In my last article, I detailed how the traditional banking system over the years has become a very one-sided relationship. I would even describe the relationship as parasitic where banks view their customers as nothing more than profit engines. Maybe some of you will feel that I am being unfair and demonizing institutions that provide a valuable service. I do agree that they provide necessary services but what customers pay for those services vs what they are paid for depositing (loaning) their hard-earned money to these banks is in my opinion unnecessarily low.
As one-sided as these relationships have been, we have not had any other choice but to use their services. In my opinion, though that may be about to change. With the creation of decentralized finance, or Defi for short, we may now have another option other than the traditional banking system. Although still in its infancy, I believe Defi will offer a place where we can deposit our money and earn a fair return. Defi protocols and platforms offer many of the same financial products as the traditional banking system but are open, transparent, and permissionless as opposed to the closed traditional financial systems.
Decentralized finance is a blockchain-based financial system that does not rely on intermediaries (Banks, Exchanges, Brokerages) to offer financial products. They instead utilize smart contracts on a blockchain to verify and complete transactions, Defi protocols and platforms are a combination of all the intermediaries listed above.
Defi protocols and platforms offer Staking of coins or tokens which is basically the same as depositing money into a savings account. You can stake a variety of coins and besides earning interest you can also benefit if the value of the coin increases. You do have to be careful though because the value of the coins can also decrease. You also want to be careful to not stake anywhere that requires a time lock. A time lock simply means that you will have to lock your coins up for an extended period of time. This can be very costly if coin prices start dropping and you can't sell because your coins are locked up. I only stake where I am able to withdraw my coins at any time, for any reason.
For those who are risk-averse, there are also stable coins that can be staked at very good rates. A stable coin is a type of cryptocurrency that is pegged to the US dollar and as a result, its price is very stable.
Many Defi protocols and platforms also offer yield farming pools. Yield farming is a process in which investors deposit their crypto into liquidity pools on an exchange in return for rewards. This is a more complicated process where pools are created from coin pairs, this process also carries more risk but as a result, the rewards are much higher than simply staking. These liquidity pools are then used by the platform or protocol as a way to fund their decentralized exchange (DEX) or to loan out to anyone wanting to borrow crypto.
On some platforms, you can also loan out your crypto in a peer-to-peer method to earn even more interest. Not all Defi platforms or protocols allow you to loan out your crypto but there are quite a few that do and the rates are pretty impressive. You can earn anywhere from less than 1% up to about 10% depending on the platform and coin or token you are lending.
I believe with the introduction of decentralized finance platforms we now have another choice other than being stuck dealing with the traditional banking system. In fact, Defi platforms and protocols allow us all to basically become a bank. Rather than the traditional finance system exploiting their customers to boost their revenue, we can all share in that revenue stream. We can also collect much higher rates for depositing our cryptocurrencies on a Defi platform than we can from a traditional savings account.
I have been involved in the crypto space for almost 5 years now so I am well aware of the risks but I believe with proper education and the use of stable coins we can minimize the risks we are exposed to. There are tradeoffs, however, with a traditional bank your funds are insured against loss, and with the crypto space, it is your responsibility to keep your funds safe. Personally, that doesn't bother me at all, I prefer to carry that responsibility myself. I believe it is an acceptable tradeoff to have full control of my finances and the ability to capitalize the most from those finances.
It is hard to believe that there is an estimated 1.7 billion adults worldwide that for various reasons are excluded from the global financial system. This is where Defi and cryptocurrencies, in general, can really be life-changing, anyone with a $20 cell phone can download an application and basically become a bank. This access to a global, decentralized, borderless peer-to-peer network will open up unimaginable opportunities for them. especially for business owners and entrepreneurs where this access will allow them to operate on a worldwide scale. My belief is that this opportunity will change many lives for the better, it will, in my opinion, ignite innovation in parts of the world that up until now have basically been left behind. They will then be able to join in with the rest of us in the global economy that they have been excluded from for far too long.
For the rest of us who have been privileged enough to live in a part of the world where we have easy access to banks and other financial systems, we now for the first time ever have another choice. We can choose to continue to operate in fiat currency dealing with banks who loan out our deposits at exorbitant rates while paying us next to nothing, then charging us fees just for access to our money. Or, we can educate ourselves and enter this new asset class taking full control of our finances while reaping the most we can from those assets rather than allowing a large corporation to use us to bolster their revenue.
I also want to add that it does not have to be just one or the other. We can use both systems in any combination to gain the most benefit for ourselves.
I hope you found this article interesting and thought-provoking.