So far we've defined Decentralized, Blockchain, and DeFi. Smart Contracts are the foundation on what DeFi is built on.
To add more context, DeFi is still in the wild west stages. It's so new and the risks involved with it are bonkers. I'm still learning and there's way too much to go through. This series is a simplification, but it's worth digging deeper.
Let's get into it:
Smart contracts leverage the computing power blockchain provides and make it programmable. The protocol’s underlying code is deployed transparently on the blockchain itself.
That's a mouthful, but I'll explain it as if you were 5 years old:
What's A Smart Contract?
Nick Szabo, one of the first crypto pioneers describes Smart Contracts as a vending machine:
- There are different snacks in the machine
- Your inputs would be the money inserted and your snack selection
- The machine outputs the snack and the appropriate change
A smart contract is the vending machine processing the transaction. Vending machines remove the need for vendor employees to provide the snacks.
Smart contracts replace institutions to authorize financial participation:
"The vending machine is a contract with bearer: anybody with coins can participate in an exchange with the vendor."
Like Bitcoin becoming a pioneer for blockchains, Ethereum is the pioneer for smart contracts. A Smart Contract is a lot like an API, which I defined as
“a combination of legos, which build into a useful object. In other words, an API packages software in easy-to-use interfaces to get complex tasks done simply."
Smart Contracts leverage the computing power of the Ethereum blockchain. Like APIs, they add logic to define rules within the network. With the correct inputs, smart contracts will guarantee the definitive output.
Voila, that's a smart contract. Pieces of code on the blockchain, which enforces an agreement (inputs and outputs) without relying on middlemen.
I'll be setting up a crypto wallet to purchase DeFi tokens. The next series of emails will do a deep dive on smart contract protocols. All the tokens I plan to buy will be described here. Stay tuned.