The global economy is plunging, and the savers are now only receiving a pittance from their high yield savings accounts. Product accounts such as Goldman Sach’s Marcus are receiving rates as low as 1.7%. There is, however, one sector where interest rates seem to be blooming…DeFi.
Despite it being only two years old, the decentralized finance sector is giving rates as high as 8% for consumer deposits. According to dapprada data, MakerDao, the top most DeFi protocol has at least 350 daily active wallets and is the top loan contract platform in the digital currency arena.
De-Fi or decentralized finance is a product of blockchain technology whose aim is to extend the benefits of decentralization to the banking space. The development hopes to create an open alternative to the traditional loans, savings, insurance, and trading sectors that accommodates anyone that can access the internet. De-Fi is also known as open finance or distributed finance, in sectors where centralization and decentralization are combined to create unique products.
De-Fi is the second most important blockchain innovation after Bitcoin and is eventually going to be as disruptive as the king of cryptocurrencies is. The Ethereum blockchain, the home of Dapps, is also synonymous with DeFi, running various open financial platforms in payment, lending, trading, derivatives, and prediction markets.
Open lending platforms have received the most user attention of all open finance protocols on Ethereum. MakerDao has had the most significant impact on this sector, followed by Compound. Decentralized public lending platforms have many advantages over traditional lending. They allow the use of digital assets as collateral. Their processes are secured by smart contracts and enable instantaneous transaction settlements. Since DeFi eliminates the use of third party players, open lending loans have affordable interest rates and attractive repayment periods.
World Bank data shows that close to 1.7 billion people globally are unbanked. Most of these people are excluded from the traditional banking system because they lack the prerequisites of banking, such as good credit scores or identification documents. De-Fi platforms such as MakerDAO allow anyone with an internet connection to access baking services such as lending. All they need is access to crypto-assets such as Ethereum that act as collateral.
De-Fi ensures that its users access more types of capital beyond assets that are exposed to government capital controls. Wealth can be stored in stable DAI that mirrors the value of the greenback, thanks to its over-collateralization feature with ETH.
Dapps such as Dharma or Compound enable lending of crypto assets to borrowers to facilitate the growth of capital via favorable interest rate earnings. They offer high interest for savings, which have turned to be a godsend in an age where traditional savings account interest rates are on a downward spiral. As an illustration, both Compound and Dharma now offer yield rates of 4% on USDC and DAI deposits, while according to the FDIC, traditional savings account only provide an interest of 0.09%.