Smart Contract Basics Part 3: How Smart Contracts Reduce Transaction Costs

When it comes to making agreements or conducting transactions, intermediaries such as lawyers, brokers, and banks have traditionally been involved to ensure that the process is carried out fairly and transparently. However, the involvement of these intermediaries often leads to increased transaction costs, which can be a barrier to entry for many individuals and businesses.

Smart contracts offer a solution to this problem by enabling transactions to be carried out in a secure, transparent, and cost-effective manner without the need for intermediaries. In this post, we’ll explore how smart contracts work and how they can reduce transaction costs by eliminating intermediaries.

First some basics – what are smart contracts?

Smart contracts are self-executing computer programs that automatically enforce the terms of an agreement between two or more parties. These contracts are stored on a blockchain, which is a distributed ledger that records all transactions in a secure and transparent manner.

Smart contracts are programmed to execute when certain conditions are met, such as the transfer of funds from one party to another. Once the conditions are met, the contract is automatically executed, and the agreed-upon actions are carried out without involving intermediaries which results in a lower per transaction cost.

So what are some of the ways smart contracts reduce transaction costs?

Some of the more obvious ways include:

Eliminating intermediaries
As just mentioned above, one of the primary benefits of smart contracts is that they eliminate the need for intermediaries such as lawyers, brokers, and banks. This can significantly reduce transaction costs, as intermediaries almost always charge fees for their services. By eliminating intermediaries, smart contracts can reduce the costs associated with legal fees, brokerage fees, and banking fees.

Increasing efficiency
Smart contracts are highly efficient because they are self-executing and automate many of the tasks that would normally be performed by those intermediaries that are no longer needed. For example, a smart contract can automatically transfer funds from one party to another when certain conditions are met, without the need for a bank or broker to facilitate the transaction. This can save time and reduce the costs associated with manual processing.

Improving transparency
Smart contracts are stored on a blockchain, which is a distributed ledger that records all transactions in a secure and transparent manner. This means that all parties involved in a transaction can view the terms of the contract and the execution of the contract in real-time. This level of transparency can reduce the costs associated with disputes and can help to prevent fraud.

Enhancing security
Smart contracts are highly secure because they are stored on a blockchain, which is resistant to tampering and hacking. This can reduce the costs associated with fraud and can help to ensure that transactions are carried out in a secure and transparent manner.

Smart contracts increase efficiency and offer a secure, transparent, and cost-effective way to conduct transactions without the need for intermediaries. By eliminating intermediaries, improving transparency, and enhancing security, smart contracts can significantly reduce transaction costs and make it easier for individuals and businesses to conduct transactions in a fair and transparent manner.