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Natsune Oki on What are Defi, Smart Contracts?

Updated: Jun 27, 2022

What is Defi in crypto?

Defi is the short form for Decentralized finance. This term indicates the new form of the financial system where transactions happen on a peer-to-peer basis, without going through an intermediary party, with blockchain technology.

The benefits of Defi are:

Inclusive financial system: If someone wants to create a bank account with a traditional institution, that person needs to go through a strict verification process ( They will ask you who you are, what you do for work etc). Unlike traditional banks, Defi can be used by anyone with a crypto wallet and internet access.

Fast transaction speed: Let’s say you buy something online, using your card connected to your bank, this transaction doesn’t show up on your bank record until hours later or even next day. With Defi, transactions happen in real time.

Transparency: Without a central authority, every transaction still needs to be verified. Hence transactions that happen with Defi are verified on a peer-to-peer basis. Hence, all transactions are viewable to the public.

Automation: Defi technology uses what is called ‘Smart Contract’ - which we will talk about in a second. Smart Contract coding follows the “X if Y” protocol that developers can infinitely add protocols for various number of scenarios which allow the system to run itself without human intervention.

Highly secured: Thanks to blockchain technology, people can not trick the system because once data is recorded in a blockchain, this data cannot be changed.

Open-sourced that anyone can build on: Developers can easily build different apps and services on top of the open-sourced Defi blockchains.

Essentially, you can think of this as the term to describe the side of blockchain technology usage that is related to financial transactions.

What are Smart Contracts?

Smart contracts are the program stored in the blockchain that regulates rules in how transactions between buyers and sellers are completed. Developers can tell smart contracts to take action A if action B happens or action C if action B doesn't happen. As an example, Let’s say that there is person A with an apartment, and person B who wants to move into this apartment. Person B pays person A using cryptocurrency that is operated on a smart contract. The developer of this smart contract can code this contract to say if person B pays, and person A doesn’t give a key to the apartment by date X, then 100% of the money should be refunded to person B. This way technology can make its own judgment without people’s intervention. However, there are still problems to overcome. Technology only knows what’s programmed at this point. But in real-life situations, many variables need to be considered, so that is the next obstacle it needs to overcome.

How are smart contracts used in NFTs?

Most simply, an NFT smart contract records transaction data associated with a given NFT. Smart contracts hence can verify ownership of a given art to its owner, and the data, once it's stored inside of a blockchain, is immutable so that no one can track the record. In the context of NFTs, smart contracts also allow linking one digital asset’s ownership associating with another one or handling royalty payment.

You can check out this article to find more definitions of words related to Web 3 and blockchain!

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