Suppose you are new to cryptocurrencies and blockchain technology. In that case, this article will show you the basics of smart contracts, blockchain technology, and decentralised finance (DeFi) and how these are utilised in the most popular decentralised applications.
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Smart Contracts Defined
A smart contract is an automated self-executing agreement that works without central regulators or intermediaries. It eliminates expensive intermediaries and nonessential paper to process conventional transactions, contracts, and exchanges while advocating for visibility and transparency on the blockchain. This operates by two parties that agree on a digital contract with predetermined provisions or conditions that must be complied with before executing a contract without the need for an intermediary.
Smart contracts have an extensive span that includes fiat or crypto payments and supply chains or more complex applications that encroach decentralised finance (DeFi), including stablecoins, lending protocol, decentralised exchanges, derivatives, random number generation, insurances, digital asset transfers.
The total value of transactions in DeFi smart contracts is an estimated $20 billion. This might seem like a great value. However, this is smaller than approximately $1 quadrillion for the derivatives market and $89.5 for stock markets, which are the total national amount for these contracts.
DeFi is still in its growing upstage. When this industry matures and starts to provide solutions to perennial problems with traditional finance, it is more likely to undergo mass adoption with smart contracts reaching up to the trillions.
Decentralised finance is a transition from traditional banking services and norms that will eventually become a reality.
The Link Between Smart Contracts and DeFi
It was in 2020 that smart contracts became popular as the DeFi industry developed from a humble sector in 2018 to one of the fast-emerging industries in blockchain technology.
Smart contract codes are utilised by various cryptocurrencies and decentralised applications (DApps) to process the exchange of goods, data, services, funds, and others. The difference between users of centralised financial institutions and DApps is that the former conducts transactions through intermediaries while the latter needs smart contracts to validate the legitimacy and transparency of these transactions and ensure that the goods and services are transferred in accordance with the provisions within the smart contract.
Advantages of Smart Contracts
The use of smart contracts over regular centralised applications or agreements has different advantages. Smart contracts have a high degree of security, efficiency, transparency, speed, and accuracy compared to traditional centralised methods of exchanging goods, services, or information. Crypto users do not need to depend on the black box of a centralised system. Instead, they can depend on the algorithm of smart contracts as each user can accurately see how each application works.
This makes using smart contracts a more affordable way of managing the exchange of goods, assets, or services.
Smart Contracts and DeFi Concerns
In a DeFi setting, specific concerns need to be addressed in a decentralised system. Since smart contracts process external data that are not verified by a centralised data source, these need to undergo verification in another way.
For instance, one concern is that DeFi users need access to accurate price feeds to know the accuracy of a digital asset. They need to trust that their data source is reliable and secure and can safely engage in transactions in a decentralised environment. DeFi users sometimes get confused with all the technical terms that come into it.
This can be resolved through the use of a data-oracle platform. Decentralised applications can benefit from using smart contracts through these data oracle platforms. These platforms provide access to data that are reliable and trusted from various sources. Thus, smart contracts can be implemented without intermediaries and remain fully decentralised.
The world is quickly adapting to the impact of smart contracts on how persons and groups exchange information, interact with one another, and gain access to financial services. Smart contracts will revolutionise, making systems more efficient and transparent, and will be implemented on a broader scale in traditional industries in a matter of time.