The state of banking and finance today is a complex labyrinth that even the most experienced bankers have a hard time navigating. Despite the appearance, there is a way to this madness. As Nobel laureates such as Muhammad Yunus and Joseph Stiglitz have warned in the past, the central bank, in particular, has been transformed to keep the status quo in check. Or, in the words of Mike Maloney, a specialist in monetary and economic history: this is “the greatest scam in human history”. Meloni argues that giving a small group of unelected individuals the keys to the monetary press will undoubtedly rot 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 banks around the world, individuals and small business owners who simply want to keep the wealth they earn are increasingly asking: Does my bank work for me or am I working for my bank? But until recently, there was simply no alternative to central bank currencies, and no one could provide the services of commercial and investment banks.
Today, with cryptocurrencies and decentralized financing platforms (DeFi) on the scene, institutional banks are no longer the only players in the game. What was once the unquestioned and even uncontrolled power of institutional banks prior to the 2008 financial crisis can now be captured as thousands of new entrants compete to change the fundamentals of the financial systems we know.
So what does this mean for the average person?
DeFi vs traditional finance
To clear the fog a bit, let’s compare the advantages of DeFi over traditional and centralized banking and financial services in terms of sole proprietorships and small and medium-sized enterprises (SMEs).
In the traditional banking and financial sector:
An individual takes the risk of borrowing their savings from banks. Most banks use fractional provisioning, which means that if someone makes a $ 100 deposit, the bank can borrow $ 90 and only has to keep $ 10 on hand at all times. Much of this is invested in. complex financial instruments that can be highly susceptible to credit defaults, as demonstrated by the 2008 crisis.
By default, an individual’s purchasing power is reduced. The fiat money stored in banks is tied to the monetary system, which can be devalued by inflation and currency devaluation. So, if you put $ 100,000 in a bank account at the beginning of the year and the dollar devaluation is 10% for the year, your savings can be bought at 10% by the end of the year. less than before.
Standard interest rates can range from 0.03% to 0.09%. But, for example, if the currency devaluation is 10%, you still decrease by 9.91-9.97%.
Barriers to opening accounts and accessing certain banking services often arise. Banks set their own arbitrary requirements, such as loyalty, minimum balance (e.g. $ 2,000,000), credit checks, and access to banking services.
Personal data is tracked and technically is bank data, according to Riley v. California, 573 U.S. 373 (2014).
The range of financial products offered is limited. Loan applications are usually boring and difficult to pass, except for many who need them most.
For comparison, in decentralized finance:
Individuals have complete control over their finances and are free to trade or even put their assets in cold storage for added security.
Individuals can invest in a wide range of assets, such as Bitcoin (BTC), which are not pegged to the dollar and can act as a hedge against inflation.
Users can use their savings to work with it on DeFi lending platforms and trade digital assets such as token art. Despite the instability, yields can range from 2% to 50,000%, with options on rates.
There are fewer contracts blocked for using the services (if any): people can come and go if they want.
There are no “bank charges”, although there may be gas fees, like Ethereum, or exchange fees.
Individuals can open anonymous accounts to share and keep their wealth.
Individuals can access multiple financial products, such as instant loans and leveraged trading, without long and complicated deals, using their cryptocurrencies as collateral.
Related to: Decentralization versus centralization: where is the future? Experts answer