DeFi Elements

Jul 17, 2022 | Learn DeFi

DeFi Built-In 4 Elements

  1. Cryptocurrency

Cryptocurrency, the new global money for the internet age, is also a medium of exchange like other currencies.

A cryptocurrency is a digital currency that acts as an asset that can be exchanged between two parties resulting in a transaction. The transaction is secured using cryptography; therefore the term cryptocurrency was connected. Cryptocurrency is a combination of “cryptography” and “currency”.

Cryptocurrencies use a decentralized technology that allows users to do transactions securely without the help of an intermediary moderator like a bank.

Cryptocurrency is a system that is neither regulated by any centralized authority nor tracked by any financial institution.

This digital asset is supported by a technology called BLOCKCHAIN.

Blockchain is a peer-to-peer network of nodes also known as BLOCKS containing all the transaction details at each stage between the two parties.

These blocks are linked and get security using cryptography.

  1. Cryptography

What is Cryptography?

It is the study of secure communications techniques that allow only the sender and intended recipient of a message to view its contents The term is derived from the Greek word kryptos, which uses means hidden.

It is closely associated with encryption, which is the act of scrambling ordinary text into what’s known as ciphertext and then back again upon arrival.

In simple words, cryptography is a study of secure communication, one person will encrypt a message and the other person can decrypt it.

Why is Cryptography needed?

Cryptography is frequently expected to keep delicate information from being compromised and taken by individuals who are not intended to see it. This information can be military, financial or monetary, scientific (logical), mathematical (numerical), medical (clinical), and so forth in beginning. There is an extraordinary measure of justifications for why a wide range of individuals needs to keep certain information secret.

When presented to the wrong sources, some data might be a danger to public safety. For instance, atomic launch codes, the passwords to the entrances to weapons or contamination disease holding centers like CDC testing offices and things of this nature all should be kept secret to safeguard public safety. Cryptography makes it workable for just the suitable individuals to approach the sensitive data of importance.

How do Cryptography works?

There are various ways that cryptography might be applied to a piece of information.

Before the times of modern technology, transposition ciphers were used to modify the letters in a message. For instance, a message that read NRGEE SRGAS might be put through an interpretation code to reposition the letters, so they read GREEN GRASS. This is a very basic use of the concept of cryptography. Nonetheless, it was extremely famous in ancient times.

The strategies for carrying out cryptography to information have become fundamentally more complex. Presently, extraordinarily complex computer and mathematical technology can be used to encrypt information in more complicated ways than ever before. A portion of this technology is presently being used for modern-day cryptocurrencies.

Regardless of how complicated cryptography is, it always works on a similar basic principle; encrypt information and hide its true meaning so just only a person with permission can unravel it.

Role of Cryptography in Cryptocurrency.

Cryptography is an essential mechanism for securing information in computer systems. Without cryptography, cryptocurrency is just a central hub for attackers and scammers.

Cryptocurrency requires cryptography for mainly three (3) purposes;

  • To secure the transactions
  • To control the creation of additional units
  • To verify the transfer of assets.

To accomplish all these things, cryptocurrencies depend on what is called, “public key cryptography”.

This paper discusses the types of cryptographic techniques used in cryptocurrencies, studies their characteristics, and explores the working of these techniques.

  1. Blockchain Technology

Blockchain is a relatively new method of storing data online, which is built around the two core concepts of encryption and distributed computing.

Encryption means that the data stored on a blockchain can only be accessed by people who have permission to do so – even if the data happens to be stored on a computer belonging to someone else, like a government or a corporation.

Distributed computing means that the file is shared across many computers or servers. If one copy of it does not match all the other copies, then the data in that file isn’t valid. This adds another layer of protection, meaning no one person other than whoever is in control of the data can access or change it without the permission of either the person who owns it or the entire distributed network.

Put together, these concepts mean data can be stored in a way so that it is only ever under the control of the person who owns it, even if it happens to be stored on a server owned by a corporation or subject to the control of a local government. The owner or government can never access or change the data without the keys to the encryption that proves they own it. And even if they shut down or remove their server, the data is still accessible on one of the hundreds of other computers that it’s stored on.

  1. Smart Contract

Smart contracts are like pieces of code that run on blockchain-based networks. Once deployed, they operate as programmed where users can rely on them to be unstoppable and censorship-resistant.

A smart contract is a self-executing contract with the details of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained in that exist across a distributed, decentralized blockchain network.

Smart contracts refer to digital transaction protocols that utilize the blockchain to enforce an agreement automatically while doing away with any third party. The terms of the agreement are written in computer codes, containing rules and penalties that the parties must agree to before entering one.

The transactions through this means are immutable and transparent, enabling the parties involved to audit and validate the data as and when needed.

Even though smart contracts are irreversible, developers can adopt indirect ways of updating the codes or clauses for the terms of an agreement if required.

Smart Contract Three (3) TYPES or Categories:

  1. Smart Legal Contracts – These contracts are legally enforceable and require the parties to fulfill their contractual obligations. Failure to do so may result in strict legal actions against them.
  2. Decentralized Autonomous Organization (DAO) – These are blockchain communities that are bound to specific rules coded into blockchain contracts combined with governance mechanisms. Hence, any action taken by the community members gets replaced by a self-enforcing code.
  3. Application Logic Contracts – These contracts contain an application-based code that remains in sync with other blockchain contracts. It enables communication across different devices, such as the merger of the Internet of Things with blockchain technology.

What is the purpose of a smart contract?

On a blockchain, the objective of a smart contract is to simplify business and trade between both anonymous and identified parties, sometimes without the need for middlemen. A smart contract downsizes customs and costs related to traditional methods, without compromising authenticity and credibility.

Which blockchain has smart contracts?


The most popular blockchain for running smart contracts is Ethereum. On Ethereum, smart contracts are typically written in a Turing-complete programming language called Solidity, and compiled into low-level bytecode to be executed by the Ethereum Virtual Machine.

Who writes smart contracts?

Anyone can write a smart contract and deploy it to the network. You just need to learn how to code in a smart contract language and have enough ETH to deploy your contract.

Is Bitcoin a smart contract?

Many think that smart contracts are only executable on overly complex blockchains, but Bitcoin is a smart contract platform by definition.

Is Ethereum a smart contract?

As the Ethereum website puts it, “Ethereum is a decentralized platform that runs smart contracts.” These contracts run on the “Ethereum Virtual Machine (EVM),” a distributed computing network made up of all the devices running Ethereum nodes

Smart Contract Three (3) Main Components

  1. Signatories (parties)
  2. The subject of the contract
  3. Contract Terms

The parties involved must satisfy the terms of the agreement (a set of rules and penalties) for a successful transaction.

Besides eliminating the need for an intermediary, executing agreements through digital contracts is considered cost-effective and secure.

More so, the decentralized blockchain network ensures that transactions remain transparent, traceable, and irreversible.

How many smart contracts are there?

Smart contract deployment

As of December 19, 2021, there are currently 929 smart contracts live on Cardano’s mainnet, which are mainly focused on DeFi, following September’s Alonzo upgrade. Thanks to Alonzo, developers can now create DeFi protocols such as DEXes and lend/borrow platforms on the Cardano blockchain.

Prepared by: Wilmina Dela Pena


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