These days the terms cryptocurrency, blockchain, NFTs and smart contracts are doing the rounds. You will see them in the news or finance blogs, so what is this all about?
Now, most of you must know what cryptocurrency is. It is a digital transaction medium that does not depend on any central authority, say like the Reserve Bank of India. But not all of us know what a blockchain is. A blockchain is a shared database or ledger that records transactions and stores this information in nodes. A blockchain based ledger makes it difficult to alter the details of a transaction once it is made, as the data is stored in multiple nodes and a change in one necessitates a change in all of them.
A non-fungible token is a type of financial security that consists of digital data. These tokens are stored in a blockchain. The NFT ownership is recorded in the blockchain, and transfers are controlled by the owner, which allows the sale and trading of NFTs. An NFT smart contract allows for setting up a sale agreement between the owner of an NFT and anyone who is buying it.
Smart contracts, on the other hand, are programs in a blockchain. However, some necessary conditions need to be met for recording these contracts on the blockchain.
It is used for automatically running and recording an agreement, where all participants are sure of the outcome of the agreement. The best thing about blockchain and smart contracts is that there are no intermediaries involved.
Principles of Blockchain
Blockchain technology is bound by five principles:
The database is distributed
Each blockchain party has access to the whole database. Therefore every party in the blockchain has the right of entry to the transaction history. A single party does not control the data, and every party can confirm the records without any intermediary.
The communication between the transmission partners happens directly. There is no transmission through a central node. Each node stores the data and then forwards this information to the other nodes as well.
Pseudonym transparency between nodes on a blockchain
Every transaction and its value are visible to each node (user) on the blockchain. Every node has a unique ID. It is usually an address containing 30-plus alphanumeric characters. Hence, users can remain anonymous.
Records are irreversible
Once a transaction is recorded in a database with updated information, it can’t be altered in any way. Users are linked with all the transactions, also with the ones that were recorded before their transaction.
Blockchain transactions can be programmed and automated by AI
The ledger of blockchain transactions is tied to computational logic and can be easily programmed. Users set up algorithms to automatically activate inter-node transactions.
What are NFTs?
An NFT or non-fungible token is a financial security that contains digital data which is stored in a blockchain in the form of a distributed ledger. An NFT’s ownership is transferable, so they can be either sold or traded.
The NFT Ecosystem is a platform that is based on blockchain technology. You can standardize the creation and trading of NFTs on this platform.
What are smart contracts?
Smart contracts are programs kept in a blockchain that functions per the pre-set conditions. Typically, they automate the implementation of an agreement so that every participant can have a certainty of the outcome.
How are NFTs and smart contracts revolutionizing finance?
NFTs and smart contracts are changing the world of finance. Their accessibility across multiple platforms is altering the way we complete transactions. To accommodate both of them, a Decentralized Finance or DeFi has been made.
Based on the peer-to-peer transmission concept, DeFi has no intermediaries. It has democratized the world of finance and has become an alternative to banks, brokerages, and non-banking financial companies.
DeFi also reduces the likelihood of transaction errors, thereby increasing a financial system's efficiency.
Furthermore, a DeFi protocol employs smart contracts present on the blockchain network. Most DeFi projects’ source codes are public, and anyone can check them online. Moreover, you can audit them if you want to.
Popular DeFi projects such as Uniswap have evolved into extremely well-organized global financial markets. They cater to both institutions and individuals. Thanks to DeFi, Decentralized Exchange (DEX) has become a reality.
Use cases of NFTs and Smart Contracts in 2022
The NFT data cannot be replicated or counterfeited because of the encryption of data. Even if somebody wants to steal it, then the blockchain system will record their presence.
NFT smart contracts could aid in the creation of convincing new products, IDs, payment rails and many other financial products that will have minimal human intervention.
NFTs and smart contracts, or blockchain contracts, can also eliminate document fraud by tokenizing assets and docs into immutable digital tokens. It will also reduce illegal activity in trade finance and reduce human error, thereby saving wages for imperfect work.
NFTs are making new innovative products with startups for creating digital reps of financial commodities like the XDC Network. It is currently being tested to be incorporated as a trade finance system. The XDC network Tradeteq is a trade finance distribution firm that deals with invoice finance transactions as tokens.
Smart contract-based NFTs in Gaming
NFTs are giving extra benefits to gamers, which allows them to have complete ownership of in-game assets. They can sell them or trade them with ease. Not only does it ease the process of managing the in-game assets, but it also allows them to monetize the same.
NFTs and smart contracts are being incorporated into the legal industry as well
Smart contracts are being used as legally binding tools for agreements, licenses and contracts. Moreover, they are leading the way to streamline the economic execution of certain transactions and legal protocols.
NFTs and smart contracts in the real estate industry
NFTs and smart contracts in real estate have allowed investors to have partial ownership of their assets.
The smart contracts and the blockchain network have made the process of keeping property records, financial transactions and additional documents more efficient than before. Additionally, all types of intermediary fees like broker fees and closing fees do not exist anymore due to the implementation of this system. The processes have also become less time-consuming.
NFTs and smart contracts have helped in the creation of DAOs
DAO or Decentralized Autonomous Organizations help in the process of registration and transfer of ownership to compensation. They can replace the whole procedure of corporate finance and money movement in the organizational structure, thereby reducing administrative expenditures.
Smart contracts aids in the creation of new technologies
AI-enabled smart contracts create extremely efficient, responsive and complex dApps. They can exponentially enhance the capabilities of technology in every field.
Benefits of NFTs and smart contracts
Almost all the benefits have been enlisted above. Still, just for the sake of simplicity, we are enlisting the benefits here:
Due to data encryption, NFTs and smart contracts are tamper-proof. Right now, they can be found present in the financial institutions and government offices in India.
Increased speed with fewer chances of error
Smart contracts and NFTs bring in additional speed to every process due to less human intervention. Moreover, the possibility of an error is also minimal.
NFTs and smart contracts are transparent processes, and the entire blockchain network, including the parties involved, is aware of all the transactions. So there are no chances of manipulation of any sort.
Since there is less dependency on humans and the storage costs are negligible, the costs of NFTs and smart contracts are way less than the traditional fee costs.
Limitations of NFTs and smart contracts
It is not all good-good for NFTs and smart contracts. They have their limitations; these are:
Law firms have always been facing problems with logic-based execution. So, digitizing the entire documentation and processes of the transaction will be a tall order for them.
Legal ramifications in asset disputes
Human intervention is necessary for legal disputes involving the segregation of various assets, both of financial and non-financial nature. Since NFTs and smart contracts reduce the dependency on intermediaries, handling the issue will become problematic.
Apart from legal procedures, NFTs and smart contracts are used in many financial organizations. Due to the limited expansion of blockchain technology, some industries are facing problems in handling them because of overcrowding of orders. This delays the transactions as well as increases the operational fee. So, it might become more of a bane than a boon.
Future and scope
The future and scope of smart contracts and NFTs are increasing. It can be used independently or in collaboration with every digital entity that is available out there. Also, it is extremely versatile. We are going to see a lot of inclusion of NFTs and smart contracts in every major industry in the coming decade.
Considering the scope of this field, the employment opportunities are promising for finance professionals who understand them thoroughly and have the right technical know-how of them. The Integrated Program in Finance and Financial Technologies and the Certificate Program in FinTech, Blockchain and Cryptocurrencies help you prepare for the future and changing world of finance with industry-focused curriculum and certifications.
Knowing all the concepts of NFTs, smart contracts, be it standard blockchain contracts and or crypto smart contracts, are extremely important in today’s world. The fintech industry is going to see a lot more usage and application of these in the coming years. So finance professionals should be aware of the scope of NFTs, blockchain, and smart contracts and prepare themselves for the upcoming change in this sector.