---
# System prepended metadata

title: Smart Contracts - a backbone for DeFi’s growth
tags: [EN-TheSmith's-Collection]

---

---
Author: https://twitter.com/guiribabrb
Original Article: https://odysee.com/@ShapeShiftDAObr:a/smart-contracts:be
---
# Smart Contracts - a backbone for DeFi’s growth
The automation of the activities carried out in our society has become a natural consequence of the evolution of mechanisms and tools developed throughout history. In search of process improvement and efficiency, reducing costs, intermediaries and, nowadays, increasing the integration of software for its improvement, new technologies emerged that are so disruptive that find applicability in all sectors. This time, we’re not talking about Bitcoin, but **smart contracts**.

The smart contracts were initially conceived by Nick Szabo, creator of Bitgold, one of the attempts throughout the history of people and groups intended to create a digital representation of value. In the case of Bitgold, the idea was to develop a currency as scarce as gold, deflationary, auditable and reliable. Its concepts are very close to those present in Bitcoin, with even those who attribute the personality of Szabo to that of Satoshi Nakamoto. However, despite being innovative, the Bitgold project which was developed not only by Nick, but also by Wei Dai and Hal Finney - active participants in the discussions between cypherpunks and and with Satoshi Nakamoto in the forum where Bitcoin was born, bitcointalk.org - ended up not coming out of the paper.

Even though Bitgold hasn’t gone into operation, the concept brought by Szabo about smart contracts illustrates how it works very well. In simple words, it’s possible to understand it as a digital soda machine - [metaphor of the vending machine](https://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/idea.html) used by Szabo described in the Bitgold white paper.

![](https://hackmd.io/_uploads/rkJP1hfit.png)


From commands entered by a user (customer), the machine would supply the soda, but only after fulfilling a pre-established condition (payment). Without its respect, the user won’t get what he desires. Not only that, but the compliance does not depend on a salesperson or employee, but only on the controls on the soda machine, **removing the need for an intermediary**.

Thus, smart contracts are a way to automate the execution of conditions pre-established defined by its developer from lines of code programmed and implemented in a DLT - Distributed Ledger Technology. Although the use of programs to automate functions seems conventional and everyday nowadays, smart contracts have unique features such as:

- Immutability of the code, thanks to its implementation in DLTs, keeping the predefined conditions unalterable, avoiding changing the execution criteria after its approval or use.
- Transparency in creation, implementation and use. Using DLTs, developers can provide the lines of code for smart contracts, so they can be understood, audited, and accepted by other users. In addition, after its implementation, all transactions and interactions with them can be viewed, due to the publicity of the DLTs¹ information.
- The intermediary’s withdrawal from the transactions/interactions. With the security provided by the transparency and immutability present in smart contracts, the possibility of relying on the automatic execution of previously defined conditions is guaranteed, eliminating the need for an information validation mechanism: all checks are carried out according to the codes implemented in the DLTs.

With the obvious advantages of using associated blockchains, this has been integrated into the development of several DLTs in operation today, [including Bitcoin](https://river.com/learn/what-are-bitcoin-smart-contracts/#:~:text=features%20for%20Bitcoin.-,What%20Is%20a%20Bitcoin%20Smart%20Contract%3F,after%20a%20certain%20time%20delay.). Despite Ethereum being the blockchain with the highest number of active users, Total Value Locked or holding more development time using smart contracts to build decentralized applications, Bitcoin has already brought them with it. However, [smart contracts in the network developed by Satoshi didn’t have the capacity to process them,](https://www.usenix.org/system/files/sec19fall_das_prepub.pdf) due to the high complexity associated with many of them².

Vitalik Buterin, s[ince the conception of Ethereum whitepaper](https://ethereum.org/en/whitepaper/), had the intention not only to create a payments network, but also to develop applications on the blockchain: an *on-chain* computing. With that intention, Ethereum created the ability for applications to be built inside the blockchain, using smart contracts. These are currently known as decentralized apps or *dapps*.

As with its launch in 2013 - and the ICO for fundraising to build the current scenario - the first of its kind was developed by the DAO, a venture capital that intended to collect funds from users and invest in community - voted projects. It was not only the first decentralized application, but the first DAO via smart contracts. The story ended up not working out very well, as a vulnerability was exploited by hackers and the funds deposited in smart contracts were stolen - 11.5 million ETH. For a while, DAOs and *dapps* weren’t that much explored, [but as early as 2017 came what would be the first hype with their use in Cryptokitties, digital representations of cats with NFTs](https://www.coindesk.com/tech/2020/07/31/ethereum-history-in-5-charts/#:~:text=The%20first%20dapp%20on%20Ethereum,and%20The%20New%20York%20Times.).

![](https://hackmd.io/_uploads/rkl_yhzoY.png)

After entering the bear market and the coming of the fall in cryptoassets prices in 2018 and 2019, developers started to build *dapps* not only for the commercialization of NFTs, but to elaborate financial instruments similar to the traditional ones, but removing the intermediaries present in the operations: it emerges the Decentralized Finance sector.

It’s hard to know for sure the first DeFi pioneers, but it’s known that MakerDAO was one of the first to have wide adoption by users of cryptoassets. The possibility of borrowing a decentralized *stablecoin* issued from the ETH deposit in equally decentralized smart contracts has been a disruption in the sector. Soon competitors such as Compound, C.R.E.A.M Finance, among others, began to appear. The automation of functions provided by smart contracts gave developers the opportunity to develop not only the ability to lend money without even knowing the users, but also to set interest rates for loans or list new tokens to be used as collateral, only through governance of the *dapp*. This was also carried out in a decentralized manner, by the holders of the MKR token, necessary to participate in voting.

Over time, other types of applications in the Decentralized Finance sector were developed, such as DEXes, insurance protocols, DAOs, *play2earn* games, among other numerous innovations that arise daily created by the crypto community.

Even with the widespread adoption of smart contracts in the crypto sector, these aren’t necessarily associated. The advantages of its use have made other sectors digitize their interactions to improve the efficiency of their processes:

- Law - The adoption of smart contracts for automation in the execution of contracts signed in the legal world was a hypothesis previously brought up by Nick Szabo. Its use can be done, for example, in the creation of automatic rent payments by tenants in a condominium. The government can also take advantage of the technology, aiming to bring greater traceability to government funds directed to certain sectors, such as Education, Health and Safety.
- Supply Chain - The use of smart contracts in this sector optimizes the understanding of all processes that occur with a good. Its use would allow companies to implement, with private DLTs, communication and tracking mechanisms without intermediaries, excluding the need for manual interfaces to validate information.
- Insurance - The bureaucracy present in the documentation required to access insurance or the fulfillment of this, if the insured event occurs, can be reduced or even extirpated. [A practical example:](https://www.semanticscholar.org/paper/An-Overview-on-Smart-Contracts%3A-Challenges%2C-and-Zheng-Xie/e0bc89f5776804bc2be27f1945f900d1ac8f1e7f) passengers of an airline purchase insurance for the flight and sign a smart contract signed with the company. If the system is notified that the flight has been delayed for more than two hours, the money is automatically returned to the passengers.

The vast applicability of smart contracts is still being explored by the developers and its integration in our everyday activities will be a natural transition. Thinking in a utopian way, soon we’ll all have our wallets, and we’ll live from interactions with smart contracts on the web3.

But what about you, do you know any interesting applications for this technology? Share with us and comment on the post!

¹This transparency will only be present in public DLTs like the Bitcoin or Ethereum blockchain.

²Currently there are Bitcoin Second Layers already operating with more complex smart contracts. [Stacks,](https://stacks.org/stacks-blockchain) a blockchain that proposes a solution for limiting the Bitcoin network with smart contracts using Proof of Transfer as a consensus mechanism, will bring the first DEX - [StackSwap](https://finance.yahoo.com/news/stackswap-raises-1-3-million-132000785.html#:~:text=StackSwap%20is%20also%20the%20first,power%20of%20the%20Stacks%20protocol.) - using the Bitcoin blockchain. Furthermore, with the Taproot update on November 14th, the Bitcoin network is expected to be able to handle smart contracts with greater complexity.

###### tags: `EN-TheSmith's-Collection`


