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Smart contracts have unlimited potential and are already disrupting several industries, and the financial services sector is no stranger to blockchain technology.
A massive increase in the adoption of blockchain solutions by the financial services industry can be seen in the past few years. Financial services firms use DeFi smart contracts to implement blockchain-based solutions for various use cases.
Smart contracts enable trustless agreements, execute contractual obligations, and pay out investors automatically when predefined conditions are met.
This article discusses the top 5 use cases of the DeFi Smart Contract.
But first, let’s have a look at the background of DeFi.
Background of Defi
DeFi is a decentralized network where enterprises and financial institutions can build and run their financial applications on the blockchain. A key feature of DeFi is that it makes it easy to develop, deploy, and operate financial applications, such as smart contracts, crypto exchange platforms, crypto wallets, payment gateways, and more.
Defi’s platform enables enterprises to build blockchain applications without spending resources on developing and maintaining a blockchain network. Defi’s platform also allows enterprises to build applications connecting to multiple blockchains. This makes it easy for enterprises to deploy blockchain applications that can process payments in various currencies, assets, and cryptocurrencies.
DeFi enables enterprises to build blockchain applications with no upfront cost. All these blockchain applications are built on the DeFi network and are powered by DeFi tokens. The DeFi network is built on top of Hyperledger Fabric, a blockchain network maintained by the Linux Foundation.
Defi’s platform is blockchain agnostic, which is compatible with most blockchains. On top of Hyperledger Fabric, DeFi also provides connectors for other leading blockchains such as Ethereum and Ripple. DeFi has been recognized as one of the seven blockchain companies to watch out for in 2019 by a leading business publication.
Now let’s look at the top 5 use cases of DeFi Smart Contract.…
Decentralized Autonomous Organizations(DAOs)
The DAO, the first ever decentralized autonomous organization, formed on the Ethereum blockchain, allowed shareholders to vote on company decisions, hire and fire employees, and even receive dividends in the form of Ethereum tokens.
Due to some security loopholes in the smart contract code, The DAO hack led to crypto-heists of more than $50M. This is a prime example of hackers exploiting a smart contract code.
But, now, we have much more advanced technology and a better understanding of how to use smart contracts securely. Now, we can make DAOs more secure by using smart contracts as they can be programmed to follow the rules per the agreement between the parties. The smart contract code automates the decision-making process on the blockchain protocol.
Compliance and KYC
A DeFi smart contract checks for compliance and know-your-customer (KYC) information. Its use cases can be observed in various industries, including healthcare, financial services, and real estate.
For example, a financial institution can use a DeFi smart contract to check that a customer is not on the sanctions list, or a healthcare company can use it to check for a customer’s allergies. In healthcare, DeFi smart contracts aid in integrating information.
Now, healthcare providers can use blockchain technology to share information more securely, efficiently, and in a decentralized manner. For example, patients may give their doctor permission to share their medical records with other healthcare providers as part of a treatment plan. This way, no one party is responsible for keeping the complete record.
Companies are now using blockchain technology to create DeFi smart contracts that analyze data and report insights based on certain parameters and thresholds. This also helps them efficiently collect payment from customers on an agreed date.
For example, a shipping company can create a smart contract with a customer to deliver a shipment by a certain date and collect payment on a particular date. This contract will be triggered based on the shipping company’s data from their tracking system.
If the delivery date is exceeded, the DeFi smart contract will trigger an action. It can send an email informing the customer that the shipment is late and by how much, and then request them to make the payment.
Derivatives are financial instruments that are traded in the market for speculation. The main aim of these financial instruments is to reduce risk by providing a contract between two parties to exchange an asset for a predefined rate.
The main idea behind creating a smart contract for derivatives is to automate the transaction process.
Consider an example of a farmer who delivers a certain quantity of wheat at the beginning of the harvest season. To secure his profit, the farmer can enter into a DeFi smart contract with a buyer at a certain rate and receive payment well in advance.
This way, the buyer can be assured that the farmer will deliver the wheat at the right time. In this case, the buyer and the farmer are two different parties using a DeFi smart contract to exchange wheat for a certain rate.
Creating a digital identity is challenging since there is no central authority to verify your identity. This makes it hard for companies to onboard new customers or provides them with proper verification.
Many companies are working on creating digital identity solutions, but the biggest issue with many of these is that they are centralized. One of the biggest advantages of using a decentralized solution for identity verification is that it is not under the control of a single organization.
Thus, it makes it hard to manipulate or misappropriate the data. Now, if you use a decentralized application, then one of the requirements for logging in to the application is to have a verified digital identity. This can be done by creating a DeFi smart contract that verifies the digital identity.
DeFi Smart Contracts are the perfect amalgamation of blockchain technology and digital contracts. These contracts give you the ability to automate certain processes in a contract.
They take care of various variables and accordingly implement responses to different actions or inputs. The scope of their usage is as wide as any other blockchain use case.
We have seen that the top use cases of DeFi smart contracts are decentralized autonomous organizations, compliance and KYC, data analytics, derivatives, and digital identity.
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