Introduction to Decentralization
The main takeaway from the previous Crypto Crier was that our current monetary system is poised for unprecedented hyperinflation.
This is causing an influx of investors looking for assets to protect them for potential drastic increases in supply. While we explained how blockchain systems innovate traditional finance; the vehicles of change are cryptocurrencies. Cryptocurrencies use the blockchain consensus system to verify all transactions that happen on the network. This means that anyone who wants to participate relies on a global collection of computers to record and store all monetary transactions. This collection of computers makes a decentralized network.
Before we are able to explore what decentralized networks are, we have to understand how centralization works. Centralization in a network means that a few large providers (or hubs) lay the foundation for the network communication. These hubs are not linked to one another and are inefficient with few redundancies. If the provider has an hub outage, the entire region will not function properly until it is fully restored resulting in interruption of services.
Alternatively, a decentralized network is a lattice of multiple datacenters which we call nodes. If one node has an outage it can pull information from other unaffected nodes. With blockchain there are millions of node providers globally with no single points of failure. Therefore, the system can be fully functioning even with many nodes down due to multiple redundancies.
Now incorporate these structures into our current financial world; we have centralized providers controlling the movement of all money. These financial institutions not only hold all of our money, but we pay them for this service. Americans pay $329 annually in bank fees on average. When you consider that half of American households have less than $500 in savings, the impact of banking fees become more relevant.
Not only do financial institutions charge you for the service, but they make exorbitant interest by changing credit card balances an average of 23% APR. Contrast that to the current bank savings average rate of .05% APY. Collecting billions in fees while making 22.95% profit off the money in your bank account shows how well centralization works for making them money.
Now lets move to decentralized finance (DeFi), whose goal is to remove these middle men who are profiting off of your life savings. The average variable interest rate for USDC on the popular DeFi app Compound is 11.40% APY (as of February 8, 2021). That is 228x the current banking savings rate. As of January 4, 2021, Stable coins are now considered legal notes of settlement per the Office of the comptroller of the currency (OCC), the governing body for US currency. Meaning that USD and stable coins are equivalent in the eyes of US law. Why let a few large providers make all of the profit when you can have stable assets making 228x more interest with no added risk.
Decentralized finance applications such as Compound will create a more equitable financial system. The APY difference between lending and borrowing is a competitive 2.71% with DeFi compared to current financial systems 22.95% profit. Which one sounds better to you?
-Dr. Austin Fortner
