Why is decentralized finance so important to us?
September 8, 2020
With the current disruption in the job market and in the careers of undergraduates who are soon to enter the workforce, financial independence is going to be more important than ever before. That uncertainty regarding having gainful employment to earn an income is not the only personal finance issue young people are going to face. The concept of being incentivized to save money and being rewarded for doing so is also evolving. It has become more challenging to earn interest on the money that a person saves with the near-zero rates most banking institutions provide. Interest rates on typical savings accounts are unlikely to change in the foreseeable future due to the U.S. being unable to issue debt at higher rates. This is especially a cause for concern among millennials and Generation Z considering the questionable long-term solvency of social security and the likelihood of benefits being cut within the next two decades.
Luckily, there are now platforms in a booming new ecosystem, Decentralized Finance, or DeFi for short. Well — what exactly is decentralized finance? DeFi is a system aiming to recreate the globe’s financial infrastructure, utilizing cryptography to create applications that are decentralized (able to function without a single controlling entity or institution). These applications are unable to be impeded by larger institutions. Without barriers to entry, these applications can be built by anyone in the world with a computer and internet access. This technology’s relevance is not going anywhere as the total value locked in DeFi in August jumped over 80% from $4.2 billion to $7.88 billion. While there are many other uses and applications for DeFi with tremendous utility, there are many ways on how college-aged students can conveniently reap its benefits at the present moment.
In traditional financial institutions, banks can freeze one’s account at any time, while assets stored in an account on a blockchain (decentralized, cryptographic encrypted ledger) are secure, reliable, and preclude the possibility of a person’s assets being taken away. Some of these platforms, such as the Celsius Network or Compound, offer up to 10% APY with interest payments deposited weekly on a multitude of commonly used digital assets including USDC (United States Dollar Coin), a stablecoin issued by Coinbase. USDC has a 1:1 exchange rate and is backed by fiat money in an accredited bank account. So, essentially this is a cryptocurrency without the risk of loss due to the volatility posed by more known ones, such as Bitcoin and Ethereum. While interest rates for each currency change based on demand, they will remain multiples above the one in your Wells Fargo or Chase savings account and do not charge fees. In addition, this can easily yield returns above what would be gained by investing in the stock market, but without the risk, uncertainty and stress involved. This presents an amazing opportunity for those who want to start having a passive revenue stream and/or yield the incredible benefits of compound interest on their savings long-term.
Noah is a senior in business.