As the Bank of England maintains interest rates at 0.1% and continues purchasing government bonds to inject cash into the country, savers are facing the sting. While inflation rates are targeted to be 2%, (although they were only 0.5% in May), for those who have savings accounts, this means your money will be worth less in 5 years than it is today. So, what other options are there for customers? One option is Decentralised Finance (DeFi).
The traditional way saving accounts work is that a bank charges people for borrowing their money. This money comes from customers who deposit money with the bank in a savings account. Customers need to be incentivised to store their money with a bank, so banks offer customers interest on their money as a reward for storing their money in a bank.
DeFi is now a credible alternative to traditional banking products. By using blockchain technology, various businesses have been able to create a digital version of banking services that work in the exact same way as a traditional bank does. The main benefits are automation of paperwork and back office admin as well added security and reduced fraud opportunities. Blockchain allows information to be stored across a network, making it almost impossible for someone to edit data and steal all your money.
These digital banking services have been created by companies developing protocols (basically a computer programme). One protocol, Compound, has created the ability for people to lend their crypto to investors and earn interest for doing so. There are people who want to borrow crypto, mostly for financial trading, so Compound has made a marketplace that mimics the business model traditional banks currently use.
With a traditional bank, I could invest £250 every month for 12 months into a Yorkshire Building Society Saver Plus account at 0.95% AER. At the end of 12 months I would earn £15.42 in interest. In comparison with Compound, I could invest my money into DAI (a cryptocurrency that is backed by the US dollar) and earn £73.27 interest in 12 months, 4 times greater than what a traditional bank can offer me.
A major concern around cryptocurrency is the volatility of certain currencies. However, many new currencies are becoming investor friendly and much safer by tagging themselves against the value of the US Dollar, like DAI. This means the price is maintained against the value of the dollar.
One major question that always arises when we discuss blockchain technology is, is this safe? As we have seen with many businesses across all sectors, nobody is safe from hackers and data breaches and there is a possibility of someone hacking in and stealing your money. However, the same applies with traditional banks also. In the past banks have also been at risk of bank runs, where everyone rushes to the bank to take all their money, which is what happened to some banks in 2008. So, wherever you put your money there are always risk (even if it’s stuffed under your mattress, your house could always burn down).
In a time where banks are struggling to offer incentives to savers, DeFi presents itself as a frictionless and safe option to earn high interest on your savings. As start-up businesses continue to create more user friendly and easier ways for customers to enter the market, DeFi has the possibility of creating a credible alternative for people looking to get the most out of their savings.
Cent is here to get you started on your crypto investment journey and stay with you all the way. The app offers comprehensive information on the market changes, tracking your money and ensuring you can earn easily.
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Interest rates quoted are accurate as of 20th July 2020.