Smart contracts are a mainstay feature of DeFi and blockchain technology. We describe smart contracts and DApps in detail in this post.
Smart contracts were introduced in 1994 by Nick Szabo, an American computer scientist. He saw smart contracts as computers executing the terms of a contract, with the terms themselves being defined in computer code. The programmable blockchain platform Ethereum is an example of how smart contracts operate.
If you’ve heard of Ethereum, you know you can use it to exchange the value of digital assets directly with a counterparty. This is possible because Ethereum is capable of running smart contracts to support the value exchange. A smart contract is essentially a digital contract, programmed to execute when certain predefined conditions are met. After the conditions are met, transactions are added to the blocks for processing.
The major blockchains capable of running smart contracts are Ethereum and EOS. Most DeFi takes place on the Ethereum blockchain. The Bitcoin blockchain does not have the capabilities to execute smart contracts. Because smart contracts run on blockchains, you need native cryptocurrency to pay for transaction processing, like the way you need fuel to drive a car.
Smart contracts eliminate the need for middlemen
Smart contracts allow you to carry out transactions involving digital assets without the need for intermediaries. Digital assets can be pretty much anything – more on this in upcoming posts. In real life, if you want to buy a house, you need lawyers to draw up a contract and oversee the deal. You need real estate agents to facilitate the purchase. Sometimes, you need the local court to resolve disputes with the owner.
Simply put, several intermediaries are involved in every real-world transaction. In the digital realm, a smart contract can be programmed to oversee and handle the entire transaction. Instead of lawyers, software engineers write the contract to govern digital asset transactions. The digital nature of the contract results in faster transaction execution and reduced facilitation fees.
DApps are applications built on smart contracts
DApps, or decentralized applications, are systems built around smart contracts and deployed to a blockchain. A web or mobile interface with a self-custody wallet allows anyone to access these decentralized applications. Think of them as a smart contract you can use to carry out a specific type of transaction. DApps can be built for a variety of purposes, including gaming, logistics, and of course, finance.
Major smart contract applications on the Ethereum blockchain today are Compound, Maker, and Uniswap:
- Compound: Cryptocurrencies and digital assets tend to sit idle in wallets and on exchanges. With Compound, you can potentially earn interest on any idle cryptocurrency by supplying it to the Compound Liquidity Pool.
- Maker: The Maker protocol manages the volatility of DAI, its cryptocurrency. DAI is an unbiased cryptocurrency that is stable, decentralized, and non-discriminatory.
- Uniswap: Uniswap is a decentralized exchange protocol for almost any digital asset. Anyone can swap one digital asset for another or provide liquidity to those who want to swap digital assets and earn fees.
Smart contracts have advantageous properties
Smart contracts are executed by computers, which provides several advantages:
Mistyped forms, missed details, and other manual errors are common problems you may encounter with human-readable contracts. With smart contracts, however, expect a lot more clarity. They are precise, with no room for ambiguity.
Transactions facilitated by smart contracts are immutable, meaning unchangeable. Once certain conditions are met, a smart contract executes the transaction, and that transaction cannot be reversed. Records of the transaction are distributed across the decentralized blockchain network, making it impossible for anyone to remove records.
Smart contracts are self-executing, which means you don’t have to trust the other party to stick to the terms defined in the agreement. The smart contract executes on its own once it determines the conditions are met.
When you deal with middlemen to process transactions, it’s time-consuming. They have their lives to lead, and your transaction isn’t always a priority. Machines, however, don’t have that problem. They can process transactions rapidly. As a result, smart contracts are time-efficient and typically execute very quickly.
Smart contracts can interact with each other. They are like lego blocks – you can combine multiple to build a new structure or smart contract. This is why smart contracts are considered to have so much potential. They can be molded in new, innovative ways to create exciting products and services.
Access the Compound Liquidity Pool with Linen App
Are you interested in trying out a DApp like Compound? Use Linen App to gain access to the Compound Liquidity Pool. Linen App provides the necessary tools to connect your bank account and supply digital dollars to a pool and potentially earn a yield on your assets. Linen App is a self-custody digital assets wallet and an interface to the Compound DApp.
Smart contracts have a host of real-world use cases – from insurance to employment agreements and loans. Smart contracts are still finding their feet and aren’t perfect, but they continue to improve each day. A lot of talent and resources are being poured into the development of applications based on smart contracts. They promise to make everyday transactions faster, error-free, and more affordable for everyone in the near future.