Ethereum’s Turing Complete design means that anyone can write a Smart Contract, there is no submission or vetting process. Smart Contracts can create their own rules and ownership structures. Given that Ethereum also supports token standards, it is a blank canvas for new permissionless methods of generating and exchanging value.
Currencies & Token Systems
The inclusion of token standards was a masterstroke by Ethereum’s founder, Vitalik Buterin, because it allowed these new digital applications (dApps) the freedom to build their own mini-economies, with tokens for exchanging and creating value, as well seamlessly integrating with other applications through Smart Contracts – a concept called composability.
The most common Ethereum token standard is ERC-20. This set of guidelines allows developers to build applications with a unique token, which is interoperable with other products and services.
The ERC-20 standard specifically relates to fungible tokens within Ethereum and provides an API for tokens within Smart Contracts providing the following standard functions:
- transfer tokens from one account to another
- get the current token balance of an account
- get the total supply of the token available on the network
- approve whether an amount of token from an account can be spent by a third-party account
With a few extra lines of Smart Contract code, you can determine the supply, distribution and additional utility of a new fungible token. This ability opened the floodgate for alternative token systems to Ethereum and Bitcoin, commonly known as alternative coins (altcoins), and cryptocurrencies that are pegged to fiat currencies – Stablecoins – making them more appealing to traders and businesses.
There is also a standard for tokens that aren’t designed for exchange – non-fungible tokens (NFTs) – which Smart Contracts can apply to create in-game economies where users take ownership of what they create and earn within games, freely trading them outside of the game.
Play-to-earn is one of the fastest-growing areas of the Ethereum ecosystem, with Axie Infinity one of the most popular applications. It uses Ethereum’s Smart Contract capability to:
- Create a token for trading within the game
- Collect, breed and battle NFT based creatures called Axies
- Allow players to have stake in the game through a governance token – SLP
Decentralised Finance
Combining Smart Contract capability with a common standard for exchanging value enabled the emergence of a new phenomenon known as DEFI (Decentralised Finance). In simple terms, DEFI uses Smart Contracts to offer financial services to the External Account holders of Ethereum and other ERC-20 tokens.
Saving & Loans – Protocols like Compound use Smart Contracts to algorithmically offer interest on deposits and lend out funds against collateral. Compound alone has over $10bn in Ethereum based assets earning interest.
Decentralised Exchanges – Smart Contracts enable Automated Market Making – automatically providing liquid pools of tradable asset pairs without any central process or oversight. A DEX will incentivise users to provide liquidity (LPs) and then use algorithms to provide constant pricing and balanced liquidity pools.
DEX’s can also offer the same kind of complex derivatives trading offered by centralised exchanges but with much greater freedom, control and access to liquidity. dYdX and Uniswap are two of the most popular decentralised exchanges.
Yield Aggregation – Given the explosive growth in opportunities to generate a return from DEFI protocols, Smart Contract-based services will find the best strategies to optimise return, also known as Yield Farming.
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