Understanding Smart Contracts and Their Impact on Decentralized Finance (DeFi)

Over the years, I have actually come to discover that decentralised finance which we always called DeFi has really grown to become something magnificent and most especially dominating in the world of the financial system. When it comes to DeFi revolution, I will say one of the things that distinguished them are the smart contracts. The smart contracts are what I tagged been able to carry out contracts on its own using agreement in the code format.

Before even delving to my topic today, what do I mean by Smart Contracts, I mean computer based programs that automatically execute what is expected to be carried out as terms written in code format. They are most of the time deployed on the Blockchain. Smart contracts help to use the Blockchain technology to carry out what they need to be carried out and this gives a great edge because it is transparent based and also decentralised.

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When it comes to DeFi, smart contracts plays a very significant role in that and one of it is the fact that DeFi is a system that helps to lend, borrow and also trade making use of the Blockchain technology. This massive development helps to remove the centralised authory and centralised institutions away as hindrance and that is made possible by making use of smart contracts. Smart contracts have made financial services to be easily accessible to virtually everyone as long as you are on the internet.

Smart contracts is used for lending and borrowing. By smart contracts, we can carry out peer-to-peer lending and borrowing services. Platforms like Aave and compound have made it possible. For many of us, we might not be aware of them. This is great because with those lending platforms, there is no need to make use of central institutions like banks or even following the protocol of the centralised authority.

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The other benefits I will mention are that smart contracts have been offered to DeFi is the aspect of staking and yield farming which is called the staking protocols. In staking protocols, it means you can lock up your address in liquidity pool for a period of time and earn rewards for that. Rewards are actually distributed based on the volume of the assets you locked up or you staked and generally the participation.

Over the years, there have been massive impact that smart contracts have offered to DeFi and one of them is the fact that there is increased Accessibility. Like I said, with smart contracts now, you can access DeFi or Financial services as far as you have internet connection. This has helped to remove barriers and even help people to have access to financial products. Another benefit is the fact that it comes with lower cost. If you are the one that deals with banks, you will understand with me that the financial services that DeFi offer is at a lower cost compared to the traditional financial institution we grew up knowing.

Of course even with so much benefits, I will say it comes with its own risk that needs to be looked out to. One of the risk is been vulnerable to coding errors and this can ope ways for DeFi hacks. In fact most of the time, it can be so dangerous that at the end of the day, lot of funds can be lost and services obstructed at the end of the day. I believe that particular aspect needs to be looked out to when it comes to smart contracts.