Intro to FinTech

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Smart Contracts

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Intro to FinTech

Definition

Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They automatically enforce and execute the terms when predetermined conditions are met, providing a transparent and efficient way to facilitate transactions without intermediaries.

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5 Must Know Facts For Your Next Test

  1. Smart contracts eliminate the need for intermediaries, such as lawyers or banks, which reduces costs and speeds up transactions.
  2. They operate on blockchain networks, ensuring that once deployed, the contract cannot be altered or tampered with, providing security and trust.
  3. Smart contracts can be used in various sectors, including finance, real estate, and supply chain management, to automate processes and enhance efficiency.
  4. These contracts can handle complex agreements, allowing for conditional transactions where funds are released only when certain criteria are met.
  5. The rise of decentralized finance (DeFi) has heavily relied on smart contracts to enable peer-to-peer lending, trading, and other financial services without traditional banks.

Review Questions

  • How do smart contracts improve efficiency in financial transactions compared to traditional contracts?
    • Smart contracts improve efficiency by automating the execution of agreements once predetermined conditions are met, eliminating the need for intermediaries like banks or lawyers. This automation reduces processing times significantly and minimizes the chances of human error. As a result, transactions can be completed faster and at a lower cost, making them highly attractive for businesses looking to streamline their operations.
  • Discuss the role of smart contracts in decentralized applications (dApps) and how they contribute to the overall functionality of these platforms.
    • Smart contracts serve as the backbone of decentralized applications (dApps) by providing the logic necessary for these applications to function autonomously on a blockchain network. They allow dApps to perform complex operations without reliance on a centralized authority. This decentralization ensures greater transparency and security since users can interact with the application directly, with smart contracts governing all actions taken within the platform.
  • Evaluate the implications of using smart contracts in sectors like real estate or insurance, focusing on potential benefits and challenges.
    • Using smart contracts in sectors such as real estate or insurance can lead to significant benefits like increased transparency, reduced fraud, and lower costs by automating processes like property transfers or claims processing. However, challenges include legal recognition of these contracts in various jurisdictions and ensuring that the code accurately reflects complex legal terms. Additionally, issues around security vulnerabilities in code could potentially expose parties to risks if not properly managed.

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