Blockchain Enabled Smart Contracts for Reducing Transaction Costs in Financial Markets

Abstract

The fast digitization of financial markets has added pressure to the demands of efficient, transparent, and cost-effective infrastructural systems where the transaction was concerned. The conventional financial systems are characterized by high cost of transaction due to intermediaries, manual checks, information asymmetry and agency problems. This paper will discuss the concept of reducing these transaction costs and improving market efficiency through smart contracts that should be enabled by blockchain technology. Smart contracts, which are automated contractual agreements coded on blockchain systems, will replace contractual processes with automation, remove middlemen, and create trust by decentralizing verification. The study is founded on a qualitative analysis of close to sixty academic articles, industry reports, and policy documents that have been published since 2015. The paper recognizes automation, transparency, decentralization, and information symmetry as mediating factors that smart contracts can lower the operation, coordination and enforcement costs. Conceptual framework is presented to define the connection between the smart contracts and the reduction of transaction costs, which is moderated by technological scalability, regulatory environment, and the market adoption. Results indicate that smart contracts are able to reduce trading fees, delays in settlements and counterparty risks as well as enhance transparency and reliability in the systems. Nevertheless, there are still issues such as regulatory uncertainty, cybersecurity, poor interoperability, and excessive energy use in blockchain activities. The paper proposes that broader use of smart contracts would need regulatory transparency, technological change, and institutional preparation. It also concludes that smart contracts based on blockchain have a great potential to turn financial markets into more efficient, inclusive, and resilient ecosystems, assuming the barriers to their implementation are planned appropriately. Empirical validation of the study by pilot projects and real time applications in finance should serve as the future research.