DeFi as a savings tool — Interest, Yield and Passive Income- What’s the hype?!

Crypto Curry Club
Aug 6, 2021 · 5 min read

DeFi: Interesting Interest for Savers

For anyone who’s over 30 years old, you’ll know that the yield produced by traditional savings accounts has diminished incrementally since the mid-1980s or so.

During 1985, for example, CD (certificate of deposit) rates averaged over 11% APY, while even prior to the great recession of 2009 you could access standard accounts in the mid-single digits.

Today, however, you’d be lucky to see more than 0.1% APY from a standard savings account, despite the fact that any interest rate hikes are regularly applied to loans and mortgage repayments.

Fortunately, the world of decentralised finance (DeFi) is challenging the status quo, through various projects backed by novel concepts such as staking, liquidity mining and yield farming.

But how can DeFi platforms deliver higher rates of passive income? and how is this influenced by blockchain’s proof-of-stake (PoS) protocol?

The Passive Income Potential of DeFi

In simple terms, DeFi refers to a decentralised and blockchain-based range of financial projects which have the potential to replicate (and ultimately supersede) existing fiscal structures such as exchanges, brokerages and even banks.

Instead of relying on central authorities or intermediaries, DeFi products utilise smart contracts on second and third-generation blockchains, which in turn utilise predetermined conditions, smart contracts and algorithms to facilitate even more complex agreements and transactions.

While De-Fi products were historically built on the Ethereum network (which enables users to create DApps), we’ve recently seen newer blockchains like Celo, xDai, Solana, Cardano and Polkadot provide significant competition and increased scalability in recent times. This has helped to improve efficiency and facilitate a wider range of DeFi services, including decentralised lending and staking services.

For example, it’s now possible as a holder of crypto assets to lend and stake your holdings within a wider user pool for a predetermined period of time. For the duration of this agreement, your holdings accrue interest and grow your savings, with rewards often paid instantly on a recurring, monthly basis.

In the case of staking, this involves setting aside a specific amount of tokens to become an active validating node within the associated network. Simply by holding these coins and pooling them as part of a wider resource, users can become an important ‘cog’ within the network’s security infrastructure and functionality, before earning rewards based on a fixed ROI and rate of return.

*We recommend additional research on yield farming and liquidity mining as these are important and increasingly popular concepts and similar to staking.

How Do These Rates of Return Compare With Traditional Savings Accounts?

The precise answer varies according to a number of different factors, of course, but there can be no doubt that DeFi products can offer considerably higher rates of passive income both in the short and longer term. This has much to do with the finite supply of most crypto assets and typically higher rates of interest, especially during times of increased demand and particularly when compared with fiat currencies such as the US dollar and the Great British pound.

In general terms, crypto-assets boast average rates of return that can be five times higher than even superior savings accounts offered by banks such as Goldman Sachs. This difference increases to approximately 20-times when compared to low-interest savings accounts, which currently dominate the market throughout the developed world.

Within certain DeFi wallets, you can even access expected annual returns of between 10% and 23% when staking some crypto assets, providing a huge amount of passive income that’s significantly higher than traditional and centralised savings vehicles.

the DeFi wallet for everyone

How Can You Access Instant and Frequent Rewards Through De-Fi?

Another advantage provided by De-Fi products and concepts such as staking is the flexibility with which rewards can be accumulated and redeemed. This compares favourably to savings accounts, which often lock in your funds for an extended period of time and may even prevent you from making any kind of withdrawal at all.

Of course, the restrictions imposed by staking vary depending on your choice of crypto asset and wallet, but generally speaking, rewards and returns are generated with the creation of every single block. This creates a scenario where you can claim rewards on a bi-weekly or monthly basis as required, or even more frequently if you desire. Similarly, you can be proactive when claiming larger rewards generated by significant staked amounts, as waiting too long to do this can see the associated network fees increase incrementally over time.

In terms of managing and accessing your funds, you also have the option to ‘unstake’ your holding at any given time. With some services, you might need to allow a period of between 24 and 48 hours to allow for this process to be completed (and leave a small amount of your holding by way of a transaction fee), but these are small prices to pay for being able to access your funds in real-time. For many DeFi protocols, staking and unstaking is almost instant.

Why is Proof-of-Stake Superior from an Earnings Perspective?

Staking and similar De-Fi concepts are increasingly underpinned by the aforementioned ‘PoS’ consensus, which offers immense advantages over proof-of-work (PoW) in terms of flexible design and energy efficiency.

In terms of the latter, PoS is thought to utilise approximately 99.95% less energy than the traditional PoW mining model, with this offering a huge benefit from the perspective of sustainable adoption in the future.

When staking coins through a PoS model, you’re also able to capitalise on the finite supply of different crypto assets, which maximises the impact of increased demand and translates into higher values and increased rates of return.

This isn’t the case with fiat currencies, which have a floating supply and therefore have less intrinsic value overall. Similarly, centralised authorities like central banks retain the autonomy to manipulate the base interest rates that underpin fiat currencies around the world, which may undermine each asset’s value during times of economic turmoil and cause interest to be paid at a significantly lower rate.

In contrast, crypto assets are immutable and completely decentralised in most instances (save for the potential emergence of largely centralised and third-party staking providers), while they remain immune to the impact of macroeconomic factors such as traditional interest rates and inflation.

With newer blockchains like Celo, xDai, Solana and Polkadot also offering dramatically increased scalability and block times as low as 800ms, crypto lenders can benefit from more scalable and efficient networks that reduce transaction costs and increase the value of assets in real-time!

Disclaimer: Cent finance advises all users and stakeholders to do their own research before investing in, or using any DeFi services. The views expressed in this post are not financial advice.

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