What is DeFi?

5 May 2022

What is DeFi? Decentralised finance, better known as DeFi, is essentially the entire financial world behind crypto.

As we speak, developers are recreating fundamental financial institutions and replacing old ways and old systems. It is hard to understand and imagine if you are an onlooker looking in from the outside. Still, the adoption is growing exponentially, and knowing what DeFi is, is essential.

Centralised Finance

The world as we know it has used centralised finance; this is still the main financial fundamental that the world use today. In centralised finance, we have a central authority that controls the money in essence. With such authority comes the power that the government can print more money or agree or disagree to lend you money, to name a few.

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There has not been another option for years. There’s nothing we can do if banks charges go up, for example. This is changing and daily, we see these changes becoming more prevalent visual.A few years back this was only an idea. Now it is becoming a reality.

But what is DeFi?

In DeFi, there are no banks, but there are pieces of code that run and act as banks and are open to everyone. Moreover, this code does not need you to trust it, knowing that it is true. Another significant upside is that it is less expensive than centralised finance.

DeFi is thus seen as an umbrella term for financial services on public blockchains, for example, Ethereum, which is the best-known blockchain to date worldwide.

Three main things that DeFi is built on:

  • Blockchain,
  • smart contracts &
  • Cryptography.

Defi is based on the following five pillars:

  • Stablecoins
  • Lending & borrowing
  • Decentralised Exchanges
  • Insurance
  • Margin

DeFi allows anyone from anywhere with only the need of an internet connection to borrow, lend and trade using its software. This software records and verifies financial actions in a distributed financial database. This will be faster than centralised finance and does not require a third party or paperwork!

DeFi is open to all. It opens up the future of money as we know it to be more relatable, open to all, and instantly available for everyone no matter what.

Decentralised finance applications allow users to fully control their own money, which is currently lacking in centralised finance. The control will potentially create a free, fair, and open financial market for everyone globally with an internet connection.

How does DeFi work?

DeFi users usually engage using decentralised apps (dapps), mostly run on the Ethereum blockchain. There are no accounts to open or applications to fill out, making it unique compared to conventional banks.

What about DAOs?

It is not possible to talk about DeFi and not mention DAOs which will be a whole other blog of its own in the near future. Decentralised Autonomous Organisation (DAO) the reason DAOs exist is to take advantage of DeFi fully.

DAO, in essence, is the organisation that governs by code instead of leaders. As a result, many see DAOs as a way to more rigorously guarantee democracy.

The Future of DeFi

You need to go down the rabbit hole of DeFi for yourself. Early adoption and education are encouraged in the DeFi space. DeFi adoption is happening worldwide, and it is seen and talked about if you only look into El Salvador, which has been struggling with high inflation for years. The adoption of Bitcoin and DeFi is rapidly growing, especially after they made Bitcoin legal tender on 7 September 2021. It is refreshing to see the possibility and new hope that DeFi has brought to El Salvador combined with every generation to follow.

What are you doing with your money to save? It is your responsibility to be financially literate in today’s market because today, in the DeFi market, it is all-inclusive and possible.

How can we help?

We are future-focused accountants who are passionate about Crypto, DeFi and going bankless. We have a deep understanding of the blockchain, liquidity & staking protocols, ICOs / IDOs, NFT ecosystem and other DeFi nuances. Partner with us for all on-chain tax and accounting.