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The battle of banks vs. DeFi is a win for individual crypto investors

December 19, 2021No Comments

The current state of banking and finance presents a complex maze that even seasoned bankers struggle to navigate. Despite appearances, there is a method to this madness. As Nobel Prize winners such as Muhammad Yunus and Joseph Stiglitz have warned in the past: Central banking, in particular, has been transformed to keep the status quo in check. Or, in the words from Mike Maloney, expert in economics and monetary history: It is "the biggest scam in the history of mankind." Maloney reasons that giving a small group of unelected people the keys to the monetary press will undoubtedly ruin the purchasing power of workers' savings, to the benefit of the few who benefit from asset price inflation.

In the wake of the global financial crisis and devastating banking operations around the world, individuals and small business owners who simply want to preserve the wealth they have earned are increasingly wondering: Does my bank work for me or do I work for my bank? But, until recently, there were simply no alternatives to central bank currencies, nor could anyone provide the services of commercial and investment banks.

Today, with cryptocurrencies and decentralized finance platforms (DeFi) on the scene, institutional banks are no longer the only players in the game. What was once the unquestionable, and even uncontrolled, power of institutional banks before the crisisis now at stake as thousands of new entrants compete to change the foundations of financial systems as we know them.

So what does this mean for the average person?

DeFi vs. traditional finance

To clear the fog a bit, let's compare the benefits of DeFi versus traditional and centralized banking and finance, from the perspective of individual business owners and small and medium-sized enterprises (SMEs).

In traditional banking and finance:

The individual assumes the risk of lending his savings to the banks. Most banks use fractional reserve banking, which means that if someone deposits $ 100, the bank can lend $ 90, and they only have to have $ 10 on hand at any one time. Much of this is invested in complex financial instruments that can be highly exposed to credit defaults, as the 2008 crisis demonstrated.

The purchasing power of the individual declines default. Fiat money stored in banks is tied to the monetary system, which can be devalued by inflation and currency devaluation. So if you deposit $ 100,000 into a bank account at the beginning of the year, and the devaluation of the US dollar currency is 10% for the year, then at the end of the year, your savings can buy 10% less than before.

Standard interest rates it can range from 0.03% to 0.09%. But, if the currency debasement is 10%, for example, you are still down from 9.91 to 9.97%.

There are often obstacles to opening accounts and accessing certain banking services. Banks set their own arbitrary requirements such as loyalty, minimum balances (for example, $ 2,000,000), credit checks and access to banking services.

The individual's data is tracked and technically it is bank data, according to Riley v. California, 573 US 373 (2014).

The range of financial products offered is limited. Loan applications are often tedious and difficult to approve, excluding many who may need them the most.

In comparison, in decentralized finance:

  • People have full control over their finances and can trade freely or even put their assets in cold storage for added security.
  • People can invest in a wide range of assets like Bitcoin (BTC) that are not pegged to the dollar and can act as a hedge against inflation.
  • Users can put their savings to work for them on DeFi lending platforms and exchange digital assets as tokenized art. While volatile, returns can range from 2% to 50,000%, with options to bet.
  • There are fewer contracts (if any) closed to use the services: people can come and go as they please.
  • There are no "bank fees", although there may be gas fees like in Ethereum or exchange fees.
  • People can open anonymous accounts to trade and store their wealth.
  • People can access better financial products like instant loans and trades leveraged without lengthy and complex approvals, using your crypto as collateral.

Related: Decentralization versus Centralization: Where is the Future? The experts respond

DeFi adoption

Overall, the new benefits of decentralized finance are sure to make traditional banks run for their money. In fact, as analysts like Robert Breedlove He suggested, in accordance with the principles of Game theory, institutional banks will have no choice but to join the revolution to remain relevant. Even conservative fund managers like Ray Dalio and David Morgan have joined the bandwagon, speaking publicly about adding cryptocurrencies to their portfolios. Recently, United Wholesale Mortgage announced that accept Bitcoin for mortgage payments. And, with the news of the world Bitcoin's first exchange-traded fund (ETF), the adoption rate of decentralized finance within traditional finance is projected to take off even further.

It seems that decentralized finance has won its first battle. But the war is not over yet. As of this writing, up to 98 percent of the world's executives surveyed remain invested in the traditional banking system. In fact, more than $ 127 trillion of funds worldwide are administered through banks and bank-centric payment gateways, while the market capitalization of cryptocurrencies is $ 2.2 trillion in comparison (less than 2%). Suffice it to say, it is still early days for decentralized finance.

Related: What's gotten in the way of a pure Bitcoin ETF?

This means that for the next 10 years at least, there will continue to be a sizable addressable market for companies looking to bridge the gaps between new decentralized finance and old centralized finance. What is driving this growth is the increasing regulatory acceptance of cryptocurrencies and the availability of new tools for companies to use cryptocurrencies in a compatible way.

First of all, major financial centers like Singapore now have clear licensing regimes for crypto companies. This allows crypto companies to operate with the same legitimacy as traditional financial institutions. Regulatory acceptance gives institutional investors and large multinational companies the confidence to transact in crypto.

Second, there are now tools that allow businesses to manage their crypto payments in a compliant way. For example, remote workers and business owners can issue and track invoices denominated in one currency, such as USD, and receive payments in any other currency, such as Ether (ETH). This simplifies processes like crypto billing, payroll, and accounting.

So while decentralized finance has yet to achieve mainstream adoption, two things remain certain for the individual. First, as the adoption rate of DeFi increases, so will the need for banks to compete to win your business. Second, for the first time in history, you, as an individual, have more power than ever to benefit from the changing state of finances. This is perhaps the greatest victory of all.

This article does not contain investment advice or recommendations. Every trade and investment move involves risk, and readers should do their own research when making a decision.

The views, thoughts and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Christophe lassuyt is a co-founder of Request Network, a YCombinator-backed open source protocol that offers a suite of blockchain-based financial products ranging from invoicing to payroll, expense and accounting dedicated to early crypto companies. Before co-founding Request in 2017, Christophe was working on other crypto projects such as Moneytis, making money transfers with crypto as the backbone in 2015. Christophe has accumulated extensive experience as a financial manager working internationally in North America, Europe and Asia . in various companies.