4 Use Cases for Smart Contracts in Decentralized Finance

Blockchain has gained widespread acceptance in specific industries and processes, even though many people remain sceptical about it. One of the most talked about blockchain projects is Decentralized Finance (DeFi).

Instead of being overburdened by large and tedious legacy systems, most financial institutions have adopted the DeFi platform, which has lowered many of the entry barriers previously faced by SME’s and start-ups. For the most part, financial institutions see this as a threat, but some large banks have seen it as an opportunity to leverage the speed and agility of small businesses, by setting up blockchain incubators and accelerators.

For newcomers to DeFi, the first challenge is to find a product that fills a need in the target market. Tokenisation and stable coins are examples of new instruments which have emerged as a result of the capabilities of decentralized ledgers, such as traditional financial models like payments. Below are a few examples of how it could be put to use.

Peer-to-peer Payments and Transactions

The use of Digital Ledger Technology (DLT), eliminates the need for third-party intermediaries such as banks and agents. Smart contracts replace the approvals and procedures previously handled by these traditional players. The high transaction speed of traditional financial platforms cannot be currently matched, due to the complicated mechanics of verifying the validity of a transaction on the blockchain.

For peer-to-peer payments such as cross-border transfers, where the costs of currency transactions and the time it takes are detrimental to both parties, crypto is becoming increasingly popular. The major cryptocurrencies are also gradually becoming more accepted by retail stores.

Cloud e-commerce platforms

An increasingly popular use case for DeFi is the creation of online markets that connect buyers and sellers directly.

  • PayPal, for example, is on its way to providing crypto exchange over third-party applications.
  • Bitpay is another application which allows you to add funds to your wallet using bitcoin and other cryptocurrencies. These funds can then be used to complete payments on apps that do not generally accept cryptocurrency, such as Amazon.

Smart contracts enable these direct exchanges without the need for an intermediary or a broker to intervene. An example of the scope of this includes community-based localised markets rewarding customers with tokens for shopping locally, as well as markets allowing sellers to trade globally without being reliant on companies like Amazon and eBay taking a portion of the sales revenue. The art market in particular, caters to collectors and investors with specialised interests.

A Market for Energy and Data

This market has become critical for consumers, especially in the developing world, due to the development of smart grids and the increasing need for data to power communications via mobile and other devices. Customers mostly use pre-paid data and electricity, with Electroneum being a pioneer in providing top-up options via an app on a DeFi platform. Peer-to-peer energy trading is also an option and consumers can return any excess capacity to the grid. Power2Peer is a great example of a mobile application reinforcing this method of trading. Renewable energy is a major focus for providers in this area, in recognition of the need for the planet to have a carbon-neutral future.

Lending and Borrowing

There is a long history of investors and savers profiting from the difference between what the market pays in interest and what it borrows in interest. It is difficult for many borrowers to obtain credit due to stringent underwriting standards, or the requirement that they put up collateral.

DLT allows borrowers who would not be eligible for a traditional bank loan, to access funds from one or more investors directly, through a smart contract that defines and controls the loan. Mpocket and Kreditbee are great examples of platforms that work on the principles mentioned above. Other models, many of which are in the mortgage market, will pay interest and even lend fiat in exchange for cryptocurrency collateral. The Covid-19 pandemic is fuelling a rapidly expanding DeFi domain.

Summary

The most significant benefit of smart contracts is the increased level of automation they afford. This automation will go a long way if it allows companies to simplify many aspects of their operations. Not only that, but it also resolves any problems in systems where trust is an issue.

Using smart contracts for Digital Identification is an obvious decision. Individual identification is a key tool in this. Digital properties such as name and reputation are also included and it opens up a whole host of exciting new possibilities for users when used correctly. Digital identification also helps to protect the identity from counter-parties whilst making it possible to be exchanged with the companies it requires.

About the Author

Adam Norrie
Founder/Chief Executive Officer

Adam has many years of experience in the crypto industry already and is the creative mind behind Astralis.