At the end of July 2019, the US Federal Reserve decided to cut interest rates for the first time since 2008. Before that decision, it was easy to find high-yield savings accounts that produced 2.50% APY or greater. Since then, the fed has cut rates an additional two times. As a result, most digital banks offer 1.90% APY or lower on savings.
What’s even more troubling for savers is that the economy, in many important areas, isn’t showing signs of a slowdown. The stock market is still on the uptrend (as of November 7 at least). Additionally, in October there were massive injections of cash into financial markets to boost liquidity (a.k.a. quantitative easing), possibility creating higher inflation levels.
What’s Wrong With Fiat Savings?
Although APY offered by digital banks is supposed to be relative to inflation levels, it’s seemingly more difficult to justify the use of savings accounts that have recently reduced the amount of interest that savers can expect to earn.
Inconsistency is also a problem. Some savings accounts change interest rates on a day-to-day basis. While the fluctuations might be only a few pennies difference for smaller amounts, it could add up to quite a lot of money in the long-run.
Simply put, the biggest flaw of fiat savings accounts is that they are directly tied to central banking. The US, for example, is considered to be fortunate to have relatively high growth. In contrast, many banks in Europe have negative interest rates, meaning that saving money is actively discouraged.
Comparing DeFi Savings Accounts
Decentralized finance (DeFi) savings accounts could be one possible solution to help savers beat inflation without having to face the potential risks of participating in the stock market, for example.
Although crypto is still considered by many people to be “The Wild West”, more regulations are forming that have allowed the industry to develop rapidly in the past few years. Decentralized finance, also known as open finance, is part of this movement. More companies are gaining regulatory approval and offering alternatives to centralized banking.
Coins like Bitcoin, Ethereum, Ripple, and others do have a volatile market value, which can make investing risky. However, many DeFi platforms allow users to save Stablecoins (cryptocurrencies tied to the value of a stable currency, i.e. USD) and earn much higher interest than they could get with fiat through digital banks.
Challenges To Adoption of DeFi Savings Accounts
One of the biggest obstacles to crypto adoption is that DeFi platforms are providing a completely new solution to a world that is established around a fiat infrastructure. For example, in the US, funds of bank customers are protected by the FDIC. Banks have to adhere to regulations in the US and don’t have to worry as much about international recognition when it comes to ensuring funds.
Decentralized applications are inherently designed to support a borderless economy; however, no such global standard for policy exists. This means that projects have to work with multiple nations and governing bodies to have consumer protection that is backed by legislative compliance.
Comparing Nexo Vs. Dharma
While meeting regulatory requirements is a difficult task, it’s possible. For example, according to Nexo, “The Nexo Group has legal entities in various locations throughout the world, to services 200+ jurisdictions in the most efficient manner and complies with all applicable global and local regulations.” One of the tradeoffs is that it isn’t fully decentralized. For example, Nexo uses BitGo as a custodian. Luckily, Nexo has a $100 million policy that covers the costs digital assets where private keys are held 100% by BitGo in the event of 1. third-party hacks, copying, or theft of private keys 2. insider theft or dishonest acts by BitGo employees or executives, and 3. loss of keys.
Relying upon a custodian for storage and receiving insurance on funds is close to what banks already do, so the main advantage of Nexo is a higher APY.
As a comparison, another DeFi savings platform called Dharma works from Argentina to Zimbabwe. However, it doesn’t offer the same insurance protections. According to the website, “Digital currency is not legal tender, is not backed by the government, and digital currency accounts and value balances on Dharma are not subject to Federal Deposit Insurance Corporation or Securities Investor Protection Corporation protections. Dharma is not a bank and does not offer fiduciary services.” One advantage that Dharma has is that it can be considered a truly decentralized application. Savers store funds on a Dharma Smart Wallet — a non-custodial wallet that allows them to always have control of their own funds.
Although having 100% ownership of funds is more in line with the principles of Bitcoin and other cryptocurrencies, giving up the insurance on savings that banks and other traditional institutions offer isn’t easy to do.
Will DeFi Become The Go-To Choice For Savers?
As shown in the comparison between Nexo and Dharma, major contrasts exist between existing DeFi applications focused on savings. Although the “perfect solution” doesn’t exist for savers in the crypto world, being able to earn higher interest regardless of which nation you are from is a welcome innovation in the financial world. Although DeFi is an area of finance that has just emerged within the past couple of years, it’s clear that many companies are building the infrastructure for a new era of finance and savings.