Decentralized Finance (DeFi) vs. Traditional Banking

We are currently living through the biggest transitional period in human history.

The rapidly changing times we are experiencing are exposing the faults in the systems we’ve been indoctrinated into.

The unsustainable nature of the current economic model is blatant as the house of cards begins to sway. Inequality continues to soar endlessly, but there is hope.

Decentralized finance is on the rise and the benefits for its users have the potential to blow traditional banking into oblivion.

In this article, we will delve into the inner-workings of Traditional Finance, Decentralized Finance, the bridge between the two, and the pros and cons of each.

Traditional Finance

In a recent interview with Jerome Powell (Chair of the Federal Reserve), Powell spelled out how the Federal Reserve is propping up the economy with an endless supply of currency. The following excerpt is from a transcript of the 60 minutes interview with Powell:

PELLEY: Fair to say you simply flooded the system with money?

POWELL: Yes. We did. That’s another way to think about it. We did.

PELLEY: Where does it come from? Do you just print it?

POWELL: We print it digitally. So as a central bank, we have the ability to create money digitally. And we do that by buying Treasury Bills or bonds for other government guaranteed securities. And that actually increases the money supply. We also print actual currency and we distribute that through the Federal Reserve banks.

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

-Thomas Jefferson

How Central Banks Print Currency and Steal From the Future (7 Steps)

1. The government creates debt through the issuance of bonds, stealing prosperity from the future. The Treasury then borrows currency from bonds, and the debt is auctioned off to large global banks. The banks buy portions of the national debt and take their cut as the money is transferred throughout the system. 

2. The banks sell the bonds to the Federal Reserve for a profit. The Federal Reserve pays for the bonds from a nonexistent balance by creating currency out of thin air. The currency is passed onto the banks who buy more bonds with the newly created currency adding to the national debt. Banks are the middleman for currency creation.

3. The treasury disperses the newly created currency throughout various sectors of the government. The government spends the newly created currency on public works, social programs, and war. The government employees then take their earned money and deposit it back into the banks. When depositing currency into a bank, the bank does not actually hold onto the currency. The deposited currency is treated as a loan, and the banks use the loan to profit through various methods. 

4. Banks leverage their investments with their account holders’ deposits. Banks are only required to hold a small fraction of their account holders’ deposits in the vault while they loan out the majority. This process is called fractional reserve lending. What this means is the banks are legally able to take the vast majority of a depositor’s currency and loan it out for profit without the permission of the account holder. The currency is then loaned out with interest, the loan is spent into the economy, and the currency is deposited back into banks. The bank then loans out the newly received currency, and the process is repeated creating leverage upon leverage. This expansion of the currency is responsible for inflation.

5. Our taxes are funneled back into the same system. The IRS takes the tax payers’ currency and hands it over to the treasury. The treasury pays the debt owed by the federal reserve from the borrowed bonds. The majority of our taxes go directly back into paying off these bonds borrowed by the Federal Reserve with interest.

6. The system is designed to require an endless supply of debt. There will always be more debt than currency in this system because the currency is created from debt. The entire system is a paradox that is doomed to fail from the start.

7.  The private owners of the Federal Reserve take their cut. The world’s largest banks own the Federal Reserve. The vast majority of the profit in the monetary system is funneled from the working class back into the hands of the people who run it.

These seven steps are just the surface of the monetary system rabbit hole. Mike Maloney does a great job elaborating these 7 steps and dives much deeper into the corruption of the monetary system in the documentary series The Hidden Secrets of Money.


Pros and Cons of Traditional Finance

Now that we have discussed how the current monetary system prints currency into existence and steals from the future, it is time to consider the benefits of traditional banking and weigh the pros and cons.

Traditional Banking Pros:

  • Variety of options — Banks have been around for a very long time giving them the time to innovate and grow their services. Banks provide access to savings accounts, checking accounts, Roth IRAs, brokerage accounts, credit services, and much more usually all in one place.
  • Convenience — Banks are a prominent industry in the western world providing access throughout entire countries. The traditional banking system is a simple on-ramp for storing cash.
  • Physical locations — Banks are accessible through physical locations making cash deposits and withdrawals simple through over the counter transactions and ATM’s.
  • FDIC insured — Most banks are FDIC insured covering up to $250,000 per depositor. As long as your cash is deposited into an FDIC insured bank, your cash is automatically protected from bank failures or robberies.

Traditional Banking Cons:

  • Potential negative interest rates — Interest rates have been lowering drastically over the years, and President Trump has been encouraging the idea of potential negative interest rates. What negative interest rates would mean for bank account holders is that rather than earning interest when storing money in a bank, the banks will charge their account holders interest. The purpose of negative interest rates is to encourage people to spend their money in the economy instead of keeping it in a bank.
  • Wide range of fees — Banks charge relentless fees for their account holders in just about any way they can. These fees include checking account fees, minimum balance charges, overdraft charges, returned deposit charges, lost card fees, foreign transaction fees, account closing fees, and the list goes on.
  • Wait Time — Traditional banking is very slow whether referring to approval time or bank transfers. Banks are also only open during regular 9–5 business hours and minimally on Saturdays.
  • Lack of ownership — Banks are only required to store a very small portion of account holders’ money in their vaults. Without permission from the account holder, banks loan out their customers’ money through various avenues for profit, and the customer does not receive incentive.
  • Middlemen for debt creation — Through the leveraging of debt, the banks create an endless supply of currency stealing from the prosperity of the future. It is the average working-class citizen that is being exploited by this process.

Just because we have come to know and accept these systems as normal, it does not mean they cannot be replaced through innovation. Decentralized Finance and other blockchain technologies are rising to the challenge as we rapidly approach an inevitable crossroads.

Decentralized Finance (DeFi)

Decentralized finance aims to run with the positive aspects of traditional finance while replacing the corrupt centralization with a decentralized structure. Replacing the centralized third party with decentralized blockchain technology such as smart contracts allows the users clear control over how their money and assets are handled. Smart Contracts are a way to make a trade on the blockchain without the use of a middle man. Once both sides meet their end of the agreement, the trade is executed automatically.

Smart contracts are able to be programmed to receive and redistribute digital assets with custom agreements and criteria. All transactions are stored on a public blockchain and cannot be altered once the contract is established in order to justify unclear disagreements. DeFi is open and permissionless as it reaches to the 1.7 billion people around the world that do not have access to banking. Decentralized Finance options are available to anyone with a smartphone.

Decentralized Finance takes the positive aspects of traditional finance and puts them onto a blockchain replacing the third party with smart contracts. DeFi presents tremendous opportunities for lending and borrowing as lending and borrowing are accomplished through a peer to peer network. In the DeFi lending and borrowing ecosystem, the interest that would normally go to the bank goes directly to the lender. As central banks have control over the money in their users’ bank accounts, DeFi gives the power over the deposited money and digital assets directly to the user.

Decentralized Finance Pros and Cons

Decentralized Finance is changing the fundamental structures of finance as it replaces corrupt centralization with blockchain tech. However, DeFi is still a very new technology and every new technology has to innovate before becoming prominent. Here we will weigh the pros and cons of DeFi as it currently stands.

Defi Pros:

  • Blockchain as a trusted source — Utilizing blockchain technology provides control and transparency as each individual user can see where their digital assets are stored and how they are being utilized. Once a smart contract is deployed onto the blockchain, it is permanently recorded and cannot be altered. Trades are only executed once both parties meet their end of the agreement.
  • Censorship resistant — The middle man is replaced by blockchain technology, and the platform is open to everyone regardless of class, borders, or credit history. The 1.7 billion people throughout the world that do not have access to banks have access to DeFi platforms.
  • Autonomy — The user owns the money and digital assets stored on the blockchain. There is no central authority; you are the authority over your own money and digital assets. You have the choice between saving, staking, lending, and borrowing.
  • High return on investment — As opposed to the lack of return in interest a client is offered at a traditional bank, DeFi offers users incentive as a reward for staking or lending out their digital assets. Through DeFi, the interest that would usually go to the bank when loaning out a client’s money goes directly to the lender. The user earns the interest the bank would usually keep.
  • Low-interest loans — The replacement of the middle man with blockchain technology brings down the interest of loans substantially. The loan interest rates are not determined by credit checks, but rather a universal set interest rate. There is no need for a credit check, as long as the user has sufficient collateral for the loan.
  • 24/7 access to instantaneous loans: DeFi is constantly running day and night world-wide. Many platforms offer collateralized loans with virtually instantaneous access to funds.

Defi Cons:

  • The full responsibility of ownership — “With great power, comes great responsibility.” This cliche holds true in the world of DeFi as full ownership of assets implies full responsibility. It is up to each individual to do their own research and use the platforms responsibly within the scope of their understanding. There are many things that can go wrong in DeFi such as scams and hacks. It is essential to protect yourself and make sure your digital assets are properly stored and insured.
  • New technology — Defi is a relatively new technology, and with all new technologies there are bound to be unprecedented malfunctions. There are proper ways to store and insure your digital assets, and this is a crucial aspect of DeFi. As with every new technology there is a learning curve, but the benefits of DeFi far outweigh traditional finance when used properly.
  • Regulations — As DeFi is still a new concept, laws and regulations are still unclear as they vary between countries and states. As the innovation within the general cryptocurrency industry grows exponentially, governments are struggling to keep up with regulations.

Open Finance (Perfect for Beginners)

There is a middle ground between DeFi and traditional finance for people not quite ready to dive all the way into decentralized finance. For the sake of simplicity, I am going to refer to this middle ground as Open Finance in this article.

Open finance is a great way to gain exposure to the blockchain industry while lowering the risk factor as it combines the best of both decentralized finance and traditional finance. Open finance utilizes blockchain technology and smart contracts through a third-party platform while providing insurance. It acts as a banking, lending, borrowing, and staking platform. The different platforms offer a diversity of credit or debit card options, each with their own perks.

Open Finance Pros and Cons

Open finance acts as a middle ground between DeFi and traditional banking, providing the third-party services of traditional finance and the blockchain technology of decentralized finance. Here we will weigh the positives and negatives of this combination.

Open Finance Pros:

  • High-interest return on investment — You can earn up to 12% annual interest for storing your money on these platforms. You can earn up to 18% annual interest for staking their native digital currencies.
  • Automatically Insured — Depending on the platform, your account could be insured up to $100 Million. In the world of DeFi, insurance is crucial.
  • User Friendly — Defi can be a very technical area of interest creating a substantial learning curve for beginners. Open finance platforms bridge the gap between beginners and veterans in the space.
  • Incentives — Most of these open finance platforms offer some sort of incentive for using their platform. Some examples would be up to 5% back on all spending when using their cards, up to 18% annual return for staking, or dividend rewards when investing in their platform.
  • Instant low-interest loans — Through open finance, you are able to take out a loan instantly against your investments and pay at your own pace. There is no credit check and no repayment deadline.

Open Finance Cons:

  • Not decentralized — Although they use blockchain technology, these open finance platforms rely on a third party so they are not decentralized. This is both a pro and a con as a third party provides services that a completely decentralized platform does not.
  • You do not hold your private keys — Private keys are a big deal in the digital asset space as they are attributed to full ownership. Again this is both a pro and con as holding and storing your private keys is a huge responsibility. The private keys on open finance are normally held in cold storage in a high-security vault and backed by insurance. It is important to look into this for any platform you use.

Disclaimer: The information in this article is not financial advice. Always do your own research and consult a financial advisor if seeking financial advice.

Open Finance Platforms

These open finance platforms provide a perfect middle ground between DeFi and traditional finance. They combine the benefits of a third party platform and blockchain technology. The following platforms are ordered according to the ease of use.

Crypto.com (Earn up to 12% annually)

Experience Level: Beginner

Offers:

  • Earn between 10%-12% on stablecoins (digital currency tied to the dollar) and up to 18% on their native cryptocurrency.
  • Purchase stablecoins and cryptocurrency directly from their app with no fees or markups.
  • Diversity of tier level Visa cards with up to 5% back on spending
  • Instant loans against investments
  • No credit check
  • Insured up to $100 Million
  • $50 sign up bonus with referral link (Link below)

Crypto.com offers the highest annual interest rates, the most incentives, and the most user-friendly platform I have come across in the open finance space. This is a great option for anyone just getting started as they have everything you need in one platform. The on-ramp is made as simple as possible as the cryptocurrency exchange is built directly into the app.

This is a true revolution in the open finance sector as you can do everything you need to do in one app. It is a great alternative to banking as you are able to earn 10%-12% annually on your savings and earn up to 5% back on your spending.

$50 USD Sign up bonus for both of us when signing up for Crypto.com with the referral link https://platinum.crypto.com/r/9ckxx2jwck

Nexo (Earn 8% on savings annually)

Experience Level: Beginner/Intermediate

Offers:

  • Earn 8% annual interest on USD, EUR, GBP, and stablecoins
  • Instant credit line against investments
  • No credit check
  • Dividend payments when holding their cryptocurrency
  • 100% Asset-Backed Guarantee
  • Licensed and regulated financial institution
  • Insured up to $100 Million
  • 10+ years of FinTech success
  • Regulatory compliance

Nexo is among the most professional open finance platforms as they are a licensed and regulated financial institution. The Nexo team came from a background of 10+ successful years in the FinTech space. Their approval time is quick and their loans are truly instant.

Nexo is a legitimate banking alternative as you are able to earn 8% passive annual interest on your savings. There is a long waitlist for their MasterCard, but next day deposits into your bank account are available if you need access to your funds. Any lagging in the transferring process is usually at the end of the banks. Nexo’s incentives are blowing the traditional finance sector into oblivion.

Decentralized Finance Platforms

For the users ready to take on the full responsibility and autonomy of becoming their own banks and dive all the way into what decentralized finance has to offer.

Maker and Compound Finance

Experience Level: Advanced

Maker is a truly decentralized finance ecosystem built on top of the Ethereum blockchain. Maker is a platform that uses ETH as collateral for the creation of the stablecoin DAI. DAI is a decentralized and permissionless stablecoin often used for lending and borrowing through platforms such as Compound Finance.

Features:

  • Create and earn interest on the DAI stablecoin
  • Instant loans against Etherum
  • No credit check
  • Fully autonomous and decentralized ecosystem
  • Peer to Peer lending and borrowing platform
  • Full ownership of private keys

Compound finance and Maker are great options for people who want to take on full responsibility and autonomy of being their own central banks. Maker offers the full autonomy of the DAI stablecoin creation through a cryptocurrency collateralized loan while still maintaining full ownership of the cryptocurrency. The loan is paid in the stablecoin DAI, and the DAI can be used in a plethora of ways.

DAI has been labeled “The world’s first unbiased currency.” Compound finance is a great option for individuals seeking to “HODL” their positions as interest is earned on the DAI while maintaining full ownership of the private keys. Always remember you are fully responsible for your assets in the DeFi space. There are plenty of insurance options for this sector.


Synthetix

Experience Level: Veteran

Synthetix is a partially decentralized platform built on Ethereum targeted toward trading synthetic assets (Synths) on the blockchain. Synthetics in traditional finance are a selection of assets that simulate the value of another asset, such as how options or futures simulate stocks. Synthetics are vehicles used for trading based on the value of an asset without actually owning the asset.

Features:

  • Minting synthetic assets (Synths) through staking the Synthetix native cryptocurrency (SNX)
  • Trading the value of real-world assets without actually owning the asset
  • Utilizing the traditional finance methods of synthetics with the benefits of a decentralized blockchain ecosystem
  • Full ownership of the digital assets through the possession of your own private keys
  • Burning of Synths for the liquidation of your synthetic asset’s value
  • Virtually endless potential possibilities for the minting of Synths

What Synthetix is doing is bringing the traditional finance concept of synthetic assets onto the blockchain in a decentralized manner. Synthetix is currently functioning in a partially decentralized ecosystem and aims to develop the platform to be completely decentralized. This is an ambitious project as they are taking a popular niche in the traditional financial sector and decentralizing it onto a blockchain.

The Synthetix platform currently presents the ability to trade Synths correlating with cryptocurrency, commodities, Forex, and stocks. These Synths are minted through staking the Synthetix native currency (SNX). When ready to liquidate a Synth, the Synth is burned and the value is liquidated back into SNX tokens.

For example, if you wanted to mint a Synth for the price of gold, you would lock up an amount of SNX tokens equivalent to the price of gold. Your minted Synth would then be worth the price of gold and the SNX would be locked onto the platform as collateral until you are ready to liquidate. When you are ready to sell, you would burn the Synth in order to liquidate the value of the gold back into SNX tokens.

In theory, this process could be done with any asset with a price data feed. This presents tremendous opportunity as it opens up a plethora of ways real world assets can be traded for full, partial, correlated, or inversely correlated value on the blockchain. The potential possibilities are endless.


Conclusion

The endless potential possibilities of DeFi and Open Finance are unfathomable as a new industry is being built from the ground up. Will DeFi be to Traditional Finance what Netflix was to Blockbuster?

Maybe that is wishful thinking, but time and time again technology has evolved to revolutionize and overthrow countless industries. Great technology takes time to develop before revolutionizing an industry; but once momentum builds, exponential growth is inevitable. DeFi is still at its infancy, but progress is growing rapidly. There is hope for a Decentralized future.


Sources:

https://www.cbsnews.com/news/full-transcript-fed-chair-jerome-powell-60-minutes-interview-economic-recovery-from-coronavirus-pandemic/

HIDDEN SECRETS OF MONEY – MIKE MALONEY  S1 • E4

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