DeFi and Why It Matters

We’ve written a few articles about cryptocurrency and its effects on Canadians and the world and those articles have mainly focused on what blockchain is and does. However, a big part of blockchain is yet to be explored and the biggest part of it is Decentralized Finance, or DeFi. This term has been popping up more and more recently and for good reason.

What is DeFi (or Decentralized Finance)?

It is an ecosystem comprised of applications built on decentralized networks, permissionless blockchains, and peer-to-peer protocols for the facilitation of lending/borrowing or trading with financial instruments – i.e. it is a method of decentralized banking that ranges from storage of assets and earning interest, to lending, to arbitrage. The majority of these applications run on the Ethereum network.

DeFi is getting to a point where it is going to make meaningful change in the way we do business and the way the world runs. One of the biggest dreams since blockchain’s inception has been providing banking services to those who were previously unable to acquire them. That has since become the opportunity to provide banking services to not only those people but to anyone who wants to control their own funds without a third party.

In my opinion, the center of this movement is an asset referred to as Dai1– a stabilized, decentralized currency that can be used by anyone, without barriers. Dai is a stablecoin (a coin whose value doesn’t fluctuate, unlike bitcoin or ether.) This makes it an ideal candidate for all of the business opportunities that were made impossible due to bitcoins fluctuating value.

Since the inception of the idea of DeFi, there is now over $700 Million USD worth of assets locked up within the various applications. Let’s walk through an example:Kevin has $1,000.00 – Typically, this would be in a bank account, where he would get 0.6-2.1% interest on it annually. Not great. But Kevin has decided to use decentralized finance to store his money. He can buy ether with it through an exchange, and then convert that ether to Dai. Remember, Dai is a stablecoin – Its value doesn’t fluctuate. Kevin will have $1,000 today, and in 6 months from now from his principle. But the difference is that kevin can use a decentralized finance application to store his money, or lend it out. With Compound2 Kevin can deposit his Dai, and earn interest between 0.4% and 8% (in the summer of 2019, some assets were earning as high as 19%).  Why would someone do this rather than a bank account? Two reasons: Higher interest, and full autonomy over your own funds. No one can lock or unlock your funds but you, there are no limits on deposits and withdrawals, and no opening/closing times.

The effects of DeFi are that anyone with a cellphone and an internet connection can now have a bank account. That’s all it takes. 1.7 billion adults in the world don’t have bank accounts3. While not everyone has access to a cellphone and internet, the barriers to entry are much lower. One doesn’t need a Social Insurance number, a permanent address, or anyone to sponsor them to get a bank account, and one will still be able to earn money, get a paycheque, or send money to family.  The benefits to DeFi are endless – If you want to learn more, a quick google search will provide you with endless information about it.

1, January 1, 2020
2, Compound Labs, Inc., January 1, 2020
3 Niall McCarthy, June 8, 2018, “1.7 Billion Adults Worldwide Do Not Have Access To A Bank Account [Infographic],, Forbes

Disclaimer: This commentary is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, nor does it constitute solicitation to buy or sell any securities referred to. Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.

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