Updated: Jan 2
What are smart contracts?
After understanding a bit more about the blockchain and how mining gets done on it, it's important to understand smart contracts as they are the building blocks of DeFI and are used to enable transactions that occur on the blockchain. Again, we take a look at the amazing DeFi educational website Finematics for our source content.
A smart contract is effectively a piece of code that can be executed automatically in a deterministic way (e.g. it cannot do anything apart from what is in the contract). It is not just a contract but can store, receive and send funds and all of this is to remove the human factor from decision making (the most error prone of traditional contracts).
This video from Finematics explains it further and even uses a vending machine analogy to look at this.
These smart contracts sometimes need to communicate with the outside world to get information and the systems that provide this are collectively known as oracle services. These are established to provide trust in terms of what data is brought into a blockchain.
The Finematics video also goes through the need to use a coding language called Solidity and how all of these contracts are immutable (can't be changed once deployed) and decentralised (no single machine controlling the contracts).
In the traditional world of contracts, there are things like escrow and the reputation and counterparty risk that are affected by real world laws and human decision making. In situations like this, smart contracts are a better way to do things as they don't rely on any of the above issues as there is automation and nothing outside of the contract would work.
There is also benefits around lowered cost, easier reusability, lowered fraud and other areas that are tackled thanks to smart contracts.
The Full Series
Part 3 - What are smart contracts? - This video
Part 7 - Risks and Impermanent Loss
Part 8 - Tools and data to analyse tokens/cryptos
Part 9 - How to avoid scams?
Part 10 - Protocol types
Part 11 - What's on the horizon - the metaverse, DeFi 2.0
Part 12 - What is a DAO?