The concept of self-executing code that reduces risks and guarantees the satisfaction of conditions laid out in a contractual agreement is integral to most applications of blockchain technology today. Created by computer scientist Nick Szabo in 1994, a smart contract is a piece of code (now commonly deployed on blockchains) that automatically executes when specific conditions are satisfied. This makes it possible for parties to enforce transactions and agreements without requiring a third party or intermediary.

One of the most appealing features of smart contracts is their potential to drastically decrease or even eliminate counterparty risk. Once contracting parties publish a smart contract on a blockchain, its implementation does not rely on external entities, and transactions are essentially automated. Because blockchains store information immutably, running smart contracts on them offers a unique layer of transactional transparency and security. 

Smart contracts have a wide variety of applications in the blockchain industry ranging from decentralized finance to non-fungible tokens, blockchain-based gaming offerings, decentralized autonomous organizations, and more. In this article, we’ll review the top 4 use cases for smart contracts today. 

1. Decentralized finance (DeFi)

Decentralized finance, or DeFi, is an emerging sector rooted in the idea of eliminating the need for intermediaries in financial transactions. Instead of relying on banks or other centralized financial institutions, DeFi protocols enable smart contract-based interactions between users. This eliminates counterparty risk, increases efficiency, and decreases the cost of financial transactions.

Due to its vast user base and excellent smart contract capability, Ethereum is now the most popular platform for DeFi applications. Other blockchains, however, are beginning to emerge as viable alternatives for DeFi innovation. As decentralized finance continues to experience exponential growth, we may anticipate more novel smart contract applications in the future.

2. Decentralized autonomous organizations (DAOs)

Decentralized autonomous organizations, or DAOs, are a relatively new phenomenon made possible by the blockchain. A DAO is a digital entity whose governance is defined by smart contract code, substantially minimizing human involvement on the administrative level. This makes DAOs incredibly efficient and resilient, as they are not subject to the same limitations as traditional organizations.

Smart contracts are essential to the functioning of DAOs, as they provide a way to enforce the rules of the organization automatically. For example, DAOs could use a smart contract to reward members for contributing to the DAO or penalize those who break the rules. As DAOs become more popular, smart contracts will likely play an increasingly important role in their operation.

3. Non-Fungible Tokens (NFTs)

Non-fungible tokens, or NFTs, are a type of cryptocurrency that represent a unique asset. Unlike Bitcoin or Ethereum, which are each interchangeable with other units of their respective currencies, each NFT is unique. NFTs can be used to represent everything from digital art to in-game items, land ownership, digital identity management, high-value item ownership, and more. They are typically traded on specialized crypto markets like OpenSea.

Developers usually use smart contracts to create NFTs. For example, a smart contract could be used to mint an NFT when someone pays for it with ETH on OpenSea. Smart contracts provide a wide range of benefits for NFTs, including security, transparency, and efficiency. Overall, smart contracts have been instrumental in the development of NFTs. They have allowed for the creation of a new type of digital asset that is unique and immutable.

4. Play-2-Earn (P2E) gaming industry

Blockchain gaming opens up a new world of play-2-earn opportunities, and smart contracts make it all possible as they represent a new way of monetizing the video-gaming experience. Using NFTs, play-2-earn protocols allow gamers to earn rewards for their gameplay. These rewards are stored on a smart contract and can be used to purchase in-game items or be withdrawn from the game entirely as liquid currency. 

P2E is still in its infancy, but the potential is massive since, using smart contracts, creators can finally reward gamers for their passion and skill.

Securing Smart Contracts

Smart contracts are changing the blockchain industry by enabling developers to create decentralized applications that can automate transactions and operations. This makes it possible for businesses to reduce costs and streamline processes while increasing transparency and trust. However, smart contract security is crucial due to its importance in the industry and its immutability; once implemented, a contracting party cannot unilaterally alter it. 

This means that flaws or weaknesses in the smart contract’s code can have serious consequences. Before deploying a smart contract to mainnet, ensure that a credible security firm – like Halborn – audits it. A thorough smart contract audit will include recommendations for enhancing the security of the smart contract’s code. Additionally, a comprehensive penetration test is recommended for a full assessment of all attack vectors, both for the specific smart contracts in question as well as for web application code and its connections to the smart contract. 

For more information on how Halborn secures smart contracts, contact our smart contract auditors today at halborn@protonmail.com.

Top 4 Smart Contract Use Cases
Rob Behnke
10.03.2022