Finance has always been a subject of eager discussion among those in the field. DeFi is the hottest topic in the world of fintech right now and this is how it fits into the world of accounting.
DeFi Is the Future of Accounting and It's Here to Stay
What Is DeFi Anyway?
DeFi is short for decentralized finance. It is a system that introduces decentralised applications (dApps) to the financial sector with the goal of eliminating the need for intermediaries such as exchanges, underwriters, brokers, regulators, and even legal professionals.
One component of decentralised ledger technology (DLT) is ‘blockchain,’ which is the technology that allows people to bank without the use of a bank using cryptocurrencies such as Bitcoin. The DeFi intermediary is a near-frictionless codified platform.
This means that instead of a single, centralised platform business that extracts economic rent, businesses will use DeFi instead. It is frequently created and maintained for the benefit of a self-governing community. What we are talking about here is a technologically ‘tuned’ cooperative or mutual structure.
A Future That Is “DeFi”-nitely Full Of Potential
We’ve seen the growth, disruption, and eventual dominance of ‘platform firms’ since the turn of the century. Existing business standards are disrupted by these organisations, which reduce supply chains to just two counterparties. These parties are known as the manufacturer and the consumer.
Facebook connects advertisers with digital content consumers. Amazon connects sellers with consumers. Netflix connects media content to viewers. Airbnb connects property owners with tourists, and the list goes on. DeFi has the potential to accelerate commercial processes while also lowering costs and increasing efficiency across most finance operations.
However, it is a nascent technology that is largely unregulated at the moment. For example, consider the uproar caused by the reported decision of the creator of the decentralised exchange and market maker SushiSwap to liquidate $14 million in tokens shortly after its launch.
Another DeFi project example that is a little closer to home is the decentralised no-loss lottery, such as PoolTogether. Simply put, lottery players buy tickets, but if they lose, their stake is returned in full, resulting in a ‘no loss.’ The winning ticket receives its stake back as well as the accrued interest from all stakes held prior to the draw.
Premium Bonds in the United Kingdom are based on the same concept. However, instead of being managed by National Savings and Investments, the decentralised version employs blockchain, smart contracts, and cryptocurrencies as its functional currency.
Ready to Take On the Future
At the moment, smart contracts have more than $11 billion locked up. More than 100,000 Bitcoins, or more than 0.5 percent of all Bitcoins in circulation, are locked into such smart contracts on the Ethereum blockchain.
In this context, DeFi is still in its early stages and is unlikely to disrupt our established multi-trillion-dollar financial industries anytime soon. However, as chartered accountants, we should be aware of it. Are we ready for such a challenge? Absolutely.
If you think about it, previous innovations, such as aviation, were not ready on day one to challenge established transportation norms. In 1903, the Wright brothers’ first powered flights covered only a few hundred feet. Long-distance flight, on the other hand, became commonplace after a lifetime.
Looking toward the future and how well we are able to adapt to the changes that are thrown our way, it looks extremely hopeful that DeFi’s innovation is likely to ‘stick.’