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Can Smart Contracts Replace Banks?

Smart contract

Can Smart Contracts Replace Banks?

by | Smart contract

Ben Constanty

CEO, Smartlink

Disrupting online payments with smart contracts.

When Bitcoin made its entry in 2009, there were several tech minds speculating it to dominate the financial industry over the coming years.

Some even predicted blockchain technology replacing traditional financial institutions.

Fast forward to 2020, and we are yet to see that from happening.

What has happened instead is that leading banks are investing in blockchain technology and even partnering with major distributed networks to venture into new service areas.

Smart contracts, first coined in 1993 and introduced in the Ethereum blockchain, were speculated to do the same with banks.

However, we’re still debating whether they can deliver on these expectations. Is it possible that smart contracts replace banks in the future? Let’s find out.

🔎 Key takeaways

  • Smart contracts are programmed agreements that self-execute as conditions are fulfilled
  • Smart contracts can execute a transaction in a few seconds while Banks can take several days to process certain types of payments or transactions
  • Smart contracts involve fewer intermediaries than banks and are therefore more cost-efficient

What are smart contracts?

Smart contracts: How do they work?

Smart contracts are self-executing pieces of codes that may hold the terms of a binding (at least in some countries) agreement.

A smart contract works quite similar to a regular contract except that it doesn’t need a central authority or intermediary to facilitate the transaction.

The terms of the agreement are programmed within the smart contract and as the conditions are met, it self-executes.

Smart contracts vs banks

Smart contracts vs Banks

In theory, smart contracts can auto-execute deals, initiate transfers, process complex transactions, eliminate the need for trust between participants, and thereby, replace intermediaries, such as banks.

But in order to determine how they hold out in the real world, let’s compare the two.

  • Transaction time: A transaction takes anywhere between a couple of seconds to up to five minutes in processing (on Ethereum blockchain), which means a smart contract will take only a couple of minutes to execute a transaction. A bank, on the other hand, may take a couple of days to execute an international transfer or confirm a transaction involving deliverables.
  • Cost of a transaction: Since a smart contract doesn’t involve multiple intermediaries, it costs only a couple of dollars to execute a transaction irrespective of the amount of money involved. Banks, on the contrary, work with multiple intermediaries to process a transaction, which pushes the overall price of a transaction higher. You can expect to pay a few hundred to several thousand dollars, depending on the size of the transaction, in traditional financial transactions.
  • Overhead expenses: Businesses or individuals incur overhead expenses when working with banks. Smart contracts can eliminate these expenses altogether.

Massive adoption of smart contracts is yet to come

Smart contracts mass adoption

However, it doesn’t mean that companies are fully ready for self-executing deals and agreements.

Massive adoption will come once fintech companies such as Smartlink or Marco Polo foolproof the current technology and generate multiple real-life case studies in different industries.

We are still at the very beginning of the smart contract revolution.

Security loopholes are becoming less of a problem as companies in the space keep .

Most importantly, not every country or regulatory body recognizes smart contracts, which makes them inconsistent tools for businesses.

Ben Constanty

CEO, Smartlink

Disrupting online
payments with smart contracts.

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