Abstract：Bitcoin brought decentralization and blockchain technology to the crypto market, but it was still hampered by centralized finance, which became burdened with governance to suit regulatory and investor expectations.
What is a smart contract and why is it important？
The most prevalent scenarios in which smart contracts are used
How to interact with a DEFI Smart Contract: A Step-by-Step Guide
Smart Contracts are designed for more complicated use cases.
Emerging novel protocols are finally attracting interest after several years of consolidation in the crypto market, and it's far more than just a repeat of the 2017 ICO bubble. One of the most popular is DeFi, which stands for Decentralised Finance.
Bitcoin brought decentralization and blockchain technology to the crypto market, but it was still hampered by centralized finance, which became burdened with governance to suit regulatory and investor expectations.
DeFi, on the other hand, represents true decentralisation, with no actual government and a trustless and permissionless mentality.
Although the crypto sector appears to be a once-in-a-lifetime opportunity to launch a decentralized financial business, a thorough understanding of smart contracts is required.
The adoption of Smart Contracts - which give their logic - grew in tandem with the explosion of the DeFi business in 2020. While CeFi relies on intermediaries to manage transactions, DeFi creates trust and transparency through immutable Smart Contracts.
What is a Smart Contract, and how does it work？
Smart Contracts are self-executing programs that run on a blockchain network, with the conditions of contracts between two parties - such as a seller and buyer - put into lines of code instead of a formal, legal document.
Smart Contracts are created in the Solidity programming language, which is an object-oriented programming language.
The purpose is to eliminate the necessity for a middleman in business and trade between identified and anonymous participants.
They allow developers to create significantly more complex functionality than just receiving and distributing digital goods. These programs are referred to as dApps, or decentralised applications, and they are essentially a collection of linked Smart Contracts with a user interface.
Smart Contracts are used to establish decentralised financial protocols and apps on blockchain networks that execute exactly as intended.
Some Smart Contracts Use Cases
· Intellectual Property - Smart contracts can be used to create and enforce intellectual property agreements such as licenses, as well as to make real-time payments to property owners.
· Because blockchains are immutable, smart contracts safeguard against counterfeit and theft. In a blockchain network, goods sold without a transaction record will be rejected. This is known as Provenance.
· Smart contracts can be used to authenticate work certificates, diplomas, college degrees, and other documents. This is called Certification.
· Authenticity - A smart contract can assure that a customer's purchase is genuine.
· Insurance Claims - Smart Contracts can help insurance companies speed up the claims process. If a claim fits the requirements, the contract can be automatically executed.
To summarize, smart contracts provide the following advantages:
· Security - It is impossible to alter the distributed ledger.
· Disintermediation - Smart contracts allow parties to enter into contracts without relying on a third party.
· Individuals and businesses can save money by using smart contracts instead of traditional contracts because there are no intermediaries.
· Near-real-time execution - As soon as the required requirements are met, transactions take place virtually instantaneously for all parties involved.
· Transparency - Because terms and conditions are available to all parties on the blockchain network, smart contracts foster a trusting atmosphere.
Learn how to effectively use and interact with smart contracts.
Tokens are represented and managed by smart contracts on Ethereum networks. The MakerDao protocol, for example, is the DeFi industry's backbone. MakerDAO is an important part of the DeFi ecosystem since it holds 60 percent of the $1 billion in locked ETH in the DeFi market.
MakerDAO's main product is DAI, a stablecoin pegged to the US dollar that is maintained by a system of price feeds and underlying collateral (ETH).
The project is built on the Ethereum blockchain and operates without the use of a middleman. Smart Contracts that handle Collateralized Debt Positions are used by MakerDAO to offer loans directly in the DAI stablecoin (CDP).
· Borrowers can use CDP to secure a loan on MakerDAO's platform by depositing a digital asset into a Smart Contract as security. The criteria are established in such a way that the CDP holds the assets and allows the borrowers to create the equivalent of USD worth in DAI to take out a loan after the asset is deposited.
· Let's take a look at CDP, which is a form of Smart Contract.
When a customer deposits Ether into Maker's Smart Contract, a Collateralized Debt Position is created, allowing you to draw out DAIs at the collateralisation rate.
· Let's imagine you put down $1800 in ETH, which will allow you to take up to 905 DAI at a 200 percent collateralisation ratio.
· To get your Ether back, you'll have to pay back the borrowed amount in DAI, plus a small fee to assist keep the DAI peg to USD stable.
However, if the price of Ether falls by a certain amount, your CDP will close immediately. This acts as a safety net to protect against loan default.
To avoid this, either take out fewer DAI or put more Ether up as collateral. The MakerDAO system always has adequate cash locked against the borrowed amount because to the CDP smart contract.
MakerDAO has added additional conditions in the CDP smart contract.
· Users can repay the borrowed amount plus the annual stability charge if the price of a collateralised asset does not fluctuate.
· If the value of a collateralized asset falls, the CDP becomes under-collateralized, then a third party will liquidate the CDP with a penalty. These third parties can profit in a variety of ways from a liquidated stake.
· When the price of collateralised assets rises, the collateralised ratio rises, allowing borrowers to draw further DAIs against their collateralised asset, eventually increasing the collateralised ratio.
Smart Contracts for System Control
MakerDAO is a self-governing system, and the native MKR token enables token holders to vote on modifications to the Maker Protocol via a smart contract voting procedure. Among the changes are:
· What should the annual borrowing rate (or stability fee) be？
· What kind of collateral should a CDP have？
· In the event of a flash crash of the collateralized asset or any other emergency, the process will be shut off.
The voting smart contract interacts with MKR token holders, and their vote is permanently recorded on the MakerDAO blockchain for complete transparency. This contract keeps track of votes that are weighted according to the number of tokens each voter uses. As a result, the larger holders have a higher stake.
MakerDAO's voting smart contract processes the vote results after they have been collected.
Another smart contract called “spell” is used to carry out the alterations that the contract has decided on. The contract is currently being developed by one of the members of the Smart Contract Team. This procedure will be automated as the project evolves to become a completely decentralized platform, removing a single point of failure from the system.
More Smart Contracts in Complex Situations
Smart contracts can be applied in a variety of industries, including medicine, entertainment, and prediction markets, in addition to ordinary cash transactions.
Trials in Medicine
During medical trials, a patient visits many healthcare facilities and physically transports all of the paperwork in order for doctors to better comprehend the patient's medical history. Smart contracts can make things easier by providing 360-degree visibility of a patient's data.
A prediction market is necessary for gaining vital information on public perception of a campaign or organization. Smart contracts can publicly record the predictable outcome of events, allowing for reliable forecasting.
By watermarking media content, entertainment smart contracts can enable rights for content in the entertainment business, preventing plagiarism and piracy. If someone tries to steal the data, the legitimate owner will be notified right away.
Smart Contracts will be foreign to anyone who is unfamiliar with how blockchains work. Once you understand how blockchains may reach data management consensus without a central authority, Smart Contracts seem like a natural development and an exciting method to bring the benefits of blockchain technology to so many areas of our lives.
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