Smart contracts are a fundamental building block of Web3 technology, as they enable the execution of decentralized applications (dApps) and the automation of transactions on blockchain networks.

Designed to facilitate, verify, and enforce the negotiation or performance of a contract, without the need for intermediaries, such as lawyers, banks, or escrow services, smart contracts are an important component of blockchain technology. Enabling the creation of decentralized, transparent, and secure applications that can operate without the need for intermediaries or central authorities, it is interesting to look at just how much we can trust in them, especially when compared to legacy banking systems.

Who to trust?

While legacy banking systems have been reliable and secure for many years, they are often criticized for their high fees, slow transaction times, and limited accessibility, especially for people in underserved or remote areas. They also have a high degree of centralization, which can make them vulnerable to security breaches and single points of failure.

In recent years, blockchain technology and decentralized finance (DeFi) have emerged as potential alternatives to legacy banking systems. By enabling peer-to- peer transactions, smart contracts, and decentralized networks, blockchain technology has the potential to create a more efficient, transparent, and accessible financial system that operates without intermediaries or centralized authorities.

Smart contracts and traditional finance serve different purposes and have different strengths and weaknesses. While this makes it difficult to say that one is more reliable than the other in an absolute sense, there are some factors that can influence the reliability of smart contracts versus traditional finance.

• Transparency: Smart contracts are typically more transparent than traditional finance because their code is publicly available for anyone to inspect. This can increase trust and reduce the risk of fraud or malfeasance.

• Automation: Smart contracts are automated and self-executing, which can reduce the risk of human error and increase the speed and efficiency of transactions. However, this also means that there is little room for discretion or flexibility in the execution of the contract.

• Security: Smart contracts are generally considered to be more secure than traditional finance because they are based on blockchain technology, which makes them resistant to hacking and tampering. However, there is still a risk of bugs or vulnerabilities in the code, and there have been instances of smart contract hacks in the past.

• Regulation: Traditional finance is subject to regulation by governments and financial authorities, which can provide additional protections for consumers and investors. Smart contracts, on the other hand, are often outside the scope of traditional regulation, which can make it more difficult to seek legal recourse in the event of a dispute or fraud.

“Smart contracts have allowed for us to rely less on human intervention, which means a reduced operational cost for us, but also allows our clients to execute instant transactions that run without any downtime,” says Yang Lan of Fiat24. “As an ex-banker myself, I find that recreating a and mimicking some of the functionalities of a bank on the blockchain just makes a whole lot of sense.”

Designed to be trustless

Smart contracts are designed to be trustless, operating on a set of predefined rules that are executed automatically and making them more transparent and resistant to fraud and tampering than traditional contract systems. Unlike traditional contracts, where trust is necessary between the parties to ensure that the terms of the contract are followed, smart contracts execute automatically and transparently based on predetermined rules.

With confidence in traditional financial institutions waning, following a domino effect of breakdowns and bankruptcies in the banking world, the possibilities offered by decentralization are becoming more and more appealing.

While smart contracts have the potential to increase transparency, efficiency, and security in financial transactions, they are not without their own set of risks and more time is needed to determine how they can be integrated into more services and adapt with increasing regulation.

As Top Crypto Influencer Moritz Pindorek says, “I trust the code, not the banks,” and that is surely a sentiment echoed in the crypto world.