Role of Smart Contracts in DeFi
DeFi platforms use smart contracts to automate financial transactions and remove the need for intermediaries such as banks or financial institutions. Decentralized finance in short DeFi is a rapidly growing sector within the blockchain industry. Smart contracts are self-executing contracts with the terms of the agreement written directly into the code. Smart contracts play a critical role in enabling trustless, permissionless financial transactions in DeFi.
DeFi in smart contract has the ability to create decentralized lending and borrowing platforms. Borrowers can pledge cryptocurrency as collateral to receive a loan, without the need for a traditional lender as well with the help of smart contract. The smart contract ensures that the borrower will repay the loan on time and that the collateral will be returned once the loan is repaid. This allows borrowers to access loans without relying on traditional financial institutions and allows lenders to earn interest on their cryptocurrency holdings. DEXs allow users to trade cryptocurrencies without the need for a centralized exchange. Smart contracts are used to match buyers and sellers determine prices and execute trades automatically. Middleman is eliminated such as brokers or exchanges, and ensures that trades are executed securely and transparently.
Smart contracts are used to determine the exchange rate between the two tokens based on the amount of liquidity available in the pool. Therefore the trades can be executed quickly and efficiently, and eliminates the need for a centralized exchange to set prices. Smart contract can be used to create stablecoins which are cryptocurrencies pegged to the value of a fiat currency such as the US dollar. The supply of stablecoins is matched to the demand which helps to stabilize their value that is ensured through smart contract in DeFi.
Smart contracts in DeFi can also be used for insurance like allowing users to create decentralized insurance pools that pay out in the event of a specific event, such as a hack or a price drop. The smart contract can be programmed to automatically pay out claims to users who have suffered losses without the need for a centralized insurance company. Hence, it’s true means of decentralization.
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