Here are some of the ways smart contracts can provide financial services:
- Users can lend their own cryptocurrency funds into a smart contract with a decentralized exchange to become liquidity providers.
- The decentralized exchange uses those funds to facilitate cryptocurrency trading and lending.
- People can swap cryptocurrencies or put up collateral and receive a loan on the exchange. Smart contracts execute these transactions and collect transaction fees.
- Liquidity providers receive a cut of the transaction fees as a reward for lending their cryptocurrency funds.
Through a series of smart contracts, a decentralized exchange accomplishes this with no central governing body. There are no banks or payment processors involved in the transactions. Users can trade cryptocurrencies and borrow or lend and earn interest, and it all happens without a middleman.
Smart contracts are also well-suited for the legal field. If they're eventually considered legally binding contracts, then smart contracts could cut down on the time and costs involved in executing business deals.
We shouldn't cover use cases for smart contracts without talking about non-fungible tokens (NFTs), which have become wildly popular. An NFT is any type of unique digital asset stored on a blockchain. A smart contract records and stores the unique information of the NFT. Ownership information is also recorded with smart contracts.
Many NFTs are essentially collectibles such as digital art, but that isn't their only purpose. Blockchain games, such as Axie Infinity (CRYPTO:AXS), have characters that come in the form of NFTs. When players buy a new character, they're buying an NFT with statistics and other information stored on the blockchain in a smart contract.
Benefits of smart contracts
Here are the biggest benefits of smart contracts:
- They're a cost-efficient way to do business. Since smart contracts run on their own and self-execute, they cut down on the need for middlemen. No one needs to confirm if the contract conditions have been met or pay out the contract themselves, which means smart contracts can be used without unnecessary fees.
- They're fast. A smart contract can execute immediately when its conditions are met. The wait time is practically nothing, which is one reason why these contracts work so well for financial services and crypto trading.
- They provide total transparency. Every smart contract has clear terms and conditions that all parties involved can review and agree on. Smart contracts are also irreversible, so once they execute, no one can dispute the results.
- They're trustworthy for everyone involved. Smart contracts eliminate the possibility of bias affecting an agreement. The terms can't be manipulated to favor one side or the other. The only thing that matters is whether the conditions are met.
Considering how smart contracts could improve on the traditional contracts system, they're something to think about when deciding which blockchain stocks and cryptos to buy.
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