What is DeFi?

DeFi refers to decentralized finance. It’s a group of new protocols and platforms that help individuals and organizations exchange and manage financial instruments directly between one another on a blockchain.

It’s a rapidly expanding set of protocols — it includes smart contracts and protocols like Dharma and MakerDAO — that enable users to form their customized pools of capital that they can then leverage for other purposes. 

Importantly, it isn’t controlled by any single institution or individual; instead, users can manage it as they please from their phone or laptop. The goal behind creating DeFi is to provide an alternative approach for financial services as compared with traditional centralized approaches such as banking. 

There are many reasons why developers are interested in creating new solutions that don’t involve traditional systems. For example, if you wanted to borrow money today, you could talk to your bank about getting a loan. 

However, if your bank rejected your request for funds, there may not be much recourse because you don’t have many alternatives available when working within established financial institutions.

This makes it hard to get funding when you need it most - just ask anyone who has dealt with payday loans to cover unexpected expenses in their life.

Why DeFi is the future?

If you’re at all interested in finance and technology, you probably already know something about blockchain and cryptocurrencies. Blockchain is a secure platform that tracks transactions and allows for payments without a third party. 

Many think that blockchain will fundamentally change banking services worldwide. Among its most important features: 

Security - Cryptocurrencies use cryptographic keys to verify transactions and safeguard against fraud. As such, your money can’t be stolen if it’s not sent to an insecure address or if your password isn’t compromised. 

Speed – Blockchains are decentralized platforms with data stored on many computers around the world. That makes them faster than any traditional bank system because there’s no bottleneck.

What does that mean for you? Rather than waiting days or weeks for a wire transfer to process, now they take seconds or minutes. 

Transparency – You can see where every dollar is going as soon as it happens. That might seem dangerous, but it’s also useful!

Businesses can use what they call smart contracts to automate their finances and make sure everyone gets paid on time with no extra effort from HR or accounting teams thanks to automated checks built into blockchain software systems. 

Portability - This is one of the biggest reasons why governments are looking into blockchain right now. Because cryptocurrency exists entirely online, users have complete control over their digital funds.

This means moving countries won’t involve selling real estate or converting currencies—just taking out enough cash to cover living expenses while you get situated abroad. 

Safety - While being able to securely move funds across borders quickly can have huge implications for commerce, safety matters too when it comes to adopting new technologies. 

Historically, entrepreneurs trying to introduce new financial tools like credit cards, ATMs, etc., ran into criticism by consumers who didn’t trust these emerging payment methods. With blockchains, governments can act as intermediaries between banks and consumers for processes like identity verification to increase consumer confidence in using these technologies instead of sticking with old-fashioned paper checks. 

Scalability - Another major issue plaguing current financial networks has been scalability. Banks simply don't have enough bandwidth for peak volume on websites or apps during busy periods like tax season or holiday shopping seasons. However, since everything is recorded and available on the blockchain, it can scale to massive numbers of users very easily. 

If you're a developer or entrepreneur thinking about building a product that relies heavily on payments or other business transactions, chances are you'll need blockchain tech to build it. In other words, nothing ever runs out of room - so there's plenty of headroom for future growth. 

But why should businesses care if only people buying Lambos and pizza coins care? The answer is simple - even a small transaction using blockchain tech costs less than a fraction of a penny - far cheaper than any existing form of electronic payment today.

Why DeFi is important?

Decentralized Finance (DeFi) provides a way for people to participate in financial markets without having to trust any intermediaries. Instead, an open network of peers collectively provides services such as collateral loans and shorting. 

This method aligns incentives and ensures that everyone plays by fair rules—and no one can use their power or influence alone to gain an advantage. Furthermore, it allows individuals and institutions who were previously shut out from certain types of lending opportunities access to new pools of liquidity and credit. 

In many ways, decentralized finance empowers users to take control of their finances and achieve greater economic equality in global markets. With its egalitarian structure, open-source protocols, and global accessibility, we’re beginning to see why some consider DeFi one of blockchain’s most valuable innovations.

No matter how you look at it; DeFi represents a radical shift in how we think about money and markets. Financial systems tend to reward those with money and influence over others; so much so that entire economies tend to skew towards favoring groups with disproportionate wealth over those less fortunate. 

When power has been centralized into a few hands for so long, there are inevitably problems: corruption runs rampant; laws become ripe for exploitation; personal freedoms dwindle.

How does DeFi farming work?

In a nutshell, you contribute your machine computing power or storage space to a decentralized network that enables smart contracts and applications on top of it. 

For example, there is a project called Golem that allows anyone who contributes their machine’s power to create a decentralized supercomputer. 

This provides value as now one can rent out their machines for computation purposes and earn cryptocurrency in return. In essence, you are providing any kind of unused resource for someone else’s use. It also creates an incentive as now people can utilize those resources and they have an economic incentive from doing so. 

The demand will be present if projects like Golem come into existence. Users would then utilize these services and pay crypto tokens to have their calculations done through these decentralized apps/smart contracts. 

As a result of the contribution being financially rewarding, more individuals will participate as they will want to maximize returns. And as more participants join, networks become stronger which encourages further participation as data travels faster allowing users to perform more complex computations at a cheaper cost per second rate. 

Many other projects exist too such as Storj and Filecoin. These projects allow contributors to share their hard drive space and receive payments based on how much free space they provide. 

People could potentially just buy terabytes of hard drives off amazon but why when you can receive payment for sharing your excess storage space with others? Many other uses cases provide financial incentives via facilitating smart contract executions. 

This completely changes how software is built today since developers don’t need to build dedicated centralized servers anymore nor do they need expensive server farms taking up valuable office real estate.

Smart Contracts on Blockchain

Smart contracts help cut out middlemen and transaction fees. But how do smart contracts work and what makes them so valuable in today’s market climate? First, let’s define exactly what a smart contract is: It’s a piece of code that has rules attached that specify how it will be executed when certain conditions are met. 

That code can be used on a blockchain ledger and can trigger some action when agreed-upon benchmarks are reached. For example, you could attach a smart contract to an asset like gold or oil; if it reaches an agreed-upon price by some specific time frame (or any other type of threshold), then your contract executes (something). 

This would likely trigger actions such as transferring value from one party to another. Another popular use case for smart contracts is self-executing payment systems, which allow two parties to transact without trusted third parties—like a bank—in between. 

Though many still consider smart contracts far from mainstream adoption right now, they have been heralded as a transformative technology that could change business transactions altogether. 

Are DeFi loans taxable?

It depends on how you structure your lending. While DeFi loans are often associated with Ethereum, they can be created for any type of asset. And if your loan is collateralized by that asset (rather than another cryptocurrency), then it’s probably taxable—but maybe not in the way you might think. 

Here’s why: Say you borrow $1 million worth of Ethereum from someone else and use that to buy more Ether on an exchange. When your friend gets his Ether back, he or she will have increased their total holdings by $1 million—which would normally be taxable income. 

But with a smart contract-secured loan setup like Dharma, what happens isn’t quite so simple. Your loan has been structured as a combination of principal and interest payments; when your lender receives those payments, they enter them into an automatic re-lending program. 

Your original lender essentially ends up getting paid twice: once via principal payment and again via interest payment. By structuring your DeFi transactions properly, you might avoid paying taxes at all—or even turn a profit.

Conclusion

In a new era where everything digital moves at light speed and access to information is unlimited, it’s easy for investors and speculators alike to feel overwhelmed. 

But amidst all that confusion there are a handful of technologies that make sense from a business perspective and have practical applications in society—DeFi being one of them. 

With more on-the-ground implementations each day, DeFi lending platforms have proven themselves on multiple levels as smart investments for both developers and non-developers alike.

This means you don’t have just another cryptocurrency or blockchain application or platform on your hands—you have an ecosystem that will stand up under major adoption pressures while providing real value in our everyday lives.