Table of Contents
- Banks lowering interest rates
- DeFi and riding on the crypto surge
- Crypto staking: an alternative to savings accounts
- Growing Adoption
Digital currencies have long been lauded as a revolutionary aspect of finance in the future. However, it wasn't until 2020, when there was a scramble to hedge against rising inflation and disruption of the finance world by a worldwide lockdown, that cryptocurrencies caught on.
Over the last 12 months, Bitcoin, Ethereum, Cardano, and XRP have returned 292%, 655%, 1,714%, and 315%, respectively. This aggressive bull run has continued to assert, for many, the belief that the future of money is here.
These outlandish returns aren't the only thing that the explosion of the adoption of cryptocurrencies has caused. Many have turned to crypto yields to get better returns on their savings. Traditional banks have lowered their interest rates to rates that do not keep up with inflation in the past few years.
Banks lowering interest rates
Since the virus began to spread in January 2020, the Bank for International Settlements (BIS), which monitors central bank policy rates in 39 economies, stated that 29 of them had cut their rates.
The UK’s average savings account interest rate declined from 1.39 percent in 2019 to just 0.64 percent in 2020. Given that the inflation rate in the United Kingdom in 2020 was around 1%, it's evident that while crypto was rising, traditional savings accounts were falling.
According to Bankrate, here are some leading bank interest rates:
- Goldman Sachs: 0.50%
- Citibank: 0.50%
- Barclays: 0.40%
- BBVA: 0.65%
These falling interest rates have heavily impacted passive income through savings. With this traditional method of earning on savings quickly dwindling in yields, the crypto space has offered a viable option for many looking to earn more on their money.
DeFi and riding on the crypto surge
For many crypto enthusiasts, the strategy has been simple: buy and hold. Generally, this strategy has worked fine. With Bitcoin, ETH, and a few other cryptocurrencies surging past expectations, many have smiled on their cash out.
However, DeFi or Decentralized Finance have been the icing on the cake. The philosophy behind DeFi has been to solve the long-standing problems in legacy and traditional systems and financial activities. DeFi consists of an array of Blockchain-based projects and applications intended to offer cryptocurrency holders returns that banks and other traditional financial institutions can't.
As crypto continues to grow in adoption, many have continued to adopt DeFi. Deposits in DeFi applications increased from around $1 billion in June to slightly under $40 billion by the end of January 2021. According to DeFi Llama, as of writing, a total of $161.3 billion is currently locked in DeFi projects.
The allure of a lower-risk approach to crypto is undeniable, and it has the potential to broaden the pool of participants. For the first time, it's feasible to be compensated for owning cryptos (even if there's no price appreciation), which gives digital currencies genuine, tangible utility and shifts the narrative of an asset class whose primary purpose was previously to be sold at a higher price. As a result, many DeFi protocols today have the potential to grow large and bold enough to compete with their centralized counterparts while remaining loyal to their decentralized roots.
Crypto staking: an alternative to savings accounts
Many have agreed that crypto will replace banks. There have been iterators of this fact. For example, approximately 11% of young US consumers invested their stimulus checks into crypto-assets. It appears the next few decades will rarely visit banks to queue to withdraw their money or catch checks.
Staking is the process of actively participating in blockchain transaction validation in a Proof of Stake consensus. Unlike traditional Proof of Work (such as Bitcoin), with a PoS consensus mechanism, holders of a given cryptocurrency's minimum necessary balance can validate transactions and earn rewards for doing so.
The innovation inherent in cryptocurrencies has led to the development of yield farming. Rather than simply waiting for Bitcoin, Ethereum, or other digital currencies to appreciate, cryptocurrency investors are now actively pursuing profits by lending out their crypto holdings or engaging in different yield-generating strategies. Such "yield farming" can result in double-digit interest rates, significantly greater than those available with dollars.
Yield farming offers investors more incentive to stake their cryptocurrencies. Investors would be rewarded in at least two ways if they deposited stablecoins into a digital account. First, they get the APY on their deposits. Second, and more importantly, certain protocols provide an additional subsidy in the form of a new token in addition to the yield that the borrower is charged and the lender is paid.
For example, an investor may link her digital wallet to YeFi.one, a crypto staking platform, to receive interest on Tether, a stablecoin that aims to maintain the same value as the US dollar.
YeFi.one is a dApp that is accessible from any BSC-compatible wallet. Users can generate passive income by staking their crypto holdings on YeFi.one. Users can choose to stake assets for one day or 15 days, as well as whether or not their stake will auto-renew. YeFi.one is based on a smart contract that calculates interest rates and distributes rewards every 10 minutes at block minting. The collected interest can be withdrawn at any time by the user.
Near-zero interest rates in all major economies have made crypto an appealing choice. Even financial institutions have begun to passive income over capital appreciation. Their exposure to cryptocurrency has increased over the last 12 months. Following the OCC's decision, Goldman Sachs, JPMorgan Chase, and Citigroup are considering entering the crypto custody industry.
Staking, or more explicitly owning cryptocurrency, is a high risk, high reward. While staking allows you to gain passive income on your initial investment, a platform like YeFi.one also gives you control over your staking.
It's clear as day that deposits in savings accounts will significantly reduce in the next few decades. Many will turn to DeFi which allows users to earn a daily passive interest by simply staking their crypto assets.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.