Financial services companies, software developers and governments alike are exploring opportunities to automate a wide range of legacy processes using smart contracts and blockchain technology.

What are smart contracts?

Smart contracts are “computable” legal contracts that execute automatically (without verification by a third party) when a set of pre-programmed conditions are satisfied.  Unlike traditional legal contracts, smart contracts are written in source code.  They can be stored on distributed ledger platforms and secured using cryptographic keys to make them immutable and tamper resistant.

One example of a smart contract is a simple derivatives contract that settles automatically upon certain specified changes in a reference financial index. When the financial index undergoes specified changes, pre-programmed rules in the smart contract automatically trigger contract settlement (for example, a payment from one account to another).  This automatic settlement of smart contracts in accordance with pre-programmed rules eliminates the need for a trusted intermediary (such as a lawyer or escrow agent) to verify that the conditions precedent to settlement have been satisfied.  As a result, smart contracts have the potential to eliminate third party intermediaries, and to reduce transaction costs, in certain commercial arrangements that today are managed and settled manually.

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