Understanding Smart Contracts: The backbone of secure transactions in DeFi
smart contracts self-executing, tamper-proof agreements that automate complex transactions. These advances are crucial to the DeFi ecosystem, promising a future where financial transactions are more secure, accessible, and transparent. Smart contracts are built on blockchain networks, specifically public, permissionless networks like Ethereum. It is essential to understand Crypto for the foundational technology that it is.
What are smart contracts?
Smart contracts are self-executing contracts encoded into software. They automatically enforce and execute when predetermined conditions are met, eliminating intermediaries. This reduces costs and minimises the risk of human error and fraud. Introduced by cryptographer Nick Szabo in the 1990s, smart contracts have become integral to blockchain platforms like Ethereum.
These contracts operate on an «if-then» logic. For instance, if a buyer sends the required amount of cryptocurrency to a seller, the smart contract automatically transfers ownership of the digital asset. This process is transparent, immutable, and permissionless, meaning it cannot be altered once deployed. They enable atomic settlements — ensuring transactions are either fully completed or not at all — and composability, allowing different DeFi protocols to interact seamlessly. Imagine this whole process applied to every financial asset class, where it's not just crypto, but tokenized representations of underlying assets.
