Smart Contracts and DeFi: Why Smart Contracts are Essential for DeFi Applications

Smart Contracts and DeFi

Decentralized finance is generating new asset classes that have the potential to disrupt the financial services industry and usher in a new era of digital finance. In one year the DeFi industry’s market capitalization has ballooned 30 times to US$73 billion. This represents exponential growth in any market. Yet the main contributor to the increasing momentum of DeFi is smart contracts.

But exactly what is a smart contract and how are they related to DeFi?

What is a Smart Contract?

Smart contracts are self-executing and immutable agreements settled on a blockchain, often the Ethereum blockchain. These can be used to support crowdfunding, NFT auctions, multi-signature wallets, and more.

At the moment, smart contracts are best suited for two types of transactions: making sure that a payment is made once specific conditions are met and imposing financial penalties if certain conditions are not satisfied.

The main function of a smart contract, therefore, is to execute certain provisions, such as transferring funds from one wallet to another. Then, the smart contract itself is replicated through several blockchain nodes, benefiting from the security and immutability that the blockchain offers. Smart contracts, thus, make traceable, transparent, and irreversible transactions.

Examples of Smart Contract Applications

Here are examples of Smart Contracts Applications in use today:

Inmusik: This is a music streaming platform that utilizes smart contracts to enable the validation of the ownership of a song through a transparent tagging system. Inmusik then distributes the revenues to the worthy recipient or creators.

Ascribe: A digital art platform, merged with smart contracts to enable secure ownership or authorship of digital artwork. As a result, the platform helps prevent the theft of artworks as well as creating an ethical way to pay the digital artists.

Tracr: Tracr is a blockchain-based project for diamonds traceability. It utilizes smart contracts to help track the production processes and traceability of the diamonds supply chain.

Smart bond: Swiss Bank UBS recently launched a new solution called “smart bond”. It is a self-paying instrument that utilizes smart contracts to enable people to make risk-free micro-transactions.

Applicature: Applicature is a blockchain application that focuses on fostering data integrity. Specifically, it employs smart contracts to enable patients to access transparent, secure records of their health data.

What is DeFi Crypto?

DeFi cryptocurrency refers to Smart Contract based applications that aim to recreate traditional financial instruments without the need for intermediaries like banks or central authorities.  It is a term used to describe financial applications built on top of blockchains through smart contracts.

DeFi certainly builds on that concept of peer-to-peer to establish trust. It utilizes peer to peer models for lending, trading, investing, insurance, and more. Take DeFi lending as an example. With DeFi cryptocurrency, users can loan or borrow cryptocurrency, as you could with fiat currency at a bank, and earn interest as a lender. Moreover, interest fluctuates depending on demand, and borrowers must provide collateral (with other crypto-assets).

Moreover, there is no need for lenders and borrowers to know one another’s identities—everything is about mutual trust and preserving privacy. Unlike with a traditional bank, borrowers using DeFi apps cannot be held accountable with physical assets if unable to effectively pay back a loan.

Bitcoin and Ethereum are the original DeFi applications. Both are controlled by large networks of computers, not central authorities. However, there are other dapps, mostly built on the Ethereum blockchain network, that are dominating the scene.

For example, the DeFi lending space is currently dominated by Maker, Compound, and Aave. Maker (DAI) aims to be a global currency untouchable by central banks while Compound and Aave are crypto versions of a money market fund, letting users earn interest.

What DeFi Applications are common in the market?

Other applications of DeFi cryptocurrency include dapps that allow users to:

  • Bet on the outcome of events (e.g. Augur).
  • Create and exchange derivatives of real-world assets such as currencies or precious metals (e.g. Synthetix).
  • Take part in a no-loss lottery (e.g. PoolTogether).
  • Buy stablecoins such as DAI and USDC that are both pegged to the US dollar.

As a leading crypto marketing firm, TokenMinds prides itself in providing the best DeFi marketing strategy for blockchain startups.

Smart Contracts and DeFi

Smart contracts and are essential for DeFi applications. After all, those DeFi apps run on top of smart contracts. Furthermore, anyone can participate in the governance process of DeFi apps by voting on the platform proposals thanks to smart contracts. 

In short, the DeFi space is transparent and governed by people that make up its community. Moreover, the smart contract code also exists on the blockchain giving these applications all the security features of distrusted ledger technology. Also, firms can audit DeFi smart contracts to improve their security and prevent theft due to faulty smart contracts.

Other use cases of DeFi applications are in the area of financial services like payments, decentralized exchanges, stablecoins, lending, borrowing, derivatives, yield farming and so much more.

What is Blockchain App Development?

Blockchain app development essentially relates to the development of blockchain applications that range from cryptocurrency wallet apps to building DeFi apps and smart contracts using various blockchain protocols. Examples of these blockchain platforms include Ethereum, Tezos, Hyperledger, Corda, Tron, Stellar, and EOS, among others.

Additionally, other blockchain applications include:

  • Insurance
  • Healthcare
  • Lending
  • Digital identity
  • Supply chain and logistics
  • Real estate

It is important to work with a blockchain development company to ensure a smooth blockchain development process. Blockchain app development usually involves eight stages.

  1. Ideation
  2. Selection of Blockchain Platform
  3. Blockchain Ideation to identify other technology stacks for the application
  4. Development of PoC or Prototype
  5. Visual and Technical Designs
  6. Blockchain App Development
  7. Blockchain App Deployment
  8. Maintenance and Upgrades

Need help developing practical DeFi applications? TokenMinds offer cutting edge blockchain app development solutions for smart contracts, crypto wallets, and DeFi apps, among others. Get in touch with our skilled blockchain app developers to discuss blockchain app development solutions, including DeFi apps.

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