You sign an agreement and money is taken out of your bank account on a periodic basis. Or you plug in a user handle and send money off to a friend in your payment app. These are the comforts of electronic transfers in the US, and they are the modern way of sending money.
But smart contracts will change this process completely.
What are Smart Contracts?
Smart contracts are simple in concept but rather technical when you get down to the nitty-gritty. Smart contracts are algorithms that are designed to operate automatically based on predefined agreements on blockchain technology.
Blockchain technology, itself an enigma, is an open concept financial system that can be proven, managed, and regulated by people all over the world. Right now, you can go onto the blockchain (learn how it works) and regulate it.
This system does not make your money less secure. The blockchain operates using a system of private and public keys, where your private keys are kept private and your public keys are available for verification on the public blockchain.
There are, of course, different versions of blockchain technology, including the one that operates Bitcoin and the one that operates Ethereum (two very different blockchain technologies). Ethereum operates using proof of stake technology, which means that the blockchain is able to essentially create itself (through ‘proofing’) and the algorithms can execute simple commands without anyone needing to verify it.
Smart contracts are built on Ethereum technology at the moment. Once you agree to a smart contract with anyone else, the agreement is posted online for users to publicly verify (although the essential data is kept private). If the contract involves a financial transaction, then the arrangements will need to be made to ensure that the money is available prior to the contract being set up.
In essence, there is no way to back out of a smart contract agreement. The money is pre-defined, the agreement is publicly verified, and then the contract goes through once the services are completed.
What to Expect When We ‘Upgrade’ to Smart Contracts
Right now we operate on a system of agreements. Agreements in the form of verbal ones, handshakes, virtual contracts, and pen-and-paper contracts all support financial relationships.
You sign a contract and your phone bill will be automatically debited from your checking account.
Or you verbally agree to a price to a service lender and you send them money once the services are rendered (and you’re happy with them).
Smart contracts take the ideas that we have in terms of financial money transfers and improve them – drastically.
No longer do we have to rely on human agreement and manual manipulation. Once a smart contract is set up, the contract will operate on its own based on the parameters of the agreement.
There will be no room for judgment or technical glitches and it will only do what it was pre-defined to do.
Smart Contracts Redefine Money Access Globally
The issuance of blockchain and the blockchain technology for money transfers also has widespread impacts in terms of providing access to money for people globally.
Right now, millions of people worldwide rely on the centralized money transfer and banking system that we know today. However, alternative banking technologies have tried to help us to move away from the centralized regulatory nature of banks. For example, online banks have become popular recently with the rise of FDIC banks as backing online banks, blockchain technology, and payment APIs.
With products like the Sila API package, you can build a payment API that offers bank account linking, know your customer/business (KYC/KYB) verification, secure money accounts, blockchain transfers, and digital wallet security for users on mobile devices and online apps. You can safely and securely send money to a friend, colleague, or business and you don’t need to operate through a traditional bank.
These payment methods, and those like Stripe, Plaid, and Paypal, are available to many people in the US and other countries, but not globally. This means that many individuals are limited in terms of what money they can send, when and where they can access it, and how they want to control it.
Opening Doors for International Money Transfers
What many people in the US might not realize is how restricted people are globally when sending money.
Not only is it difficult to get access to money (electronically) anywhere in the world, think of the currency exchange systems too, but it’s also pricey, costly, and burdensome to send money internationally.
International money transfers usually come in the form of Paypal or wire transfers. Paypal and other international payment APIs charge a transaction fee (based on the amount of money sent) and other currency conversion rates.
Wire transfers cost money, whether that amount is included in a hefty bank account fee or you are charged $15 to $45 per transaction.
With smart contracts, the blockchain knows no borders. As long as both parties (the recipient and sender) can access the same blockchain coin that the transaction is using (in our example, the SILAUSD token), then the transaction can be made with only the fees associated with the blockchain (many cryptocurrency transfers pay what is called a “gas fee”) or fees associated with the payment API. For example, Sila charges only a few cents per transaction, on top of transactions being extremely fast and not restricted by borders.
Why Smart Contracts Will Change the World
It’s clear to see how smart contracts will change the world – the technology that they are built on is simply unable to be contained by traditional centralized banking systems. The decentralized nature opens up doors to international money transfers to people who don’t have access to money (or banks) or are experiencing issues accessing money due to political reasons.
It also takes the fees out of the hands of those banks who at present can only issue the money transfers. No longer must you rely on banks for money transfers. You can decide to build your own payment API and help people send money globally.
So, why are smart contracts going to change the world?
The simple response is in the blockchain community. So many people are sick of hearing about how banks and banking regulations are so restrictive and tightly regulated. They’re also sick of hearing about countries that are literally stealing money from the hands of their citizens.
The blockchain community is worldwide and it is there with a mission – to remove all barriers to accessing money.
With this mission at top of mind, the use of smart contracts for solidifying agreements and making sure that agreements 100% go through is ground-breaking. No longer will scammers be able to steal money from customers.
Smart contracts aren’t foolproof but they are close, and they are putting more power in the hands of the people, of the buyers, and of the citizens.