How Are Smart Contracts Used in DeFi?
The use of smart contracts has exploded in 2020 as the DeFi industry has developed from a small sector in 2018 to one of the fastest growing industries in the emerging technology space.
Many cryptocurrencies and decentralized applications (DApps) function using smart contract code to facilitate the exchange of goods, services, data, funds and so on. While users of centralized financial institutions, such as a bank or credit unions, are able to rely on intermediaries to manage a transaction, DApps must use smart contracts to ensure that each transaction is legitimate, transparent and trustless — and that goods or services are, in fact, being transferred in line with the predetermined provisions of the agreement.
In a nutshell — smart contracts ensure that party A and party B are both fulfilling their end of the agreement.
What Are the Benefits of Using Smart Contracts?
There are many benefits of using smart contracts over regular centralized applications or agreements. Smart contracts are faster, more transparent, accurate, secure and efficient than traditional centralized methods of exchanging goods, services or information. Users no longer need to trust the blackbox of a centralized system, but instead rely on “code is law” as users can see exactly how each application behaves.
These efficiencies come together to make a much cheaper way of managing the exchange of assets, goods or services.
What Are the Issues With Smart Contracts and DeFi?
For use in a DeFi setting, there are some potential issues that need to be considered. In a decentralized mechanism, smart contracts are processing external data which — without having a centralized, verified data source — will need to be verified some other way.
For example, DeFi users require access to reliable price feeds to know that the value of a digital asset is accurate and free from outside manipulation, so that they can safely and confidently transact in a decentralized environment.
A solution to this issue is to use a data-oracle platform, such as Band Protocol. Data oracle platforms allow for decentralized applications to benefit from the use of smart contracts by providing access to trusted, verified data from multiple sources. In this way, smart contracts can be executed free from outside manipulation and remains fully decentralized.