insurance on their fizzy platform, it is recorded on Ethereum blockchain. The smart contract connects to the global air traffic database and once a delay of over two hours is registered, the passengers are compensated immediately.
Etherisc is building a marketplace platform using blockchain smart contracts to buy and sell insurance policies. Users can create their products on the platform and ask for licensing for various kinds of insurance policies.
4. Digital Identity
The greatest issue with using IoT has shown to be security. Fortunately, smart contracts can be set to release only necessary personal data to the other contract party. No one can see or use the data unless the holder verifies it and since it is stored on the blockchain can’t be altered which ensures authenticity. Smart contracts also solve the problem for necessary storage for keeping personal data; it is all stored on the blockchain. This enhances KYC verification which becomes instant.
uPort is in identity protocol that “allows users to register their own identity on Ethereum, send and request credentials, sign transactions, and securely manage keys & data.” uPort is public and permissionless ledger which allows users to manage and, if they choose, share their identity data.
5. Real Estate and Land Titles Recording
Smart contracts can facilitate property purchases. A centralized registry of property can prevent fraud, allow transaction transparency and automate trust. They are especially convenient with cross-border purchases to avoid months of negotiation, piles of documentation and bureaucratic labyrinths.
New York’s Bapple Realty was amongst the first real estate agencies to use blockchain smart contracts. For this purpose, they partnered with Zap.org to collect and divide commissions. Zap uses an Ethereum-based ERC 20 token to power their oracle marketplace for smart contracts. At the moment Zap is testing app which would allow real estate agents to build and adjust various types of contacts. They have recently paired with prediction market by Stox.
6. Authorship and Intellectual Property Rights
Artists are often deprived of their royalties due to piracy. Smart contracts can find their use in the field of Intellectual Property. Ownership rights can be recorded on the blockchain and whenever someone uses the artist’s work, the smart contract would ensure that a payment is made to the account of the authorship rights holder and any party involved.
PeerTracks, Ujo Music, Mediachain Attribution Engine, Blokur, Mycelia, Aurovine, Stem, Bittunes and Decent are startups that use the pay-per-use principle to disburse the royalties to all stakeholders. However, most of these platforms are still in the test phase.
7. The Internet of Things (IoT)
There are 2.8 billion mobile devices, 30.7 billion IoT devices and 2.6 billion M2M connections in the world. Gartner estimates that by 2020 there will be over 26 billion connected devices to the IoT. All of these devices would interact to share information on transportation, weather conditions, human habits, schedules, location, payments. The blockchain offers secure, verified and trustworthy exchange of information in real time which makes them accessible to all members of the supply network. Smart contracts, which are part of the blockchain network, give the possibility of automated verification and execution of agreed transactions when certain requirements are met.
Slock.it is a company which leverages the Ethereum blockchain network to connect cars, homes, shared white goods, etc to rent, sell or share their property without a middleman. Enabling both owners and renters to find each other on a platform is freeing the users from having to coordinate with each other to hand over keys. They are handling secure direct P2P payments and providing a mechanism of deposits, and eventually, full insurance which makes trusting the other party unnecessary.
8. Tax Records
If and when, smart contracts are to be adopted by legal authorities, they could ease the tax collection. Automating the tax payment could prevent people and legal entities from committing a crime like tax evasion or branching the due date. All data and information on taxes would be recorded on the blockchain and ensure transparency which would make tax evasion almost impossible.
This September, Malta announced to put in force 3 Acts regarding blockchain which will start regulating the industry starting November 1st. Many experts in the field have given this technology 5 years before it’s widely used. Now, we see that small countries are among the first ones to step out the comfort zone filled with paperwork and start to adopt new digitized options. WIll Malta b the first country to implement smart contracts in their tax system is left to see.
Some years ago, no one could imagine that the world would have one solution to so many issues. However, the blockchain supporting smart contracts is relatively new and immature. It has to undergo processes of upgrading and adjusting. The blockchain technology consumes a lot of energy, even when cooling down. Many argue that this energy could be used for other causes.
Every new technology raises a lot of questions and smart contracts are no exception: where does the transaction take place? What happens when customers barter? What’s the value if the transaction is settled in a digital currency? Does VAT have to be accounted for, and is the rate affected by the location of the counterparty?
After all, smart contracts are a tool that can be used to change the world for good or for worse. The technology is being tested and adjusted at a very fast pace. Its true value lies in the fact that all services using smart contracts have embedded trust, transparency, and accountability in their design, not as a feature.