Ethereum and Smart Contracts: The Future of Banking

Ethereum is widely known as Bitcoin’s hipper, sleeker, younger brother. But the fact is, if Bitcoin is the future of money, Ethereum is the future of banking. Here’s a primer about an exciting evolution in banking: the smart contract.

What are smart contracts? That’s complicated. Consider this example. Suppose company A enters into a contract to purchase company B on the condition that Company B wins a bid to supply widgets to Government C.

In an ordinary contract, should Company B would win the bid, the contract does not automatically execute. Instead, Company A requires verification from both company B, and the government that the bid has, indeed, been secured before rendering payment for company B. Then, when company A is satisfied that the condition has been met, it authorizes its bank (Bank D) to transfer the funds to company B. Company B’s bank (Bank E) has to wait to receive verification that company A has the funds available to make the transaction, and that the funds have arrived in company B’s account at Bank E. Upon verification by both companies A and B that the funds have been transferred, title to company B and its the other components of the of the company and its incumbent parts are transferred to company A’s holdings.

Whew! That’s a lot of steps. And that is only a simplified illustration of a single contract with a single condition. Things can get much more complex, time-consuming and expensive as deals become more complicated (for example, consider the multiple contracts, contingencies, timelines and filings involved in an Initial Public Offering). While a lot of these steps are computerized, even the most basic contracts and transactions can take days to settle. Well, that transaction time costs money, and all parties are well — suited to seek alternatives to shorten that time span, ideally collapsing it to 0. Enter the smart contract.

The smart contract is a like any other with one crucial difference. The legalese in the written document is replaced (or supplemented if you still like paperwork) with software code. So, instead of waiting for a team of lawyers to analyze the documents and ascertain when conditions have been met, the contract is entirely digital and automatically executes upon fulfillment of all conditions. So, back to our example of company A’s purchase of company B. Instead of the back-and-forth verification between parties, banks and other stakeholders, the funds would instantaneously be verified, released, and received as soon as company B wins the bid. In fact, the transfer could even be completed before company B is made aware of the award. That’s how fast these things move. You need only a tiny bit of imagination to grasp the power.

The smart contract is one of a number of powerful applications of the Ethereum platform, and one of the reasons that so many corporations, banks, and other organizations have joined the Enterprise Ethereum Alliance, a conglomerate of power players (to say the least) working together to harness the power of the ethereum platform to revolutionize our financial systems. Smart contracts represent the future of banking. The speed and efficacy provided by them are undeniable. There are a number of ways that blockchain technology can be implemented to generate, authorize and verify smart contracts (there can be public blockchains or private blockchains that are either 100% proprietary or running on the public chain), thus a number of ways this technology can be used. But it is important to understand what smart contracts are, even if you’re not interested in looking too deeply into the rabbit hole, because they will continue to become a fundamental pillar of the 21st century banking structure. Bet on it!