Smart Contract Automation Use-Cases: An Overview
A dive into the world of novel use-cases enabled by smart contract automation
In our previous article, we looked into smart contracts and got acquainted with their groundbreaking potential to power innovative services and markets for the digital economy.
Now, it’s time to dive deeper into the smart contract automation rabbit hole by exploring a wide range of novel use-cases enabled by smart contract automation across various web3 verticals.
This article has 4 main sections:
- How do web3 developers benefit from smart contract automation?
- Smart contract automation use-cases for Decentralized Finance
- Smart contract automation use-cases for Blockchain Gaming
- Smart contract automation use-cases in wider web3
To start, let’s remind ourselves why we actually need smart contract automation.
1. How do web3 developers benefit from smart contract automation?
The backend code of a dApp is powered by smart contracts that run on distributed networks. Smart contracts are designed as a set of predefined rules that execute automatically and without any human interference when certain conditions are met.
The challenging characteristic of a smart contract is that it cannot self-execute as its code runs only once triggered by an external process.
The existing solutions to address the issue, such as manually sending transactions or building and maintaining off-chain software: are error-prone, entail high costs, cause delays in project implementation, or go against web3 ethos by being centralized.
This is where smart contract automation shines. It enables the automatic execution of smart contracts upon reaching conditions set by a developer, offering web3 developers a reliable, cost-effective, and decentralized way to build dApps.
Now, as we got a taste of the potential and limitations of smart contracts, let’s dive into specific and real-world applications of blockchain technology and smart contracts opened up by smart contract automation!
2. Smart contract automation use-cases for Decentralized Finance
Decentralized Finance (DeFi) is an umbrella term that refers to the ecosystem comprised of financial applications developed on top of blockchains. Developers from all over the world are attracted by the opportunity of using decentralized technology to create new kinds of financial assets, markets, and services by introducing a certain degree of decentralization.
Let’s look at how smart contract automation can help developers build cutting-edge DeFi dApps.
Limit Orders on Decentralized Exchanges
Decentralized exchanges, also known as DEXs, are peer-to-peer marketplaces where crypto traders make transactions directly without handing over control of their funds to an intermediary or custodian. Unlike centralized exchanges (CEXs), DEXs are powered by automated market makers (AMM protocols) that use liquidity pools as a replacement for traditional buyer and seller markets.
The problem with AMMs, however, is that they do not offer order books. Without it, traders are unable to set limit orders, that is, an order to buy or sell an asset at a specific price. This often makes trading inefficient as traders have no other choice but to patiently wait for the desired price before manually executing a transaction.
Smart contract automation fixes this. Developers can use off-chain computation to ensure the ongoing monitoring of the asset price on a DEX as well as the execution of a transaction once the target price set by a trader is reached.
If we go even further, DEXs may want to offer users advanced trading functionalities through cross-chain limit orders, that is, an opportunity to buy an asset from blockchain A based on the asset price from blockchain B. With the aid of cross-chain smart contract automation, a trader may purchase an asset on Ethereum (12s block time) once such an asset reaches a particular price target on Polygon (only 2s block time).
By doing so, developers can boost the competitiveness of their DEX by ensuring the best price performance and the highest level of efficiency for traders. A huge win for flexibility and user experience.
Automated Trading
Automated trading, albeit with some differences, is employed by both retail participants and institutions who develop self-executing systems to profit from market movements. Such traders deploy automated trading strategies for various purposes from spotting arbitrage opportunities to executing automatic orders based on pre-defined indicators, from copy-trading whales to automatically following quantitative traders who use complex mathematical models.
Whatever automated strategy a trader prefers, smart contract automation permits the automatic and reliable execution of transactions based on the conditions decided by a trader beforehand, thus, further expanding the trading arsenal of any market participant.
Reward Distribution
Yield farming is a popular method of earning rewards or interest by depositing cryptocurrency into a pool. Users lock their tokens and earn an extra yield on the cryptocurrency they own through lending, LPing, or staking.
With the help of smart contract automation, DeFi protocols can strongly improve the yield farming experience for their users by automating the harvesting of yield, calculating & releasing the yield farming rewards based on specific triggers, or auto-compounding yield farming rewards.
Prediction Services
Prediction services allow users to bet on or trade the outcome of real-world events with the market prices indicating what the crowd thinks about the probability of a certain event. DeFi protocols offering prediction services can get ahead and boost their business operations by employing smart contract automation that can be used to:
- update probability values based on received bets;
- trigger smart contract automation workflow for starting and ending prediction rounds;
- calculate user profits;
- ensure the close/payout of the event based on on-chain/off-chain triggers defined by the users.
Executing Liquidations
Lending protocols offer trustless crypto loans. Usually, the holders of a particular token stake the token within a lending platform, while the borrowers use lending platforms to take out loans with the lender who earns interest once the loan is returned. The most beautiful part is that the whole process is executed flawlessly without involving any intermediaries.
One way for smart contract automation service to help the lending protocols remain solvent is via automating the logic of liquidation mechanisms.
Developers may set up conditions for monitoring the user loan health characteristics and enable the triggering of the liquidation function once a loan is determined to be undercollateralized.
3. Smart contract automation use-cases for Blockchain Gaming
Blockchain gaming is a relatively new concept, but it has already seen some progress in recent years. Games based on distributed ledger technology have several advantages over traditional games such as lower costs, no need for intermediaries, easier access to capital, and free cross-border payments.
Blockchain games, like any games, require numerous interactions between the user and the publisher within the course of the gameplay, and smart contract automation can open up a variety of use-cases to make such games more capital-efficient and user-friendly.
NFTs
When one thinks of games built on a distributed ledger, NFTs inevitably come to mind as they play a huge part in the design of the majority of modern blockchain games.
Smart contract automation can power NFT minting, distribution, trait assignment as well as randomize various in-game parameters. Also, smart contract automation services can take care of in-game rewards distribution based on specific conditions reached by users while playing the game.
Going even further, smart contract automation helps game publishers and other creators bring new web3 experiences by powering dynamic NFTs. As we know, most of the NFTs that we are used to are static with their metadata remaining unchanged after being minted. The new wave in NFT development paved the way for dynamic NFTs whose metadata can be updated automatically based on certain off-chain or on-chain data.
The problem, however, is that smart contracts are not self-executing, so something needs to trigger the smart contract with data input for a dynamic NFT to update its metadata.
Smart contract automation perfectly helps here. Developers can define any triggers (quest completion, race care victory, reaching a certain level, etc) that, once met, will poke the smart contract and ensure the changes to a dynamic NFT.
Contract Logic Separation
For some blockchain games, it would make sense to separate the contract logic.
For example, think of a game that prescribes numerous interactions of a user with a blockchain. If such a game is built fully on Ethereum, the cost of playing a game would make it rather unattractive for users who will need to constantly pay high fees for minor transactions.
With smart contract automation, however, developers can separate smart contract logic between two chains, so that the most expensive and repetitive part would go to a cheap blockchain (such as IMX), while the cheap logic would be in the “main” blockchain (such as Ethereum).
By doing so, the game publishers can ensure both the security of a battle-tested L1, such as Ethereum, and the speed and price attractiveness of a cheaper blockchain like IMX.
4. Smart contract automation use-cases for wider web3
Smart contract automation is capable of powering a variety of use-cases in a wider web3 industry. Let’s have a look at some of the opportunities to be taken by forward-looking developers, namely DAO automation, token vesting, and automated money flows.
DAO Automation
A DAO is an entity that runs on smart contracts in the blockchain. It is fully autonomous, decentralized, and self-governing. There are no directors or managers. The code is the only law and it is executed by everyone who participates in the project. The physical distance between stakeholders and the automated execution of transactions without requiring human intervention, make DAOs attractive to many web3 builders and creators.
Although DAOs push the boundaries of decentralized and community-focused decision-making, their process often entails a high degree of friction. Yet, with smart contract automation, the vast majority of the processes that govern DAOs’ operations can be automated, including executing votes after timelocks, distributing voting rewards, rebalancing DAO funds as market conditions evolve, automating salaries/contributor payments, and many more.
Token Vesting
With token vesting, project developers distribute tokens among founders, advisors, investors, and communities over time to align the interest of stakeholders with the long-term goals of the said project.
Without smart contract automation, a developer team would manually send tokens to certain addresses on pre-defined dates making the token vesting process highly error-prone and inefficient.
Smart contract automation allows to allocation of tokens automatically upon reaching established conditions thus ensuring decentralization and reliability of the whole process.
Automated Money Flows
Automated money flows allow the use of technology to pre-schedule and pre-approve transfers of funds enabling recurring billing, renewing of subscriptions, and scheduling payments without the need to rely on anybody or manually make a transaction.
As many instances require automation of transactions, smart contract automation services allow for the pre-determined triggering of the smart contract functions when needed.
5. Concluding remarks
Smart contract automation can be a powerful instrument in a toolkit of a web3 developer. With its aid, projects can easily develop and implement innovative use-cases aiming at improving the user experience, cutting operations costs, and decentralizing a dApp.
In the context of DeFi, smart contract automation can support limit orders on a DEX (also cross-chain), power automated trading strategies, distribute rewards, execute liquidations and improve the efficiency of prediction markets.
Blockchain gaming and NFT projects can benefit from automated NFT minting, distribution, and trait assignment, randomized in-game parameters, and separating contract logic between several blockchain platforms.
Smart contract automation can also automate DAO operations, make token vesting trustless and reliable as well as automate money flows based on pre-defined logic.
All these examples are just the tip of the iceberg of what smart contract automation brings to the table. It makes the development of dApps more reliable, cost-effective, and decentralized, naturally sparking the interest of web3 devs to explore further novel applications, services, and markets made possible due to smart contract automation capabilities.
We appreciate you reading this piece and hope you found it helpful! In our next articles, we will go further and review how smart contract automation works in practice and analyze the possibilities opened up by cross-chain smart contract automation.
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