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October 16 2021 8:18 AM ˚

Smart Contract, The Future of Finance

bitcoin
(Photo: Pixabay)
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We have all been hearing how Blockchain technology will revolutionize the financial world, decentralize finance, and hugely shake up the banking sector, but just how will that happen? اضافة اعلان

Well, one breakthrough of Blockchain technology is an innovation known as smart contracts, you’ve probably heard of it, but what is it and how does it really work?

When Bitcoin’s whitepaper was first launched in 2009 it called for creating trust in a trustless environment, i.e. the world, this basically means allowing people who do not know each other to work with each other needless of trusting each other. This is intended to scale up the size and frequency of international trade, commerce and investment.

From a technical standpoint, a smart contract is a set of computer functions designed to autonomously execute once certain conditions apply. For those sets of functions to become a contract they need to be locked and rendered unchangeable once published.

Imagine a real-world situation where a real estate contractor intends to raise funds to build a new hotel in the heart of Amman and plans to raise funds for the project through an investment round from foreign investors.

The contractor claims he needs $1 billion for the project and declares all the suppliers he will be working with, furthermore he promises he can get the project built and delivered in 10 years. Previously, investors would have needed to run all the due diligences on the contractor, on his suppliers and on the financial projections before deciding to invest or not.

With decentralized finance (DeFi), finance powered by decentralized applications that are governed by smart contracts, investors would still need to do their due diligences just as they would in legacy systems. But, here’s how it gets interesting: Suppose an investor makes the choice to invest, once they put in the money, they must invest more time and effort to stay up to date on the process of execution of the project and more importantly the flow of finances during the building process.

Did the contractor really pay the steel company that he promised us as investors he would use as a supplier? Did he pay on time? Did he pay the amounts he promised us he will pay them or was there money siphoned out?

With smart contracts, an investor can make sure that once an investment is made, the contractor has no control over the money given that the contractor signed a digital contract were all the terms were coded dictating exactly when and how much will be transferred from the custodial wallet serving as an escrow account for the project to the wallet of the steel supplier during the stage of the project that he was supposed to and for the amounts agreed on autonomously and automatically. This means that smart contracts strip our certain stakeholders from the power of controlling the money and replacing them with computers.

In order for smart contracts to be built we will need strong collaboration and cross skills of finance and IT to enable the financial terms and conditions to be translated into lines of code, so finance guys get your coding skills on and IT people, start delving into finance.

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