Blockchain & Smart Contracts: Transforming Finance with Decentralisation & Security
Authors:- Aditya phad and Shi Ying Lim
Introduction
This paper aims to unpack the benefits and challenges of blockchain and smart contracts and how these technologies could revolutionise finance. We will also be discussing the future prospects of these technologies. A blockchain is defined as a distributed database or ledger shared across a computer network’s nodes. (Hayes, 2024) It maintains a secure and decentralised record of transactions by ensuring any data used in the financial ecosystem is unalterable. A smart contract is defined as a self-run program that automates the actions required in a blockchain transaction. Once completed, the transactions are trackable and irreversible. (Investopedia team, 2024) Blockchains and smart contracts play an important role in traditional finance by ensuring efficiency, transparency, and decentralisation, facilitating a paradigm shift from traditional financial systems.
The Flaws of Traditional Finance: How Blockchain Can Solve Them
The traditional financial system faces a myriad of problems like inefficiencies and limitations. Which hinders its ability to adapt to the rapidly evolving world economy. High transaction costs added by financial intermediaries like banks in the form of fees and charges create delays and bottlenecks that reduce the overall efficiency of the traditional financial system.
This reliance on intermediaries also exacerbates other problems, like lack of transparency and risk of financial fraud, which give rise to errors and inefficiencies. These issues significantly affect the small businesses and underserved populations who cannot afford high transaction charges and inadequate access to the banking system.
Additionally, the traditional financial system often excludes the underprivileged classes, especially in the developing regions of the world where financial inclusion is limited due to economic, institutional, and geographic factors that exclude individual economic growth but also impede broader socio-economic development.
Some of the most common questions that arise upon suggesting blockchain and smart contract technology as a potential solution to age-old problems include:
- How can blockchain and smart contracts transform the efficiency and transparency of the old traditional financial system?
- How can these technologies tackle the issues of exclusion and accessibility for the deprived population?
- What problems would arise during and after the application of blockchain technology in the traditional financial system?
This synthesis of how blockchain and smart contracts can revolutionise the financial system will answer questions for us that pave the way to a more inclusive, efficient, and transparent future for the global financial system.
How Blockchain & Smart Contracts Improve Transparency & Efficiency
The adoption of new technologies like smart contracts and blockchain has been studied extensively for decades for its potential to address the inefficiencies and limitations in the financial system. Researchers considered several aspects, such as transaction efficiency, transparency, security, and financial inclusion, and laid a foundation that can provide a proper understanding of their transformative powers.
Blockchain Technology: Enhancing Transparency and Security
The pioneering work by Nakamoto (2008) introduced blockchain as the decentralised, tamper-proof ledger system and also emphasised blockchain’s ability to create immutable records, which reduces fraud and increases transparency in the financial system.
Research by Tapscott and Tapscott (2016) highlighted how blockchain can eliminate inefficiencies caused by intermediaries and also discussed how transactions can be streamlined across borders and emphasised the reduced dependency on centralised authorities, thereby enhancing both the speed and cost-efficiency of transactions.
Smart contract automation and efficiency
Nicholas Szabo was the pioneer in the field of smart contract technology, describing them as programmable agreements that execute automatically when predefined conditions are met. More recent studies, such as (Buterin,2014), elaborated on how smart contracts, if implemented on platforms like Ethereum, could revolutionise financial transactions by allowing automation and reducing reliance on intermediaries. Additionally, Wang et al. (2019) demonstrated how the implementation of smart contracts in trade finance can help in automating workflows, verifying compliance, and facilitating real-time settlements in international transactions.
Challenges in risk implementation
Despite the potential benefits of blockchain and smart contracts, there are many challenges and hurdles that can occur during the transition from a traditional financial system to a modern system equipped with blockchain and smart contracts. Studies done by Peters and Panayi (2016) identified such challenges as regulatory barriers, scalability issues, and jurisdictional conflicts that hinder widespread adoption.
From a cybersecurity perspective, Li et al. (2020) analysed security vulnerabilities in smart contract coding, highlighting the instances of exploits, such as the 2016 DAO hack, emphasising the need for more robust cybersecurity practices to patch potential vulnerabilities and to ensure the future security of such platforms.
The Role of Blockchain in Modern Finance
Blockchain technology and smart contracts are reshaping the global financial system by addressing the inefficiencies in traditional systems and paving the way for a more modern financial system. Their transformative nature lies in increasing transparency, lowering costs, and the automation process, which involves industries, right from banks to supply chain management.
Blockchain in Banking: Reducing Costs & Increasing Trust
The traditional financial system relies on intermediaries, which leads to high transaction costs and payment delays. Blockchain eliminates these intermediaries by enabling peer-to-peer transactions through distributed ledgers.
Ensuring Transparency and Trust
At its core, blockchain is a decentralised and distributed ledger technology that records transactions across a network of computers. Each transaction, or block, is cryptographically linked to the previous one, forming a chain of blocks. This immutable and transparent nature of blockchain ensures that once a transaction is recorded, it cannot be altered or tampered with, providing increased integrity and auditability (Ayobami,2024). Furthermore, its decentralised nature ensures that there is no single point of failure in the system; even if one node of the blockchain goes offline, other nodes can seamlessly take over the work of the node, ensuring continuous operation of the network, which is lacking in our traditional system. Moreover, it also ensures the immutability of records, meaning any information in the blockchain can never be tampered with, and every transaction can be traced back to its origin. This level of transparency is instrumental in minimising fraud and building trust among financial institutions and customers alike. Instances of real-world application include IBM and Oracle, who use blockchain to do the auditing process in the banking sector (Ayobami,2024), ensuring quick auditing and fewer man hours required, which reduces costs for the institutions.
Healthcare Data Management
Blockchain can securely manage and share Internet of Things-generated data, such as vital signs, patient monitoring, and medical device data. This ensures data integrity, confidentiality, and interoperability across different systems and devices.
One notable example of a real-life organisation using blockchain technology to manage and secure data from Internet of Things devices in healthcare is MediLedger. Mediledger is a blockchain-based platform designed specifically for the pharmaceutical supply chain, but its principles can be applied to healthcare data management. MediLedger uses blockchain technology to ensure the integrity, confidentiality, and traceability of data. While MediLedger is primarily focused on the pharmaceutical industry, its approach illustrates the broader application of blockchain technology in healthcare data management, ensuring that sensitive health data remains secure, confidential, and trustworthy. Other organisations and platforms like Chronicled and IBM Watson are also exploring similar applications of blockchain in healthcare to enhance data security and integrity (Ayobami,2024).
How Blockchain Simplifies International Payments & Trade
International transactions traditionally face problems such as high transaction charges, prolonged delays, and currency conversion risks. Blockchain-based stable-coin platforms like USDC (Circle, 2021) and USDT or Tether (Tether, 2016) can be used to revolutionise cross-border payment by providing near-instantaneous settlements in payments without any delays and high costs. Recently, HSBC also successfully executed a blockchain-based trade finance transaction using the Corda platform (HSBC, 2024), reducing processing time from 5–10 days to just 24 hours. Which proves that blockchain can act as a great tool to enhance the traditional financial system.
Applications of Smart Contracts in Traditional Finance
Automating financial agreements
A smart contract is a digital agreement signed and stored on a blockchain network that executes automatically when the contract’s terms and conditions are met; the terms and conditions are written in blockchain-specific programming languages like Solidity. These smart contracts can automate processes like loan approvals, insurance claims, and trade finances. For instance, AXA insurance (Terekhova,2017) adopted a smart contract-based product called Fizzy to automate flight delay insurance pay-outs, thereby ensuring immediate compensation to the customers.
Enhancing Supply Chain Management
Smart contracts have extended their utility to supply chain management, where this technology, coupled with other modern technologies like the Internet of Things and artificial intelligence, allows for real-time tracking of goods, automatic payment on delivery, and dispute resolution over large supply chains. They also, with the help of advanced IoT devices and sensors, ensure quality and untampered goods. Some real-world examples include BMW using the VeChain blockchain to find genuine auto parts and to prevent odometer fraud (Crypto-rank, 2019). While IBM’s Blockchain has transformed the supply chain for giant corporations like Walmart and Maersk (IBM,2024), through the use of smart contracts, Walmart traces where its perishable products come from and also checks how fresh they are, and Maersk uses Blockchain to eliminate inefficiencies in the global shipping industry. These examples show us how blockchain revolutionises, optimises, and automates tasks that enable fast workflows and significant cost reduction.
Application in the music industry
Another example of a blockchain application is in the music industry, where the acquisition of Media-Chain (now a part of Spotify). Media-Chain is a peer-to-peer blockchain database for sharing information across different applications and organisations. In addition to organising open-source information by issuing unique identifiers for each piece of information, Media-Chain also works with artists to ensure they are paid fairly. The company issues smart contracts with musicians that directly state their royalty stipulations without the hassle of confusing third parties or contingencies (Ayobami,2024).
Application in the real estate market
Real estate can immensely benefit from smart contract technology, particularly in property transactions. Smart contracts can simplify and automate processes like escrow services, title transfers, and payment disbursements, which reduces the reliance on intermediaries like lawyers and brokers, which results in savings for the common people. Real-world instances of the use of smart contracts in real estate include propy, a blockchain-based real estate platform (E-SPIN, 2024), which enables secure property purchases across borders, with transactions recorded immutably on the blockchain.
Challenges of Blockchain Adoption: Security, Regulations & Scalability
Despite the potential blockchains and smart contracts hold, several challenges and risks exist. Such challenges include regulatory uncertainty, scalability issues, cybersecurity risks, and integration costs. Some may question if smart contracts, unlike traditional contracts with contract elements like offer, acceptance, and consideration that are encoded, can be considered legally binding agreements. Jurisdictional issues and how applicable existing contract law is to self-executing code also pose possible unresolved issues. Besides, regulatory approaches to blockchain and smart contracts vary widely across jurisdictions. Some regions have embraced these technologies with supportive legislation, while others impose strict regulations or outright bans. This inconsistency complicates cross-border transactions and the development of universally compliant applications (Zhuk,2025). Most importantly, scalability issues are the toughest to overcome. Blockchain networks often struggle to process high transaction volumes efficiently. Traditional blockchains like Bitcoin and Ethereum face problematic factors like block size, consensus mechanisms, and network congestion. This results in slow processing times and high fees, making large-scale adoption challenging. The Blockchain Trilemma states that a blockchain can only optimise two out of three key aspects at a time: security, decentralisation, and scalability. (Buterin,2021) Consequently, most blockchains sacrifice one to improve the others. For example, Bitcoin prioritises security & decentralisation, limiting scalability.
The Future of Blockchain: AI, Decentralised Finance & Digital Currencies
There is no doubt about the transformative power blockchains and smart contracts potentially yield. Moving forward, central banks and financial institutions may issue digital currencies (CBDCs), and decentralised finance platforms could grow, with automated transactions. Emerging technologies such as artificial intelligence (AI) could improve blockchain efficiency through smarter transaction verification and predictive analytics, while IoT will provide real-time data for blockchain, facilitating automation in industries like supply chain and healthcare, enabling better decentralisation. More critically, all stakeholders, including governments, banks, and technology innovators, have to work together on standardising regulations and making the cybersecurity space more robust. Financial institutions like banks should heavily consider adopting blockchain technology to reduce costs, while regulators should focus more on driving scalability and wider adoption to increase efficiencies.
Conclusion
In a nutshell, digital innovations like blockchain and smart contracts are clear game changers within the global financial system as they promise solutions capable of addressing long-entrenched inefficiencies, transparency, and accessibility issues. They hold the potential to speed up the efficiency of business processes by enabling decentralisation, automation, and greater security. Recently, these technologies have started to break down barriers for individuals and organisations in underserved regions, but challenges like cybersecurity, scalability, and regulation need attending. Finally, it is vital to achieve optimum collaboration among governments, financial institutions, and tech innovators to set best practices for adoption, regulation, and innovation, which will be crucial for the future. With these efforts, blockchain and smart contracts can tackle traditional issues of financial evolution by building a more inclusive financial ecosystem whose components are efficient and transparent.
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