When an activity is finished, a buyer and a seller agree on pre-defined automatic lines of code called smart contracts. The functions of the contract are carried out when the predefined conditions are met.
The core of decentralised finance (DeFi) technologies is smart contracts. Additionally, the creation of smart contracts is expanding as a result of DeFi's recent unprecedented expansion. The adoption rate is higher primarily as a result of smart contracts' equal benefits to businesses and consumers.
In 2008, Bitcoin emerged as the first cryptocurrency. The development of Defi smart contract development, however, dates back to the 1990s. Cryptographer Nick Szabo was the first to coin the term. The definition of a smart contract, according to him, is "a series of promises embodied in digital form, including protocols within which the parties perform on their commitments."
What exactly are these unique digital promises? And how are they effectively used in finance?
Let's start with the current problems and examine how the digital promises of smart contracts can contribute to their resolution.
Problems with centralized organizations
Smart contracts allow centralised financial organisations to transform into decentralised ones. The following issues are resolved by making it decentralised.
Digitization:
There aren't many internet services offered by conventional banking organisations. It fails to draw in the majority of clients from the next generation as a result. Additionally, digitalization of banks can save expenses by 60–80%, according to the Massachusetts Institute of Technology.
Security:
Customers worry about regular security lapses and interruptions of banking services. This cannot be avoided because the entire system is centralised.
Among the outside variables are
Natural catastrophes, political rules, and competition are examples of outside factors that affect a financial body's success. The homogeneity of service issuance tends to be compromised by this.
Disputes:
The centralised nature of traditional banking makes it vulnerable to disputes between buyers and sellers. Constantly evolving legal requirements, dishonest behavior, and inadequate organisational resources are some of the causes of conflicts.
Would you accept our claim that smart contracts are the answer to all of the aforementioned problems?
You're stuck with it.
The function of smart contracts in DeFi is covered in detail in the next section.
The Functions and Advantages of Smart Contracts in DeFi Digitization
Code lines in smart contracts are entirely digitalized. They thus let the DeFi protocols to be fully online. It saves money for both the company and its customers.
Security:
To make sure they comply with the requirements, smart contracts are audited frequently. The codes between a buyer and a seller cannot be altered after they have been agreed upon. As a result, it allayes worries shared by the company and its clients.
Among the outside variables
The automated system incorporates everything. The financial services offered by DeFi protocols are never subject to external causes.
Disputes:
Smart contracts prevent the chance of a buyer-seller dispute because the employment of an intermediary is forbidden.
Fees:
The cost of activities is very low because third parties are not used in DeFi protocols based on smart contracts.
Accuracy:
Operating with the maximum level of precision is encouraged by the absence of human interaction.
Speed:
The entire process is automated. Therefore, manual functioning is essentially nonexistent. Performance is quicker than with conventional services as a result.
DeFi protocols with smart contracts as examples
Here are a few successful examples:
- Compound
- Maker
- Synthetix
You can start up your smart contract-based DeFi protocol with the aid of Suffescom Solution.
With more than 13+ years of experience using blockchain technology, Suffescom Solution is a well-known DeFi development company. To assist you in developing your smart contract-based DeFi systems, our team of DeFi developers and blockchain architects is dedicated to offering top-notch DeFi development services.
