DeFi (Decentralized Finance) definition: Financial services and applications built on blockchain technology, eliminating intermediaries.

Term 'DeFi' is an abbreviation for Decentralized Finance. DeFi fundamentally signifies a revolutionary shift in the way financial transactions, lending, and trading are perceived. By leveraging blockchain technology, especially the Ethereum network, DeFi platforms aim to replicate traditional financial services, such as loans, insurance, and trading, but without the central institutions.

Instead of relying on centralized exchanges that act as middlemen and levy exchange fees, DeFi platforms utilize decentralized exchanges (DEXs) that allow for direct peer-to-peer transactions, reducing costs and improving transaction speed.

A key feature that has popularized DeFi in cryptocurrency discussions is staking. Through staking, users can lock up a certain amount of cryptocurrency to support the operations of a blockchain network. In return, they earn rewards, a concept closely related to yield farming, another pillar of DeFi. Yield farming allows participants to earn returns on their coins by providing liquidity, often in liquidity pools, and subsequently earning interest in the form of utility tokens.

However, the DeFi ecosystem, while brimming with innovation and promise, is not without its complexities. The volatile nature of some DeFi projects and the accompanying risks means potential investors should tread with caution. Comprehensive research, aided by exchange reviews and understanding of the platform's utility token dynamics, becomes paramount.

Moreover, as with other cryptocurrency-related undertakings, diving into the DeFi domain comes with potential tax implications. Interactions, rewards, and earnings within the DeFi landscape might be viewed as taxable events in several jurisdictions. Thus, an in-depth understanding of local tax regulations is advised before embarking on any DeFi ventures.

An example of a high-profile DeFi platform is Uniswap. Functioning as a decentralized exchange, Uniswap stands out for its automated liquidity provision, allowing anyone to trade without the need for traditional order books or intermediaries.

A banner inviting cryptocurrency investors to read Koinly's updated crypto DeFi tax guide

The information on this website is for general information only. It should not be taken as constituting professional advice from Koinly. Koinly is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances. Koinly is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.
Michelle Legge
By Michelle LeggeHead of Crypto Tax Education
Updated Nov 9, 2023
This article has been fact checked and reviewed as per our editorial policy.