Essentially, DeFi takes the basic concept behind cryptocurrencies and expands on it to create an entirely decentralized financial ecosystem.
But to build any system, the first thing that’s needed is an infrastructure. In the case of Defi, the Ethereum blockchain was amongst the first to offer a platform for decentralized apps, also known as dApps.
dApps enable developers to write automated code, also known as smart contracts. This leads us to the next question… what are smart contracts?
Smart contracts are coded to automatically execute a specific function (such as transfer of funds) as soon as some predetermined conditions are met.
Maybe it would help to think of smart contracts like vending machines. They require a specific input to guarantee a certain output. The logic is programmed into a vending machine much like it is coded into a smart contract.
Once the smart contract is deployed on the blockchain, it becomes immutable. The same way that executed transactions are stored on the blockchain and cannot be changed.
With smart contracts there is no need to fill out dozens of documents and forms. The contract is automatically executed without any middlemen and without any room for foul play.
The parties don’t need to trust each other to transact because smart contracts ensure that all the stipulations are met before any actions are taken.
Stick around for our next article where we will be looking at the role that cryptocurrencies play in DeFi.
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