By Steven Krohn · June 20, 2018
“Study how to write smart contracts, which is the basic unit of programming a blockchain for business purposes. It is the equivalent of being taught HTML and Java during the early Internet days. And master how to create assets or tokenize existing ones on a blockchain.” – William Mougayar
Blockchain technology has become very popular very quickly. Many people have called it the next big thing since the invention of internet. The technology has gained wider appeal in the FinTech sector.
Many established businesses are looking to raise finance through their own ICOs.
There are constant new developments on the blockchain ledger system. Smart Contracts are a major improvement that has made the system even better.
These automated contracts originated on the Ethereum network as an additional layer of the cryptocurrency. Given their applicable functionality, these contracts have been incorporated by every new platform since Ethereum’s launch.
Smart contracts are created on a blockchain platform by two or more contracting parties. Once a contract has been set, it executes automatically when each party fulfills its contractual obligation.
This means that a single user cannot manipulate these contracts. The contract gets verified by a P2P network every time a transaction is processed. Distributed Ledger Authentication makes them completely secure.
Contracts based on blockchain technology will allow businesses to add new instruments into the economy at large. These will allow a greater availability of credit for businesses and borrowers while giving financial lenders a higher degree of security for their outstanding loans.
Smart contracts are expected to reduce the cost of doing business and spur economic growth. It is an innovative new application of blockchain technology.
The home mortgage and financing industry is expected to significantly benefit from smart contracts and blockchain. Some of the opportunities available for businesses in the mortgage industry are outlined here.
Mortgage businesses can apply blockchain into their operations in several ways. They can use smart contracts for loan origination as well as loan servicing.
As a loan origination method, smart contracts allow lenders and borrowers to set specific terms and conditions.
As a loan servicing instrument, smart contracts let businesses view transactions in real time and improve transparency for all the stakeholders.
Blockchain allows mortgage lenders to design their operations as an ecosystem built on suppliers, agents, brokers, surveyors and insurers. These intermediaries help the lender in making a decision on approval and execution of the loan.
Building this network on a blockchain helps speed up the process for the mortgage lender.
Credit qualification is an important part of the mortgage lending process. Digitization of bank accounts will help improve loan approval rates.
Blockchain allows the potential for developers to build additional layers of financial instruments such as title reports. The beauty of blockchain network is that it creates an asset that cannot be copied or duplicated.
A national registry of title reports will help businesses achieve cost reduction and higher efficiencies. It will make the process of title report verification faster, accurate and publicly viewable.
Loan securitization is a complex process that requires careful review by underwriters. The verification of various data and packaging of loans into securities is strictly regulated by government agencies.
This is because of the financial crisis of 2007 where lenders were not following good practices and the entire financial system collapsed.
Implementing smart contracts into the securitization process will add three major benefits, apart from speed.
First it makes the sharing of information simple and easy. Any changes made to the blockchain ledger can be audited by the concerned parties in real time.
The investors can become aware immediately when payments are made on time or delayed. This improves the transparency of the reporting process.
The second major advantage is automation that can be implemented in the system. Smart contracts can get automatically executed when certain conditions are met by the concerned parties.
This will add trust in the system and make it more reliable.
The third advantage is AI. Expertly designed AI can analyze demands of investors and borrowers to adjust interest rates. The AI can also categorize loans based on collateral and income levels.
Finally, AI can also construct a new asset which can be issued as security in the financial markets.
Despite the many potential benefits of blockchain and smart contracts, banks have been slow in adopting the new technology. This is understandable as banks must assess risks in the new system before implementing it for their deposit holders.
So far, the major push for adopting these technologies has come from new “blockchain banking” startups. These new startups are more willing to take risks in the fintech industry as their resource investment is low.
Major Banks are certainly keeping an eye on these developments. It seems likely that banks could adopt smart contract technology themselves in the near future.
It should be noted that virtually all major banks have blockchain pilot projects of their own.