A Guide to Smart Contract and dApps

· 01/25/2022 12:37pm

Traditional financial institutions like banks and lending companies have centralized control of power and typically tilt financial instruments in their favor often at the expense of unbeknownst clients. Decentralized Finance (DeFi) seeks to revolutionize this unfair balance of control and change how people make use of financial instruments and solutions by introducing a permissionless system of financial infrastructures. Without a centralized intermediary, any user is able to interact directly with smart contract codes on-chain in a transparent and immediate manner. dApps (decentralized Apps) are platforms built upon these smart contracts to enable users to easily perform these interactions.

In this article, we unpack the basics about dApps and smart contract to give an understanding of the inner workings under the DeFi hood.

Smart Contract: An In-depth Look

In a decentralized world based on mathematical computation such as a blockchain, a smart contract is a piece of code that can be executed automatically and in a deterministic way on the blockchain. Smart contract also have capabilities of receiving, storing and sending funds and even calling other smart contracts.

(i) How does Smart Contract work?

Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. Smart contract follow “if-then” semantics written into code on a blockchain which makes them fairly easy to program.

(ii) Smart Contract and DeFi

DeFi consists of a wide variety of applications. For example, one can buy U.S. dollar (USD)-pegged assets (stablecoins) on decentralized exchanges, move these assets to an equally decentralized lending platform (like RAMP Defi) to earn yields, and subsequently add the interest-bearing instruments to a decentralized liquidity pool or an on-chain investment fund.

Smart contracts are the backbone of all DeFi functions. Agreements are enforced by code and all transactions are executed in a secure and verifiable way. Smart contracts ensure that each transaction is legitimate, transparent, trustless and that goods or services are, in fact, being transferred in line with the predetermined provisions of the agreement.

Decentralized Apps: An In-depth Look

Decentralized apps or dapps

Decentralized applications or dApps are web services built on top of a blockchain. Because dApps are decentralized, they are free from the control and interference of a single authority. Benefits of dApps include the safeguarding of user privacy, the lack of censorship, and the flexibility of development.

(i) DeFi dApps

While dApps can be designed to provide any type of web service (e.g., games, file-sharing networks, and social media platforms), the most widely discussed use for dApps is in financial services, as evidenced by the notable growth of decentralized finance (DeFi).

DeFi dApps allow for lending, borrowing, and a host of other financial services that are typically offered by centralized service providers. DeFi projects have already captured billions of dollars in value and look to continue this trend as more and more people become aware and familiar with their unique value proposition.

Dapps can also apply to social media and gaming, and some games have already implemented a DeFi system. Games like Axie Infinity and Alien Worlds use DeFi as their primary transaction method, and they give users an entertaining way to earn and grow their assets.

How does it all tie together?

Essentially, dApps (decentralized apps) are build on top of smart contracts to perform blockchain related transactions. Without smart contracts, dApps are simply normal applications without on-chain functionalities.

DeFi dApps use smart contracts to facilitate all kinds of use-cases including margin trading, derivatives, stable coins and general lending/borrowing. Leveraging smart contract functionality, DeFi dApps are able to operate in a long-term, scalable manner. Ramp Defi for example, is an open source and non-custodial liquidity protocol for earning interest on deposits and borrowing assets.

Join the RAMP Community

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Using the RAMP solution, users with staked assets can continue to receive staking rewards, retain capital appreciation potential on their staked portfolio, and unlock liquid capital to invest in new opportunities at the same time.

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