Smart contracts, a new concept that aims to address the problem of trust in human interactions while also increasing efficiency, have found fertile ground on distributed ledgers. They are self-executing software protocols that represent some of the terms of a two-party agreement. They are neither smart nor contracts in the legal sense.

The terms of the contract are encoded directly into lines of code. Smart contracts allow transactions between dissimilar, anonymous parties to be carried out without the requirement for an external enforcement mechanism (such as an arbitrator, a court or a central clearing facility).

As a result, transactions are transparent, traceable and irreversible. Smart contract-driven processes can take place on blockchain-secured distributed ledgers and be recorded there. This particular combination is at the heart of the majority of DeFi discussions.

The interrelationships between ABCD and DeFi

These four fast-emerging technologies are often crucial to the decentralization of finance since they are used to achieve it. For example, many decentralized financial functions make use of (i) AI’s powerful efficiencies and cost-savings; (ii) smart contracts embedded on distributed ledgers secured via blockchain’s superior record-keeping and efficiencies; (iii) cloud systems to host nearly all decentralized financial processes; and (iv) algorithmic data analysis’s potentially decisive power.

Each of these four technologies are less expensive, more convenient and efficient to use, allowing collaboration among the numerous participants that supply financial services in a decentralized manner.