Quick Guide to Decentralized Finance
What is decentralized finance (DeFi)?
Put simply; decentralized finance is the opposite of centralized finance, the pervasive financial structure currently used. Centralized finance depends on a central bank, and a central authority governs the system and often regulates who has and doesn’t have access to it — something referred to as financial gatekeeping.
Decentralized finance, on the other hand, is just that — decentralized. While not inherently a cryptocurrency itself, DeFi is built on secure distributed ledgers like those used by cryptocurrencies, removing the control banks and institutions have traditionally had on money and financial products and services.
How does DeFi work?
DeFi uses smart contracts designed to take the place of traditional financial systems. A smart contract is (typically) a type of Ethereum account that holds funds and can send or refund them, depending on specific criteria. Once the smart contract is live, it cannot be altered and will always run as programmed.
With no banks or institutions managing your money and no intermediaries required to authorize DeFi transactions, you have total control over every step of the payment process.
Use Cases
- Asset Management
- Compliance and KYT
- Decentralized Autonomous Organizations (DAOs)
- Data Analytics
- Derivatives
- Infrastructure tooling
- Digital identity
- Insurance
Benefits of DeFi
Offering a fully encrypted and permissionless infrastructure, DeFi allows you to perform near-instantaneous transactions without a bank or financial institution looming in the background, acting as an intermediary and taking a chunk of your revenue through processing fees. Utilizing DeFi for your business transactions increases your cash flow by decreasing risk (thank you, Blockchain technology!), hassle, costs, and time to cash.
DeFi allows an organization to leverage secure, scalable, and automatic payments, often with their current ERP infrastructure. This means a low learning curve for AR professionals and a streamlined workflow.
Is DeFi safe?
The answer to this question is a resounding YES. Far safer than traditional centralized finance, in fact. Blockchain data is tamper-proof, meaning your risk of fraud is incredibly low. The majority of the risk surrounding DeFi comes from regulation, or lack thereof, and bad actors targeting DeFi transactions for cybercrime.
Regulation and Roadblocks
Unregulated markets suffer from structural limitations, so who regulates DeFi? In the U.S., multiple federal authorities have jurisdiction over aspects of DeFi, such as the Department of Justice, Financial Criminal Enforcement Network, Internal Revenue Service, Commodity Futures Trading Commission, the SEC, and — perhaps most importantly — the people conducting the DeFi transaction themselves.
Ultimately, the number one roadblock to DeFi is the learning curve — DeFi seems new and thus scary, and it can be challenging for financial professionals to change their way of thinking. While the benefits of DeFi are vast and make traditional payment methods seem archaic, businesses may be cautious about “rocking the boat.” Still, the good news is that DeFi is designed to fit smoothly into our financial framework, with minimal disruption to everyday workflow.
The future of DeFi
DeFi is still in its infancy and is still getting its legs underneath it. There are still many questions to be answered: for example, DeFi’s borderless transaction ability poses essential regulation questions — who will be responsible for investigating a financial crime that takes place across borders, protocols, and DeFi apps? Who will enforce the regulations, and how?
However, we can rest assured that the greatest financial minds are on the task, and we will continue to see more and more businesses adopting DeFi for their financial functions. And with the United States working diligently to develop a CBDC and safe practices for decentralized finance transactions, we can expect to see the great regulation questions answered sooner rather than later.
Getting started with DeFi
Interested in the benefits DeFi could have for your business? Paystand offers a DeFi Corporate Card, designed to give your business a hassle-free on-ramp into the world of decentralized finance. With real-time expense tracking and a touchless and secure payment platform, our DeFi Card allows you to have total control over your company’s spend, and you earn bitcoin rewards on every transaction.