Understanding Smart Contracts in the Cryptocurrency Industry

Crypto technology is something that’s always on the move – it’s advancing, improving, and adapting to the needs of a rapidly growing industry to ensure that sustainable, long term functionality is achievable. However, sometimes it’s good to take things back to basics and ensure that you’ve got a solid understanding of the pieces of technology that really underpin the way that we operate in the crypto space. One such technology is smart contracts. Smart contracts are seen as one of the most pivotal pieces of tech in the crypto industry; in theory, it’s the way that these contracts work that give crypto such leverage over traditional currencies when it comes to safety and security in transactions.

We’re always looking to give our audience an inside look into the power that can be found in crypto, but today we’re going to give you a run-through of the fundamentals of smart contracts, including how they work, why they’re so important, and some of the applications that we’re seeing currently. Once you’ve digested this information, we’re sure you’ll feel much more comfortable with crypto adoption, unlocking the door to new potential and possibilities to move into in the future. Read on below to learn more, or get in touch with a member of our team today to find out how our solutions can enable you to make the most of your investments in the digital asset economy.

So, what is a smart contract?

A smart contract is, in essence, a contract that lays out the terms of agreement for a deal – in this way, a smart contract does exactly what you’d expect. However, it’s the way that smart contracts utilise sophisticated code to add additional layers of security and verification to an agreement, often to a degree that physical contracts relating to fiat money are unable to. This is done by utilising the blockchain capabilities of a cryptocurrency; most digital currencies will operate using a blockchain technology that noted ownership and transactions in an automated, reliable manner. The blockchain will be decentralised and will not be controlled by one central user; instead, the blockchain is held across many different devices in all corners of the globe. This means that one change at one ‘node’, will not be enough to rewrite the script. Instead, the change needs to be reflected at every node in the blockchain in order for ownership of a token to change hands. In theory, this will stop instances of fraud or theft across the board, creating a safer digital environment in which to trade, transact, and work.

By utilising the blockchain and smart contracts, developers are able to build applications that are more secure, more reliable, and ultimately more accessible for the wider market. Smart contracts built on the blockchain will enable safe transactions without the need for an intermediary becoming involved in the middle of the process – this reduces the time needed to transact, shortens the chain of possession, and makes automated secure transactions a real, tangible possibility.

Why do you need to be aware of them?

Simply put, you need to be aware of smart contracts so that you can start to utilise them right now, rather than waiting and falling behind. The sooner that you understand what smart contracts are and how you can start to use them to your advantage to improve protocols and enhance processes, the earlier you’ll be able to feel like you are a step ahead of your industry. On the whole, the biggest benefit that smart contracts will bring to any business or individual operating within the cryptocurrency industry is the automation that smart contracts allow without sacrificing security – in fact, smart contracts can be seen to improve security in many instances, which is a further benefit to their adoption. Here are a few examples of how smart contracts could be utilised in a variety of different industries over the coming years:

• Insurance: Insurance is one of the most obvious use cases for smart contracts, which means it’s likely that we’ll see this happen sooner rather than later. With smart contracts in place, entering a policy agreement with an insurer would also enter the user into a smart contract with the provider too. This would mean that all policy requirements are documented and agreed to within this contract and the user would be able to sign the contract if they agree to the terms.

With a smart contract, the contract would be able to sit open until the user needed to use it – then this happens, they’d just have to upload the required forms for payment and the funds would be released in a timely manner. By eliminating the need for communication between the parties where possible, smart contracts make insurance claims easier and more efficient than ever before.

• Real Estate: The process of buying a house has always been one that’s filled with time-consuming back and forth that becomes tiresome and tedious. Mostly, this is due to the confusing nature of most aspects of the purchase and sale protocols that must be passed – these are usually handled by a broker, which again adds an intermediary to this process. In this case, the major issue is that brokers require a very high fee for their services, adding a cost that you may not necessarily need to pay if smart contracts were involved. With your house deeds tokenised in a blockchain, such as Ethereum, you’d be able to hold the deed in escrow until funds are submitted and, once verified, release the funds to the relevant parties. In short, the result in this instance is a cheaper selling process due to the removal of the broker and a faster purchase process that helps buyers to move into their new home more quickly than ever before.

• Decentralised Exchanges:  DeFi exchanges are platforms where traders and investors can swap cryptocurrencies that can also be locked into smart contracts. Users are incentivised by smart contracts that offer interest on funds that are held by them. These funds are used by the DeFi platform to lend for a fee which is shared with the investors. This is all governed and automated by smart contracts so that lenders and borrowers interact seamlessly without having to trust a central authority. This in turn creates incredible efficiency so the returns for traders and investors are higher than found in traditional finance. When locking funds into smart contracts on DeFi exchanges you are also helping the platform with liquidity for user transactions and will be rewarded with a share of transaction fees. The total amount of crypto locked into smart contracts on decentralised exchanges is soaring and with no slow down in sight. As there is no regulated centralised intervention users have to assess the risks on an individual basis which is easier done with a better understanding of how smart contracts work.

If you’d like to make your first moves in the cryptocurrency industry today or are looking for a new partner to help manage your holdings and maximise your potential moves, get in touch with our expert team here at BCB Group.

BCB Group comprises BCB Prime Services Ltd (UK), BCB Payments Ltd (UK), BCB Digital Ltd (UK) and BCB Prime Services (Switzerland) LLC. BCB Payments Ltd is regulated by the Financial Conduct Authority, no. 807377, under the Payment Services Regulations 2017 as an Authorised Payment Institution. BCB Prime Services (Switzerland) LLC, a company incorporated under the laws of the Swiss Confederation in the canton of Neuchâtel with business identification number CHE-415.135.958, is an SRO member of VQF, an officially recognized self-regulatory organization (SRO) according to the Swiss Anti-Money Laundering Act. This update: 14 Oct 2020.

The information contained in this document should not be relied upon by investors or any other persons to make financial decisions. It is gathered from various sources and should not be construed as guidance. The information contained herein is for informational purposes only and should not be construed as an offer, solicitation of an offer, or an inducement to buy or sell digital assets or any equivalents or any security or investment product of any kind either generally or in any jurisdiction where the offer or sale is not permitted. The views expressed in this document about the markets, market participants and/or digital assets accurately reflect the views of BCB Group. While opinions stated are honestly held, they are not guarantees, should not be relied on and are subject to change. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This document may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Past performance of the digital asset markets or markets in their derivative instruments is not a viable indication of future performance with actual results possibly differing materially from those stated herein. We will not be responsible for any losses incurred by a client as a result of decisions made based on any information provided.