These days, it seems like everyone has an opinion on cryptocurrencies, the blockchain, and “DeFi,” especially crypto investors. Unfortunately, not many people fully grasp DeFi, let alone understand it enough to explain how it works or how it benefits enterprises like yours.
If you’re on the fence regarding DeFi and aren’t sure whether you should jump in feet-first, you’ve come to the right place. Today, let’s break down DeFi in detail and explore how it can benefit your small business in the years to come.
What Is DeFi?
In a nutshell, DeFi stands for “decentralized finance” and refers to all platforms or systems that allow moving financial products from person to person without the use of a third-party intermediary. Even simpler:
- DeFi means people can send money to and from each other without banks
It’s “decentralized,” meaning that there isn’t any central authority or organization in control of finances sent between individuals or companies.
Naturally, DeFi is broadly connected to cryptocurrencies and blockchain-based digital tokens. Cryptocurrencies such as Bitcoin and Ethereum run on publicly available blockchains, which are essentially transaction records whose information is regularly validated by miners.
What Is the Purpose of DeFi?
Broadly speaking, the purpose of DeFi is to decentralize finance around the world. Individuals and small business owners alike will be able to do several important things that they previously had to do only with the permission of an intermediary like a bank.
DeFi tools and systems will give individuals complete control over their assets. For example, small business owners can have full control over their currencies without worrying about those currencies being loaned or used by banks through DeFi. Individuals can also enjoy full control and ownership of digital assets like NFTs.
This ties into a broader focus on self-governance. Since DeFi runs on blockchain and cryptosystems, the entire system is publicly viewable, with no chance of fraud. This, in turn, ensures that business owners and individuals have complete self-governance for their own finances and financial products.
Business owners specifically may be able to use DeFi to finance new ventures without worrying about abstract things like credit scores.
Imagine being able to finance a new business venture, like a new small business website, with crypto entirely comprised of your own funds or through borrowing crypto through one of several DeFi systems.
How Does DeFi Work?
DeFi, as it stands today, is best understood as a broad network of financial tools that run for free on the Internet without being controlled by intermediaries. It’s oftentimes called open finance because it makes a naturally open system. The blockchain verifies all information, such as transactions or records.
At this writing, most DeFi platforms run on Ethereum’s blockchain. This uses a Turing-complete programming language, allowing anyone to create their own programs or, more usually, smart contracts.
Smart contracts are codes of code that can automatically execute transactions on the network once certain preconditions are met.
DeFi works thanks to various free Internet tools, such as the popular Compound, Maker, and Aave. All of these protocols allow you to do different financial transactions using Ethereum or other crypto tokens.
DeFi also works via decentralized exchanges such as Uniswap, which is an exchange that lets you trade Ethereum-based tokens with other users.
Because no one owns deFi, the platforms and tools that run on the DeFi network can constantly be iterated, evolved, and improved upon.
Plus, anyone can join the DeFi network starting today just by picking up some cryptocurrencies and making purchases or investing in those tokens.
What Are the Benefits of DeFi?
To recap, DeFi is a network of decentralized, free Internet tools and platforms that businesses and individuals alike can use to send currencies, create and fulfill contracts, and more.
Businesses, in particular, can benefit significantly from the DeFi network in several major ways.
Accept Global Customers
Firstly, DeFi allows businesses to accept customers globally. By accepting cryptocurrencies on the blockchain, you can instantaneously get funds from anywhere around the globe. That, in turn, broadens your customer base.
Accepting international or global customers is especially important if you primarily sell Digital Products.
Offer New Payment Methods
More broadly, businesses like yours can benefit from the DeFi network since it allows you to trade and accept cryptocurrencies with more freedom than ever before. If you already have a crypto payment processor like CoinPayments, joining the DeFi network will accelerate crypto’s adoption rate by your customers.
You can then transfer those crypto tokens into fiat currency or other coins, all from a convenient, one-stop dashboard. Trading and accepting cryptocurrencies is beneficial for businesses since it gives your customers more ways to pay you.
As research shows, this always makes your profits increase – you need to make it easier for people to give you money, not harder after all.
Engage In Higher Level Trading
Naturally, DeFi platforms and tools like Aave allow you to engage in high-level trading for crypto tokens. Alternatively, you can use tools like MakerDAO to take out collateralized debt positions on the DeFi network.
Through this tool, you’ll be able to deposit crypto tokens and use DAI’s stablecoin to make purchases within the DeFi ecosystem overall.
This high-level trading emulates the trade activity of the stock market. But unlike the classic stock market, all of the currencies on the DeFi network are not controlled by banks or corporate interests.
Aave and other DeFi tools allow you to earn excellent yields on your crypto savings. For example, Aave allows you to deposit your crypto tokens into what is essentially a DeFi savings account (a liquidity pool, to be specific).
You then earn an interest rate on your crypto in aTokens, which can be used for other purchases across the DeFi network.
Is DeFi Risky?
Like all aspects of cryptocurrency, DeFi is far from completely proven. That said, DeFi isn’t necessarily risky if you:
- Do your research
- Don’t invest unwisely
- Use appropriate crypto exchanges and trading platforms
In this way, DeFi is no riskier than trading or investing on the regular stock market.
Should I Invest in DeFi as a New Business?
As a new business owner, investing in DeFi is a wise idea because:
- You’ll be able to accept more customers, thus potentially earning more profits
- DeFi is relatively user-friendly once you dip your feet in
- DeFi may enable unprecedented growth
Perhaps most importantly, you don’t need a stellar credit score or have to bow to the big banks to get your business started. With DeFi, you can take your business to new heights using only your finances.
What Do I Need To Know About DeFi as a Beginner?
As a beginner, you should enter the DeFi network by accepting crypto tokens using a crypto payment processor such as CoinPayments. Only then can you build up the cryptocurrency, which you can use to stake other coins, enter liquidity pools, or take advantage of the DeFi tools described above.
Furthermore, just because DeFi is decentralized doesn’t mean that you’re protected from unwise investments. In fact, it’s exactly the opposite. With DeFi, you take full responsibility for your investments and purchases.
Therefore, you should invest your crypto tokens or trade currencies carefully, and only after planning your finances.
The Bottom Line
In the end, the DeFi revolution is still some years away. But there’s no better time to jump into DeFi than right now, especially if your business is partially or primarily online. You can start by accepting crypto tokens such as Bitcoin through CoinPayments.
In fact, CoinPayments makes it easier than ever to accept crypto tokens since:
- The sign-up process only takes a handful of minutes
- You’ll get access to a streamlined dashboard where you can trade or exchange crypto tokens for other forms of currency
- We also offer a range of merchant tools to help you run your online business effectively
Given all the benefits of DeFi for businesses, there’s no reason not to start accepting crypto today. Contact CoinPayments to get started or for more information.