In 1974, Bankhaus Herstatt, a seemingly innocent-sized financial institution, caught the attention of authorities worldwide. The German bank had taken on billions in U.S. dollar liabilities just to start participating in a new, secretive offshore market called the Eurodollar system. This was not your average marketplace. Transactions were exotic, executed over-the-counter, with bespoke terms and conditions. There were no pesky regulators, middlemen, or market makers intervening and setting prices. Instead, if both parties were satisfied with the risks they were taking, any kind of financial alchemy became possible.
As restrictions in the banking system collided with a rapidly expanding world, the Eurodollar system grew to become a black market, a shadow layer where the financial aristocracy — the megabanks, the pensions funds, and the sovereign wealth funds — could create money out of thin air using exotic tools to finance their ever-growing global operations — and, of course, make tons of money.
1970s-financial institutions made most of their profits by engaging in “interest rate arbitrage”, a posh term for borrowing short-term paper, usually in the form of U.S. Treasuries, and lending it out long-term at a higher rate, profiting from the spread — now known as net interest margin. While the difference between the interest rate of short and long-term money remained lackluster within the official banking system, participants in the Eurodollar system were offering risk-taking institutions such as Herstatt higher spreads and potentially massive profits.
Since Germany had become the center of globalization in the 1970s, Herstatt had every reason to take on massive amounts of risk and leverage up their balance sheet to meet demand. The bank was taking in Eurodollar deposits and arbitraging the spread between offshore and New York dollar markets, and all this was happening behind the authority’s back. What could possibly go wrong? Well, a few months later, Herstatt’s complex trades backfired, the bank collapsed, and its counterparties lost everything. Have you ever wondered where Basel III rules came from and why the authorities implemented them? Herstatt’s tomfoolery was the culprit.
But despite the authorities implementing these new laws, the Eurodollar system survived, expanded, and thrived. And, even though it literally broke in half on August 19th, 2007, this hasn’t stopped the financial aristocracy from using expert financial alchemy to pull off the biggest wealth transfer in human history, all while mediocre global growth and financial repression have fueled an ostensibly continual economic depression worldwide.
Though the elites in charge have tried everything to suppress this stark reality, thanks to a few rebel economists, most of us now know we’re being gaslighted to the extreme. The financial elites continue to disregard the major side effects of a financially repressive regime: rising prices and falling standards of living. Alternative inflation measures expose the hardship, with the Chapwood Index showing inflation running at between 8.1% and 12.9% and the ShadowStats CPI showing roughly 9%. Looking at our stock portfolios increasing 10% per year makes us feel a little better until we remember that inflation keeps crushing roughly all our gains.
Yet, the Federal Reserve clings to its official 2% inflation target, which is laughable at this point after we’ve seen the price of corn and soybeans, essentials in some people’s diets, already experience hyperinflation (a 50% intra-month price rise). It’s not just food but shelter and other essentials that soar in price each year, but central bankers won’t admit it, and if something becomes too inflationary they either alter its weighting or remove it from the CPI altogether. Job done.
Slowly but surely, as more of us wake up to this stark economic truth, we have become desperate to locate an escape route. The wealth inequality epidemic continues to get worse, and we’ve had enough. Most of us want to live a frugal life, to save slowly for retirement, not to become rampant speculators, betting on real estate, stocks, and collectibles endlessly appreciating. Hope, however, is not lost. Right now, we’re witnessing the rise of not only several liberation movements including private cities — the hip, new escapism, but the rise of a people’s Eurodollar system, only this time it’s fair, impartial, stable, and open to all: Decentralized finance, or DeFi for short.
In mainstream circles, Bitcoin maximalists continue to celebrate and pump the price of Bitcoin, and although this has changed the lives of many people who either failed to save money before or had the understandable skepticism of speculating in an overvalued stock and real estate market, the buzz around Bitcoin’s rampant price rise has distracted the masses from the latest innovations in the crypto space. A lot of crypto advocates have created unwanted friction within the community. They are no longer just fighting against the gold bugs but between themselves over what “token” will reign supreme. This ridiculous feud over token supremacy is preventing many people from discovering other cool technologies and platforms that developers have built on the blockchain. It’s stealing the limelight away from ideas that grant people more financial freedom.
Behind this smokescreen, DeFi continues to make its way slowly into the mainstream areas of finance and has enabled many people to take back control of their finances and money, to break free from the elite’s financially repressive system, and to start doing what the old system was supposed to do — only on steroids. Whether or not the elites will start to fight back against DeFi is irrelevant for now. It’s giving people hope, perhaps false hope, but that’s better than none in these trying times.
In the intricate world of crypto, there’s something for everyone. Developers fighting for economic justice have created a way for the average person to start earning positive rates of interest rates on their savings, providing a system for anyone, not just the banking elite, to earn money by borrowing and lending. Yield farms have become the latest craze. They allow users to deposit crypto and earn daily interest, ranging from 5% on centralized platforms such as Nexo to a crazy 1200% on decentralized platforms like PancakeSwap (this is one for the risk-takers). And for the seasoned crypto investor, there's the DYDX exchange, which allows you to park your “stablecoins” in a counterparty-less system and earn up to 30% interest per year.
These systems run on DEXs — decentralized exchanges — that eliminate annoying middlemen who may discriminate against you for non-financial reasons. Why will both sides of the political spectrum jump onto this new standard? It does not care about your color, race, ethnicity, sexual identity, or politics. It’s run on the sound principles and laws of numbers, physics, and mathematics, not by clueless, egotistical suits and corrupt politicians.
Instead, these systems only care about whether you can pay back your loan, and since borrowers on these platforms must “overcollateralize” (they can only borrow up to 50% of their deposited funds), the risk-reward is vastly superior compared to the centralized, financially repressive system we must normally endure. While Wall Streeters are levered 20 to 1 betting on Apple stock going to infinity, so-called unsophisticated investors continue to make double-digit returns on their savings by depositing their funds in decentralized systems — and they are doing so with smaller systemic risk.
Would you stick 5% of your net worth in a low-risk, counterparty-less system for a chance to earn a kickass retirement? This is a gamble many people will be prepared to take, especially now, as legacy systems continue to inflate away their savings. Death by inflation or life by crypto? Most will favor the latter as they come to realize the potential upside of embracing new-age finance.
This, of course, is a complete retreat from the official banking system, which several critics of crypto, like Mike Green and Nouriel Roubini, have pointed out. But the rise of DeFi shows that people know the status quo is never going to change. If the elites in charge never alter their stance — which really is the status quo, the people will have to take matters into their own hands, not through violence, but through creating decentralized systems that compete with and offer alternatives to the elite’s centralized financial monopoly.
If they get to keep their Eurodollar loophole, DeFi is our end of the deal. If the Eurodollar system is the financial elite’s route to prosperity then DeFi is the people’s Eurodollar. Yes, this movement has all the elements of a 1920s European black market, but this proves just how repressive the legacy system has become, and shows the necessity for an imminent financial revolution.
For now, DeFi is the closest thing we have to this, and it’s about to change, disrupt, and revolutionize the monetary world for the better and greater good. Don’t suffer in an already failing monetary system. Become part of the new paradigm. Join the DeFi revolution now before the legacy system leaves you out in the cold.
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This article is for educational purposes only, not financial advice.