Understanding DeFi: Words Have Meaning, But What Do They Mean?

Deep Dive into Consumer Finance

Perhaps the most challenging (and intimidating) part of Decentralized Finance is understanding all the terms and industry jargon—many of which are new and technical, while others are as old as time but commonly misunderstood.

As McGlinchey continues its Deep Dive into DeFi, think of this primer as your glossary. If you are considering entering the DeFi space, or if you are developing a product or service and are working through terminology, this resource will help.

The glossary includes:

Money – A broad term for any medium of exchange (whether tangible or intangible) that represents value and is accepted as payment for goods or services rendered, including the discharge of debt. It is most often used as a colloquialism for the currency of a sovereign authority, such as the U.S. Dollar.

Currency – A standardized, formal version of money organized into commonly recognized and accepted units of exchange, usually by a sovereign authority, whether in paper notes or specie (coins). Currencies can exist in tangible (e.g., U.S. Dollars or gold/silver coins) and intangible form (e.g., bank deposits or bitcoin).

Fiat Currency – Money issued by a sovereign authority that has no intrinsic value but is formally recognized by official decree as currency. Simply put, fiat currency is money because the government says so—not because of any underlying value.

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Legal Tender Laws – Any official decree by a sovereign authority that a specific currency is recognized (and usually printed or minted) by that sovereign authority as a legitimate form of payment for debts, public charges, taxes, and dues.

Legal tender laws typically do not prohibit competing forms of money or currency, such as gold/silver coins or digital currencies. Instead, legal tender laws generally ensure that a means for discharging debt and avoiding civil or criminal liability is legally recognized and available. This distinction is crucial for understanding why other currencies, such as gold/silver coins or bitcoin, can coexist with the U.S. Dollar.

Financial Intermediary – A third party administrator or facilitator connecting diverse entities/persons to facilitate financial transactions. Examples include: banks, brokerages, currency exchanges, and other similar financial institutions, including a sovereign authority’s central bank.

Some intermediaries are also a trusted custodian, responsible for the reconciliation or “truing up” of account balances among counterparties, such as by crediting one account and debiting another when currency is exchanged, thereby reducing the risk of fraud or counterfeit. However, a central facilitator or custodian may also increase concentration risk because it represents a single point of failure.

Decentralized Finance – A general term for any form or type of financial instrument or financial exchange between one or more parties that is not dependent upon a financial…