The blockchain and cryptoasset space has, to put it mildly, been a red-hot focus for many practitioners and firms in accounting and financial services. While price increases and volatility have grabbed headlines, and there are still outstanding tax issues that need clarity and resolution, there is another major shift underway poised to redefine lending, banking and financial services: decentralized finance, more widely known as “DeFi.”
So, what exactly is DeFi? Simply put, it’s a system of applications that replicate traditional financial market processes using blockchain technology and smart contract capabilities. With DeFi, processes such as value exchange, borrowing, lending and derived financial instruments all happen without intermediaries such as banks, brokerages or exchanges.
Some may dismiss DeFi as another technology trend or fad that will fade away, but the reality is more complicated than that. The Wall Street Blockchain Alliance, in partnership with CPA.com, recently published a
1. DeFi is here to stay, so educate yourself. With all of the technology talk in recent years, it would be all too easy to write off DeFi as another flash in the pan, but this is short-sighted. DeFi has become a multibillion-dollar piece of the blockchain-based economy and practitioners will need to be aware of what it is, how it functions, and the implications of this application.
2. DeFi is already changing business; it’s not an abstract idea. Decentralizing the processing and confirmation of financial information is just the first instance of DeFi potential. Ideas like the internet of things, 5G technology and related applications, and even self-sovereign identity will all benefit from the increasing utilization of DeFi application.
Putting some current context around these ideas is important. For example, the total assets dedicated to underpin DeFi operations is nearing approximately
3. The use cases for DeFi are still in development. While DeFi is still in its early days, there’s a few categorical ways it’s being used:
- Liquidity mining or “yield farming.” This is the process of lending crypto assets to a participant pool in exchange for a rate of return in the form of new coins or tokens
- Crypto staking. This is the process of holding crypto holdings in a ‘digital wallet’ to earn interest
- Crypto lending. This is when an investor borrows from a lender using cryptocurrencies
- Decentralized derivatives. This is when cryptocurrency exchanges enable direct peer-to-peer trading in cryptocurrencies online without the need for intermediaries.
- Derivatives. These are synthetic assets that represent real world assets.
4. DeFi is still uncharted territory. After seeing those figures, and potentially doing some additional research into the space, you may be wondering: Why is DeFi not a higher-profile topic in mainstream accounting conversations? The short answer is that there is still uncertainty and ambiguity as to how DeFi accounting and reporting are going to function. This compounds the current ambiguity and uncertainty that already exists around the blockchain and cryptoasset sector. Additionally, the rise of the DeFi sector truly only occurred beginning in 2020 and the idea is still in the very early days of adoption and implementation.
Remember: While the idea of DeFi might feel far away right now, it won’t be long before your organization or clients start asking for advice on this topic. Educate yourself now so you’re prepared.
