What’s a smart contract and why does it matter?

If you’re someone who has never interacted in decentralized finance, aka, DEFI, you are seriously missing out. While most people in crypto just buy and hold on their favorite exchange like coinbase or kraken, there is a large group of risk takers and degens, on the cutting edge of blockchain technology, running wild in the Defi space.

Defi has the potential to give people complete control of their finances. In Defi, you can earn interest, earn yield, take loans, basically, anything you do with a bank, except it’s all decentralized. Meaning, there is no central authority controlling how, when or if you do these things. It’s just people and computer code working together. One of the most important components of Defi is the smart contract.

Smart contracts are built on the blockchain kind of like how apps are built on a smartphone. You can interact and play with them, and different smart contracts allow for different things, which allows for creativity and variability. Smart contracts, like real life contracts, are just an agreement that is made. With a smart contract, an agreement is made between a person and the code that is written in the smart contract. A real life contract is an agreement between two people, or a person and an establishment, like a bank for example.

However, people have emotions and can change, so a contract made with a person or institution may not be a 100% guarantee. Math, however, does not lie. So a smart contract allows for trustlessness. What you see is what you get, there is no chance of backing out or the terms of the contract being altered halfway through the agreement. Now, obviously there are smart contracts that may have flaws, or back doors (admin keys) to allow for things to be altered, but those should be avoided.

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A true smart contract is immutable and unchangeable, so when you enter into the agreement, you know exactly what you’re getting. For example, a smart contract could guarantee 30% APY on token X if you lock token X for a specific period of time. If I were to lock token X, I would be guaranteed 30% APY of token X for the period that I have locked the token. This will be guaranteed by mathematical code. Keep in mind this APY is paid in units of token X, the USD value could still vary wildly.

The point is, smart contracts in DEFI are incredible. No longer do you have to trust people with your money, you can trust math, and code instead. Those that are not taking a look or engaging with Defi right now, are truly missing out.

Ben DuBard

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