Putting Smart Contracts To Work — Use-Cases For Defi Smart Contracts
Tags: Decentralized Finance, Smart Contract Blockchain, Smart Contracts, Decentralization, Défi

Putting Smart Contracts To Work — Use-Cases For Defi Smart Contracts Isacharlotte Mar 8·7 min read

Defi Smart Contract Development

Introducing Defi — The New Age Finance Sans Censorship

The world of finance as we know it has been in the control of a few big names and they have exercised complete authority over every activity. This has resulted in heavy centralization, inundation of processes with third parties, and associated costs and delays that directly impact the price we pay even for the simplest of transactions. Since this was considered the de facto standard, we have always been accustomed to the speeds and costs.

However, there is a new standard of finance that is slowly creeping into the mainstream world. This world of finance does not have any degree of centralization and the users can stay in control of their funds all the time. The network is global and the transactions are swift. We are talking about decentralized finance, commonly abbreviated Defi.

Defi ensures that the costs are kept to a minimum and the trust needed for the transaction to be fulfilled is handled differently than engaging a cost-consuming third-party.

Smart Contracts — The Gordian Knot Of Defi

The tedious yet inevitable task of establishing trust in the decentralized ecosystem is established by a small self-executing program native to the blockchain. This program is called the smart contract.

The smart contract is conditional and it gets executed only upon certain conditions being met. This ensures that no person can circumvent the rigidity of a smart contract. Since anything and everything to do with the basket is transparent, secure, and immutable, this month’s contract itself cannot be tampered with.

It won’t be an exaggeration to say that the smart contract is the epicenter of the entire blockchain ecosystem. While the bitcoin smart contract is created only to handle transactions at a financial/commercial level, the Ethereum smart contract is far more versatile, providing a white scope of opportunities to capitalize on this new technology.

How Can Smart Contracts Find Practical Application?

Smart contracts can be considered sophisticated representations and rigid manifestations of the “if-then-else“ statements that have been a part of the programming world ever since BASIC. Since it is simple logic, smart contracts can find a wide variety of applications where rigidity needs to be upheld.

If we were to think about places that need authentication, identity establishment, tokenization, borrowing and lending, and asset management, smart contracts find their relevance. Let us look at a few areas where smart contracts can come in as handy solutions to ensure that the process and the rigidity are retained.

Digital Identity

Establishing an identity for every human being has been a constant pursuit and some of them may even portray it as an attempt to establish the New World order. With the growing need for global travel and transactions without Borders, a universally recognizable digital identity has become a must.

While documents like passports and Social Security can adequately address the need for the time being, they are quite limited in terms of their reach. The best way to establish the digital identity of a person is by bringing in a smart contract. There are efforts that are bent on creating a digital ID ecosystem by bringing together the blockchain technology and the intuitiveness of the react native app.

Smart contracts can help establish the digital identity of a person by verifying multiple parameters and ensuring that every field matches with another, properly ensuring that the person is the same as the one he claims to be! This could effectively replace voting, passports, tax remission, and even make dating more authentic!

Unmediated P2P Transactions

Blockchain technology is about keeping everything at a Pennsylvania level. Payments, until today, have been heavily dependent on banks or at least, some form of payment that depended on the traditional financial system. The traditional financial system is slow and it also consumes quite a lot of cost for being intermediaries.

With a smart contract and by introducing an escrow based system, it is possible to have unlimited and unmediated Pennsylvania transactions. Since there is no dependency on banks, any person in any corner of the world with And access to the network can be a beneficiary or a remitter when it comes to smart contract basic transactions. These transactions cost almost 0 and our immediate. The only limit to the number of transactions is the robustness of the blockchain. A lot of efforts are underway to build dedicated blockchains for these transactions alone.

Lending & Borrowing

Traditional financial markets have depended on lending and borrowing for making an additional profit apart from what they usually make. The difference in the interest they charge the borrower and they pay the lender is the profit for the bank.

Smart contact-based lending and borrowing also provide almost the same category of service but with an added degree of automation and cost-effectiveness. Since the smart contract handles the payment of interest, the lenders do not have to wait for human intervention to make their profit. As you may have known, Defi lending is generally overcollateralized meaning people will have to deposit additional crypto money as collateral that they intend to borrow. Therefore, the possibility of loan default is also kept to a minimum.

Decentralized Crypto Exchanges

Defi exchanges can be considered the most practical and prominent manifestations of the smart contract. Instead of depending on a centralized exchange that matches buying orders with selling orders, a Pennsylvania exchange ensures that it matches the buyer with the seller. Both of them can deposit the intended exchange asset into an escrow-based smart contract. The smart contract will release funds to either party only when the transaction has been confirmed.

While there is a small arbitration charge involved, there is no other cost that a user will have to incur when using a Defi exchange. The Defi exchange also ensures that the customer states in command of the funds all the time, unlike a centralized exchange. The customer also does not have to part with the private case of their wallet.

Asset Management Including Energy

Data and energy are considered alternate forms of currency. The fact that companies that handle data are valued more than companies that handle energy is a resounding testimony to the shift in focus and profitability. With a smart contract, it becomes easy for consumers to stay in control of their investments and payments when it comes to data and energy.

This opens up new possibilities for social networks where your data is not sold for advertising and a free energy ecosystem like how Tesla envisioned. Smart contracts can be considered the biggest step in the collective efforts towards universal decentralization.

Insurance

Insurance might not be a big expense considering the benefits that we reap in the long run and in times of need. However, insurance has the potential to be even more cost-effective.

The cost of the insurance premium also includes the cost paid out to the intermediaries to verify the claim, mediate the transaction, and establish the relationship between the insurance company, the bank, and the institution that needs to be Benefited from insurance. When we introduce a smart contract, all the liabilities, costs, and relevance/need for third-party validation disappear. This effectively reduces the cost of the insurance premium and also ensures that the entire process of insurance fulfillment is simple, easy, and straightforward.

Tokenization

Tokenization is the buzzword of the time! Tokenization has redefined liquidity as we know it and has introduced a considerable degree of sellability to classes of assets that were once considered extremely non-liquid.

Smart contract-based tokenization on dedicated blockchains ensures that the participation of investors is more distributed and democratic. It also gives powers for asset owners to partially sell their assets instead of parting with their prized possession completely. Smart contracts also save a lot of time and money when it comes to the process of paperwork and scrutiny for legal complications.

Limitations of The Smart Contract

It cannot be denied that smart contracts are bliss to the world of finance, authentication, and very soon, even identity verification. While this is a bouquet full of advantages, smart contracts also have their own share of limitations and misgivings.

A smart contract is extremely rigid. This seems like advantage on the surface. However, if you were to miss even a line of code on the smart contract, you will probably need to rework the entire process. There cannot be any compromise when it comes to the accuracy of coding turn smart contracts.

There have been instances of even blockchain systems being susceptible to hacking. The susceptibility is only because of the looseness of the smart contract in terms of cybersecurity. Your smart contract needs to be made extremely secure, so it can prevent any kind of hacks and other malicious attacks.

Anything and everything revolving around blockchain technology has been in a state of perennial legal turmoil. The governments and the legislations are yet to catch up with the water the blockchain technology can offer. Therefore, it might be possible that what is considered solid evidence in the world of blockchain and smart contracts might not be accepted in the court of law. It will take some time before the entire legal system catches up with what this new technology can offer. Until then, smart contracts are bound to be legally shaky!

Smart contracts are a lot less expensive than what traditional finance offers. However, it is not attractive enough for customers to make a move from the traditional systems they are used to do. Today, most smart contracts exist on the Ethereum blockchain, and every Ethereum transaction demands a gas fee for using the resources of the blockchain. This might prove ineffective for a few customers who might find this plan uneconomical. The world of blockchain is constantly evolving and that might soon be a smart contract that powers a blockchain without demanding high gas costs.

Conclusion

Perhaps the biggest compelling factor that made people accept the blockchain is the awesomeness of the smart contract. As we have already seen, programming a smart contract is not just about knowing the essential coding language but also understanding the implications of any code errors. Therefore, it is imperative that you entrust your smart contract development process to a reputable blockchain development company.

You can get in touch with a company that showcases expertise and experience in Defi smart contract development. They will take care to understand your requirements, present you with a smart contract, and give you business solutions that are bound to stand the test of time!