Traditional finance is getting richer. DeFi can provide a fairer world
Traditional finance rejoices as cryptocurrencies plummet. But there is so much more to cryptocurrencies and decentralized finance than just lows and highs. Here’s why blockchain has the potential to change the world.
Salaries are inflated. The banks are getting bigger. And the gap between rich and poor is widening year after year. What do these things have to do with DeFi, banks and the Internet of Things?
Traditional finance: the current situation
For several years, you may have been working on your goal of finally buying a home. From year to year, you can afford less as goods become more expensive. Inflation, banks and our current financial system can be a thorn in your side. But then you learn about cryptocurrencies and Decentralized Finance (DeFi)!
This situation is symbolic of all workers who work hard and who can afford less and less “luxury” with their salary.
The chart shows the distribution of wealth in the United States, where the richest 10% of all people (blue and black lines) own more than 70% of total wealth. This becomes even more curious when we use global figures:
According to Credit Suisse, 1.1% of the world’s population owns 45.8% of assets. But how can DeFi or the Internet of Things replace this system?
Traditional finance: banks and governments invented the game
In our financial system managed by intermediaries (banks), everything is based on the transformation of debt into more debt. This can be seen, among other things, in the annual inflation rates, which signify an excess of demand over supply.
Let’s take Europe as an example. Money printed during the corona pandemic is now seeping into the economy and is now driving inflation of 7.5% in the eurozone (April 2022). Year after year, the money Europeans save for their homes is now worth 7.5% less.
In the European reserve holding system, a common commercial bank can create €100,000 out of thin air from a deposit of €1,000 at a reserve rate of 1%. The demand for credit is controlled solely by the key interest rate, which can make borrowed money more expensive by the interest it bears. At a current policy rate of 0%, demand for loans is very high.
However, as individuals, we need to post collateral to get a loan in the first place. Suppose your house costs $500,000 and you have $100,000 in your bank balance. So you could borrow €400,000 – but as collateral you could pledge your house to the bank. Usually, however, the people who can post collateral are those who are already wealthy. Therefore, they can continue to increase their wealth. This view is also shared by Kevin Owocki, CEO of Gitcoin:
“Traditional finance is getting richer and richer!
If you already own a home, you can post it as collateral, take out a loan, and continue investing with it. Moreover, the whole system relies on the fact that this asset – the house – increases in value, since the goods become more expensive due to annual inflation. In the case of real estate, this effect is of course even more pronounced.
States have become the biggest beneficiaries of the banking monopoly in recent years. They benefit directly from monetary creation. Since the 2008 financial crisis, commercial banks have increasingly purchased government bonds from over-indebted eurozone countries. It is with money created out of nothing and therefore it finances the national debt. The States become the first beneficiaries of the freshly printed money.
Not everyone has access to the banking system
According to Owocki, blockchain offers a way to completely bypass intermediaries, i.e. banks:
“Blockchain creates trust through its protocol. We no longer need the banks. Blockchain is for the average person.
If we look at where blockchain is already used everywhere, this goal has already been partially achieved. About 2 billion people in the world do not have access to banking services. Transactions from foreign family members often arrive a few days late. And, they lose about 20% in commission fees.
The workaround is to instead use cryptocurrencies to send funds directly from one wallet to another.
In the real world, using blockchain INSTEAD of traditional finance has direct benefits that profoundly affect people’s lives. This is particularly evident in the high adoption rates of blockchain in Nigeria.
It’s no wonder that using blockchain technology works well for them. 55% of Nigerians do not have a bank account. However, almost all of them have a mobile phone, which makes the adaptation even easier. In other countries, citizens have almost no choice but to use crypto assets, as inflation reduces the value of money by 50% within a year. The best-known examples are Argentina and Venezuela, where hyperinflation has prevailed for years.
DeFi and the Blockchain – An exit
Do you remember the stories of grandfather and grandmother, how they were finally able to buy a house after 20 years of work? What normal worker can claim that today without having to take out a life loan?
For the first time, DeFi gives us the opportunity to turn blockchain into banking. While today’s DeFi is not yet in its final form, there are many indications that the potential is huge. One possibility today is to lend or invest your money on the many platforms and at least escape the annual inflation rate. The second, much more interesting option will probably only develop in the future.
Example: Instead of spending your savings on an entire house, you decide to invest in real estate. You buy a share of a house as an NFT in a decentralized market – with this investment you officially own a tenth of the house. You don’t know the other 9 investors. As is already customary with real estate investors, you rent the entire house and each receive a tenth of the rental profit. At the same time, you also benefit from the increase in value. This was not possible before blockchain technology. If you no longer feel like it, you simply resell your tenth on a decentralized market.
You can also deposit your share of the house in a decentralized market as collateral and take out a Bitcoin loan. If you become insolvent, the trading platform can automatically monetize your security (the house).
From the Internet of Things to Web 3.0
“Everything in financial institutions is done to increase our confidence. People walk around in costumes; the floor is made of expensive marble and nobody understands their technical terms. Blockchain is trust. We need the internet of value.
Owicki sees the Internet of Value (Web 3.0), rather than the Internet of Things, as a way to give something back to the masses. “Web 3.0 creates trust through protocol and allows us to own the assets we use,” he says. Overall, this means more self-determination and possibilities for all users. Wouldn’t it be very profitable to get a loan in exchange for your NFT painting?
Additionally, he discusses how blockchain can help us in other ways. During Covid, several stimulus payments flowed through the US government to US citizens. Owicki estimates that millions of dollars have been burned for the bureaucratic effort to bring that money to the citizenry. Money that you could have used for your house, for example.
“With a blockchain-based digital currency, the responsible authority could have simply transferred money to all citizens at the touch of a button. The distribution of wealth becomes easier.
The extent to which decentralization and blockchain will change our world will ultimately depend on us humans. Are we adopting this technology? Or miss the boat?
Are you new to decentralized finance? Here are some tips to help you get started.
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