Smart contracts on a decentralized blockchain enabled Ethereum’s invention to pioneer the idea of a global financial system that is as open and innovative as the internet itself with DeFi (decentralized finance). Despite this, perhaps the biggest hurdle is the technical limitations of the way DeFi smart contracts must be written today. Developers need a much better solution.
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This article explains how Ethereum, as well as virtually every other platform available for smart contracts, falls short of the needs of global-scale DeFi.
What are smart contracts on blockchain?
On a blockchain, contracts are programs that run when predefined conditions are met. Typically, they are used to automate the execution of an agreement so that all parties can be immediately certain of the outcome. This prevents any time wasting or intermediary involvement. Additionally, they can automate a workflow, triggering the next action when conditions are met.
Why today’s smart contracts aren’t up to the task
A decade after the invention of blockchain technology, DeFi has emerged as its most important and revolutionary application. It is nothing less than the first step in replacing an inherently monopolistic financial system with one that is open, democratic, and constantly innovative by securely managing financial assets on a decentralized network.
This is the possibility, but think of what it would take to transform global finance in a democratized model at the scale of hundreds of trillions of dollars and billions of users. It means there will be millions of developers working on better financial products and services. The goal is to create a decentralized system where dApps (decentralized apps using smart contracts) can offer just as much functionality as today’s apps while providing the same amount of security – if not more – at an unlimited scale at a low cost.
In spite of this, DeFi today, including its developer community, barely register on this scale. A world of developers has been held back from exploring every DeFi opportunity available to them. Why is this?
The creation of a DeFi developer ecosystem of this scope requires a highly specialized development paradigm. DeFi on a global scale is a difficult problem to solve using today’s smart contracts – which were developed on Ethereum in 2013 before the big picture emerged – but haven’t delivered the features that developers need to be able to use DeFi effectively. Since then, nearly every platform for smart contracts has followed this fundamental approach. There has been a tendency to focus purely on improving scalability, without considering the issues that make smart contracts unfit for scaling up in the first place.