In today’s low-interest environment, keeping money in the bank eats up savings instead of earning interest – but it doesn’t have to be like that. How DeFi-savings accounts work and which roadblocks providers have to overcome.
The low-interest rate environment in recent years has made saving money unattractive. Since central banks cut interest rates to near zero in early 2020, even the most attractive savings accounts can not even compensate for inflation anymore. In the eurozone, many banks have also introduced negative interest rates – today, savers have to pay to keep their money in the bank.
The problem with conventional savings accounts is that they are directly linked to monetary policy. As low interest rates are likely to stay for many years to come, saving money will remain unattractive in the long run.
Defi: A better choice than Fiat?
Decentralized savings accounts could be an alternative. Interest rates are at least high enough to compensate for inflation without taking high risks, such as in the stock market.
Decentralized finance (“DeFi”) is one of the fastest-growing segments of the blockchain industry. It includes, for example, decentralized investment platforms, lending tokens, and also decentralised savings accounts. For many savers, however, DeFi is still a red flag, because the term sounds too much like techno-anarchy and regulatory uncertainty. And to some extent, that is also true.
When it comes to DeFi, there are two schools of thought: Some platforms aim to create a new financial system through maximum decentralization – a system that should function in parallel with the existing fiat money system and eventually even replace it. Other applications don’t aim at making the financial industry redundant but instead expand its current range of products and services and to make legacy systems more efficient by transferring them onto blockchain infrastructure.
For savers, the second type of platform is particularly interesting, because most savers want to know their money is being kept in a regulated and secure environment. Completely decentralized platforms, on the other hand, are too non-transparent for most people and seem more like a cyber-borg adventure than an alternative to the house bank.
Regulatory security as the main challenge
Interest on decentralized savings accounts is usually significantly higher compared to their centralized counterparts. Savers also do not have to take any volatility risks, such as with Bitcoin or Ethereum. Instead, they can put their savings in Stablecoins – cryptocurrencies linked to a fiat currency such as USD or EUR – and receive interest in return.
Interest on various savings accounts; current data here
The challenge for providers is to introduce a new way of saving in an economic system that is designed for Fiat money. For example, Fiat savers can usually rely on the deposit guarantee schemes of the respective country.
To create the same level of consumer protection, decentralized applications are increasingly trying to fit into the existing regulatory environment, both at the national and international levels. They also work with certified custodians, similar to banks, and offer private insurance to compensate for the lack of governmental deposit protection. While all this comes at the expense of decentralization, it creates a more reliable framework for savers.
Institutional investors also increasingly take advantage of DeFi-savings accounts. Hedge funds, for example, can park their portfolio assets in stablecoins in the short term while still earning interest.
One thing is for sure: The low interest rate policy is set in stone for the foreseeable future. Conventional saving accounts are therefore no longer an alternative, and savers must decide whether they want to invest their money in risky assets or explore new avenues: DeFi can offer an attractive alternative.