In the age of blockchain technology and cryptocurrencies, many terms that no one was familiar with before have become mainstream. Some of such terms are Defi, which is short for Decentralized finance, and Smart Contracts. A decade or two ago, only avid crypto enthusiasts used them. Today, they have become part of the modern vocabulary. This article looks at what Defi smart contract means and the implications for crypto beginners.
In order to understand what smart contracts, it is important to first determine what digital agreement is because this is the origin. A digital agreement is simply a contract that operates on the internet. A good example is accepting the terms and conditions of Netflix, which means Netflix can charge you monthly for using its service.
In most digital agreements, the two parties do not know and cannot see each other. This means there is the risk of either party not fulfilling their contractual obligation. To deal with this risk, the agreement is usually executed and hosted by a much bigger company with the ability to enforce the contract. Thus, the much bigger company serves as an intermediary, which is a good thing because they ensure the contract exists in the first place. But the problem is that they have enormous control and influence on the contracts.
The smart contract seeks to eliminate this enormous control and the need for an intermediary. It is a digital agreement existing on an immutable blockchain software program, and there are conditions attached to the execution of the contract. Simply put, if event A happens, action Y will be executed.
With smart contracts, people can exchange property, shares, money, and anything of value without needing a middleman. Yet, doing it in a conflict and transparent manner. It is called Defi smart contract because it is decentralized, which makes it tamperproof. Thus, Defi smart contracts refer to contractual agreements hosted by a decentralized and neutral network.
The Benefits of Defi Smart Contracts
Unlike digital agreements, smart contracts possess certain unique advantages. This includes;
Smart contracts are hosted by decentralized infrastructure, which makes it impossible to attack them directly. It also means there cannot be a central failure of the network, and there is no centralized intermediary to influence. It is tamperproof as well.
Users have the guarantee that the contract will be executed once the condition. The multitude of independent nodes on that process the contract logic makes it very resistant to manipulation.
The agreement backed process, which includes the settlement, execution, maintenance, and escrow, are all automated. This ensures efficiency since no manual data needs to be entered for the execution. And there is no middleman needed to process the transaction.
The decentralized network hosting and enforcing the smart contracts is a peer to peer-based. This means centralized intermediaries cannot siphon as much value off the agreements when compared with regular digital agreements.
Evolution of smart contract
Smart contracts have been in existence for a while, and the most multi-signature smart contract is the most basic of applications. In a multi-sig transaction, a specific number of people must use their private keys to sign a transaction for it to be valid. Its first application in blockchain was with Bitcoin in 2012.
Later on, the protocol smart contract was introduced. These are blockchains operating as one application and capable of executing a few opcodes, which are programmatic instructions.
In 2015, Ethereum introduced scriptable smart contracts, which enabled blockchain to act as a world computer. What this means is that it can operate multiple applications simultaneously. Through this system, developers could create and manage their own smart contracts and easily change it. Building a smart contract with this scripting language is quite easy too.
At present, we have the Connected smart contract, which is a scriptable smart contract connecting to the off-chain, which are real world systems and data. It achieves this through an oracle, which is a secure middleware. Oracles trigger the execution of the smeary contract with off-chain data and allow smart contracts to transmit data to other systems.
Smart Contracts Application
Even though it is still in its early stages, Smart contracts are currently used in certain markets, which include;
In the management of rights, token contracts can be created for the purpose of tracking and assigning ownership rights to the tokens. The contract programs the tokens issued to have certain functions that will give the holder a certain ability depending on what the token is for. For example, a security token gives holder equity in a particular company; a nonfungible token gives holder ownership claim to digital or real-world asset, etc.
Smart contracts are also applied by blockchain games for in-game action execution. It ensures fraud-proof execution. It can be used to generate in-game items that are rare so that users themselves know the outcome wasn’t manipulated.
Defi Financial Products
These are financial applications that make use of smart contracts to recreate traditional financial services and products. The users’ assets will be in escrow through the smart contract, and market events will determine distribution.
Smart contracts are used for parametric insurance. It is insurance where the payout is connected to a predefined event, and a smart contract offers the perfect infrastructure for this. It is tamperproof, and data inputs will trigger execution.
Defi smart contract has a lot of potential given its few applications now that it is still in its infancy stage. Experts, which include Jerry Cuomo of IBM, believe that it has massive potential. And it can apply across all industries and sectors from finance to healthcare.