DeFi and crypto will transform our financial system

Wages are inflated. The banks are getting bigger. And the gap between rich and poor is widening from year to year. You can find out what these things have to do with DeFi, banking and the Internet of Things in the following article.

Have you been working on your goal of finally buying a house for a few years now? From year to year can you afford less because the goods are more expensive? Is inflation, banks and our current financial system a thorn in your side? Then you should start dealing with cryptocurrencies and decentralized finance (DeFi)!

This situation is emblematic of all the hard workers who can afford less and less “luxury” from their wages. Not surprisingly, think those who know about the financial system. Statistically, the “poorest” part of the population has less and less:

Source: Statista.com

The chart shows the distribution of wealth in the United States: The richest 10 percent of all people (blue and black lines) have more than 70 percent of all wealth. It gets even weirder when we look at global numbers:

Credit Suisse was able to find that 1.1 percent of the population worldwide owns 45.8 percent of the assets. But how can DeFi or the Internet of Things replace this system?

Traditional finance: Banks and governments invented the game

In our financial system run by intermediaries (banks) everything is based on turning debt into more debt. This can be seen, among other things, in the annual inflation rates, which means an overhang of demand in relation to supply. The money printed during the Corona pandemic is now seeping into the economy, leading to 7.5% inflation in the euro area (April 2022). So year after year, your money saved for the house is currently falling by 7.5%.

In our reserve system, a usual Commercial bank creates 100,000 euros out of nothing from a deposit of 1000 euros with a reserve interest of 1 percent. The demand for credit is only driven by the base interest rate, which can make the borrowed money more expensive through interest on them. With the current key interest rate of 0%, the demand for credit is very high.

However, as individuals, we need to provide security to get a loan in the first place: Suppose your house would cost 500,000 euros and you have 100,000 euros in your bank balance. So you could take out a loan of 400,000 euros – but mortgage your house to the bank as security. Usually, people who can provide security, however, are those who are already wealthy. Therefore, they can continue to increase their wealth. Kevin Owocki, CEO of Gitcoin, shares this view:

“Traditional finance keeps making the rich richer!”

If you already own a house, you can provide it as collateral, take out a loan and continue investing with it. In addition, the whole system is based on the fact that this active “house” increases in value, as annual inflation makes goods more expensive. This effect is, of course, even more pronounced when it comes to real estate that is only available for a limited time.

In addition, in recent years, states have become the largest recipients of the banking monopoly, as they directly benefit from the creation of money. Since the financial crisis in 2008, commercial banks have increasingly bought government bonds from over-indebted euro area countries with money created out of thin air and thus finance the government debt. The states are thus the first recipients of the newly printed money.

Not all people have access to the banking system

According to Owocki, blockchain offers a way to bypass intermediaries completely, i.e. banks:

“The blockchain creates trust through its protocol. We do not need banks anymore. The blockchain is for the average person.”

If we consider where the blockchain is already being used, this goal has already been partially achieved. About 2 billion people in this world do not have access to banking. Transactions from overseas family members often arrive with a few days delay and a commission discount of 20%. This can be seen especially in the high blockchain adoption rates in Nigeria.

Source: Chain Analysis – 2021 Global Crypto Adoption Index

No wonder, you might be thinking, given that 55 percent of all Nigerians do not have a bank account. However, almost everyone has a mobile phone, which makes customization even easier. Elsewhere, citizens have almost no choice but to use cryptocurrencies, as inflation reduces the value of money by as much as 50 percent in a year. The best known examples of this are Argentina and Venezuela, where hyperinflation has been widespread for years.

What does all this have to do with Europe?

DeFi and blockchain – A way out

Do you remember the stories of grandfathers and grandmothers how they could finally buy a house after 20 years of work? What normal worker can say that today without having to take out a lifetime loan?

DeFi gives us the opportunity to bet on blockchain for the first time. Although today’s DeFi is not yet in its final form, there is much to suggest that the potential is enormous. One option today is to borrow or invest your money on the many platforms and thus at least avoid the annual inflation. The second, much more interesting option is likely to develop only in the future.

Example:

Instead of spending your savings on an entire house, you decide to invest in real estate. You buy a share of a house as an NFT in a decentralized market – with this investment you officially own a tenth of the house. You do not know the other 9 investors. As is already the custom with real estate investors, you rent the whole house and get a tenth of the rental profit. At the same time, you also benefit from the increase in value. This was not possible before blockchain technology. If you do not feel like it anymore, you just sell your tithe again in a decentralized market.

You can also deposit your share of the house as security in a decentralized market and take out a loan in, for example, Bitcoin. If you become insolvent, the trading venue can automatically turn your security (the house) into money.

From the Internet of Things to the Web 3.0

“Everything in financial institutions is designed to increase our trust. People walk around in suits, the floor is made of expensive marble, and no one understands their technical terms. Blockchain is trust. We need the internet of values.”

Owicki, for example, sees the Internet of Value (Web 3.0) as the Internet of Things as a way of giving back to the masses. “Web 3.0 creates trust through protocol and allows us to own the assets we use, ”he says. Overall, it means more self-determination and opportunities for all users. Wouldn’t it be quite profitable if you could get a loan for your NFT painting?

He also explains to us how blockchain would have helped us in a particular situation. Under Covid, the U.S. government made several stimulus payments to U.S. citizens. Owicki says millions of dollars have been wasted in the bureaucracy of getting this money to the public. Money that you could have used for your house, for example.

With blockchain-based digital money, the responsible authority could have simply transferred money to all citizens at the touch of a button. It will be easier to distribute wealth that way. “

The extent to which decentralization and blockchain will change our world will ultimately depend on us humans. Do we embrace this technology, or do we miss the chance?

Disclaimer

All information contained on our website has been examined to the best of our knowledge and belief. The journalistic contributions are for general information purposes only. Any action taken by the reader based on the information on our website is entirely at your own risk.

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