Smart contracts are self-executing codes embedded with pre-written conditions that need to be met for the execution of a transaction. Now, smart contracts use cases are expanding and have become an unavoidable part of the decentralized applications(dApps).
The emergence of DeFi has transformed the traditional financial institution; the smart contract development in DeFi enables various financial services and apps. The smart contract market size is rapidly increasing and is expected to reach $47.25B by 2029.
Smart contracts are the fundamental elements of the DeFi to make it transparent, decentralized, and automatically executed. It removes the need for third parties, which also reduces the significant cost and fastens the transaction processing.
Unfold The Benefit of Smart Contract in DeFi (Decentralized Finance)
Defi offers a secure and trustless decentralized environment that facilitates a variety of financial services better than the conventional finance system. We have listed the top benefits of the smart contracts in Defi below:
Decreased Cost
There is no need for the intermediaries to execute the financial operations, which reduces the overall cost. Cross-border transactions leverage more advantages of the DeFi smart contract development as traditionally, the exchange rates are very high.
High Transparency & Trust
As smart contracts in decentralized finance (DeFi) are built over blockchain networks, they offer better transparency and security in decentralized financial solutions. Blockchain verifies the transactions before execution, so there are very low chances of fraud and unauthorised access.
Better Efficiency & Automation
Smart contracts are self-executing contracts, so once pre-programmed conditions are met, they will automatically execute the terms, eliminating delays and complications in traditional contracts.
Easy Accessibility
Defi ecosystem, backed by smart contracts, enables peer-to-peer transactions without this party intervention, which offers easy accessibility to the users.
Top Use Cases of Smart Contracts in Decentralized Finance (DeFi)
Smart contracts in DeFi development have the potential to make complex operations effortless and fast, which was not possible with the traditional smart agreements earlier. This transformative shift in decentralized finance will show its significant impact on various industries. Let’s uncover the popular user cases of the smart contracts in DeFi development.
Blockchain Powered Insurance
Traditional insurance systems demand lots of paperwork and can be a daunting job with less efficiency. Smart contract integration in Defi can solve all these problems and also offers transparency and better efficiency. Blockchain technology helps in building an insurance system that works based on auto-executing smart contracts, which saves time and effort.
Digital Identity Systems
Digital identity systems can be paired with smart contracts in DeFi protocols, which offer access to the decentralized world economic system. In the coming time, identity management organisations will be able to offer DeFi access to people from remote locations.
DeFi Stablecoins
Stablecoins are another form of digital asset that has low volatility. Stablecoins are meant for exchange as they are pegged to the value of real-world commodities or fiat currency. Stablecoins offer higher value when traded. The creation of stablecoins is possible with the defi smart contracts.
P2P Lending & Borrowing
With Defi, there is no need for a third party to make the transactions, which is the transforming shift in the crypto world, as we all know. However, smart contracts in Defi make it possible to do peer-to-peer lending and borrowing. The defi smart contract development for loans and borrowing facilitates faster transactions and can handle a heavy number of transactions per second, which also leads to higher profitability.
Video Game Incentives
Crypto games are the new buzz in the tech world, which is now prevailing in the DeFi sector. Smart contracts in DeFi are now revolutionising the gaming industry, as game developers can offer incentives and rewards in the form of DeFi coins. This evolution also encourages the gaming community.
Tokenized Derivatives and Artificial Assets
With Smart contracts in finance, users can create artificial (synthetic) assets. The value of the artificial assets or the tokenized derivatives keeps on fluctuating depending on the value of the underlying primary security.
How Smart Contracts Work in DeFi
Smart contracts are built on blockchain networks, offering immutability, security, and transparency. In DeFi, smart contracts are responsible for carrying out transactions in a faster and more secure manner. We have explained below how the smart contracts work :
Code Deployment
The smart contracts are written in Solidity, Vyper, Rust, etc, programming languages. Then, the written code is compiled and deployed on the network, crafting new smart contracts in blockchain.
Conditions & Execution
When the users send the transaction requests to the smart contracts, it triggers the execution of the pre-written conditions in the specific functions of the smart contract code. These conditions decide whether the transaction will execute or not. If the conditions are met, then automatically, the execution occurs.
Blockchain Integration
Blockchain is the distributed ledger that records the transactions, ensuring transparency and high security. Anyone present on the blockchain network can verify the transactions.
Tokenization and Decentralized Applications (DApps)
Smart contracts also represent the digital ownership of the assets. These assets or tokens are traded on decentralized exchanges backed by smart contracts—the smart contracts for lending, borrowing, yield farming, etc, power the DApps.
What’s Next for DeFi as Smart Contracts Evolve?
Hybrid Smart Contracts
The amalgamation of cross-chain data with on-chain data for creating hybrid smart contracts offers better adaptability. This integration also helps in real-time decision making. The data-driven decisions help maintain trustlessness and decentralization.
NFTs in DeFi
With an ever-evolving decentralized landscape, now the lines between the Defi and the NFTs are disappearing for finance purposes. With the evolution of the financial world, we can see NFTs not only as the digitization of artwork or collectables but also as financial instruments.
Smart contracts are implemented in both the decentralized finance solutions and NFTs, so the intersection of both will unlock new revenue opportunities for the users.
Evolution of Automated Market Makers (AMMs)
Traditional order books are eliminated with the introduction of the AMMs.Now, there is no need to look for any liquidity provider, as AMMs are sufficient to offer the full-scale DeFi service.
In the future, the expectations are high capital efficiency and layer2 integration for high scalability with the evolution of smart contracts with Defi.
Traders can experience fast and secure transactions, along with better returns. AMMs allow the simplification of the complex crypto market without the need for third parties. The assets’ liquidity will be high but also enhance the overall experience of the traders with smart contracts and DeFi integration.
Cross-chain smart contracts
Cross-chain smart contracts in Defi are one of the most fruitful advancements in the tech world. Conventional smart contracts are designed for individual blockchain networks like BSC, Ethereum, etc. These contracts are not compatible with the different blockchain networks, which creates problems when transferring the data across two different blockchains.
With cross-chain DeFi smart contract development, the interaction between the two blockchains will be seamless and fast. A unified experience of cross-chain smart contracts and DeFi will be the next revolution.
Real-World Assets (RWAs)
Real-world tokenization is a booming trend nowadays; people can trade them like real-world things in the digital landscape. These assets can be the representation of the commodity, art, real estate, etc, built over the blockchain. People can use those as collaterals in DeFi protocols or trade them.
It blurs the line between traditional and decentralized finance by trading inaccessible assets in the decentralized ecosystem. These tokens offer high security, transparency, ownership rights, etc.
Defi Insurance & Risk Management
With advancements in technology, the risk of vulnerabilities is also increasing, and it is becoming complex to manage security, bugs and other issues. Therefore, the experts are working to come up with a strong idea for implementing Defi protocols and risk management solutions. And these protocols are backed by smart contracts.
These contracts ensure that the compensation for the exploitation can audit the contracts and offer insurance to the users against their losses. With an increasing number of users exploring DeFi smart contract development, the insurance protocols will be more in use and are expected to bring a paradigm shift in the Defi maturation trend.
List of Challenges and Risks in Decentralized Finance( DeFi)
Any advanced technological innovation comes with its risks and challenges in the real world. However, when the nascent stage passes, the experts come up with potential solutions to manage those risks. Below are the risks associated with DeFi.
Security
The smart contracts code can be challenging to manage when it is vulnerable to exceptional conditions. Hackers can exploit the system by decoding those vulnerabilities. Therefore, high security is mandatory for the defi applications to be fraud-proof and maintain the integrity of the data.
Volatility
The value or price volatility of the Defi assets is one of the biggest issues for traders and investors. With high pricing volatility on the defi, investors hesitate to invest a significant amount to avoid the impact of sudden price fluctuations.
Regulatory Uncertainty
DeFi is still evolving with respect to regulatory compliance. There can be challenges from the government side for certain DeFI projects. To overcome this, you need to consult with experienced legal authorities and top-notch smart contract development company to offer you the right legal solution.
Collaborate for DeFi Smart Contract Development Services
Smart contracts in Decentralized finance have brought a pragmatic shift in the finance industry. From insurance and tokenization to borrowing/lending, it is empowered by peer-to-peer transactions. Witnessing the popularity, industry experts have moved towards the Defi smart contract development to be the next part of this trend.
If you are also interested in experiencing the potential of this new business venture, then you can reach out to us at WisewayTec. We have an experienced team of smart contract developers. Discuss your needs with us, and we will guide you with the best strategy to kickstart your project.
FAQs
Which Major Industries Can Benefit from Decentralized Smart Contract Technology?
Major industries like Real Estate, Finance, supply chain, and insurance can adopt DeFi smart contract development. It offers high security and transparency and reduces the overall costs, also leading to better operational capacity.
What Is the Future of Smart Contracts in Defi?
With the continuous evolution of smart contracts in blockchain technology and the increasing use of smart contracts in famous business verticals, future opportunities across various industries are very promising.
Which Are the Most Demanding Smart Contract Applications in Defi?
Defi Smart contract development includes AMMs, decentralized exchanges, and lending/borrowing platforms. Decentralized smart contract technology is on the path to serving more business verticals in the future.
What Is the Cost of the Defi Smart Contract Development?
The cost of the Defi smart contract development depends on the project complexity and resources required, deadlines, and expertise of the development partner. You can connect with our experts to get a cost estimation.
