In nature, dams are built in order to generate power, similarly banks were able to dam dollars and they aggregated power. This might have been a necessary measure in the past but over time the maintenance cost of the dam increases and its integrity weakens which could lead to utter collapse. Something the taxpayers usually foot the bill for.
The damming of dollars has resulted in ultra powerful banks that have used public funds for private gains, no longer servicing the clients that made them the behemoths they are today. Current interest rates on savings accounts are sub 1%, now take a look at Apr of loans or worse credit cards. Of course risk is priced in but a 25% spread that’s incredible. Furthermore, at least dammed water stays in the dam, I doubt most could go to the bank and withdraw their funds in full. Most USDs today are numbers on a screen rather than physical cold hard cash. People shouldn’t be concerned by the idea of digital money, given how much currency has become modernized by technology.
In Crypto we have an innovation called stablecoins, “stables” simply represent coins that aim to keep the dollar peg. There are many such examples and oddly enough a few that never keep peg. But, by and large there is fairly easy on-chain access to these stablecoins. Within the greater cryptoverse it is not uncommon to find consistent yield in excess of 5% sometimes over 10%. By wide margins, yields on stables are multiples better than traditional financial offerings from banks. In fact, some nations’ banks have negative rates on accounts. Consider inflation and many retail depositors are actually losing purchasing power by holding large sums in a near 0% account. How fair does it sound, that banks will give you next to no interest on your money then turn around and lend it at a nice spread and they keep all the vig, that’s why the house always wins.
Where does yield come from, in Traditional Finance, the Fed sets the short term rate. It’s not a free market where the rate fluctuates and finds equilibrium. Which is rather inefficient and this has domino effects throughout the entire economy. Whereas in Crypto it’s actually a truer representation of free markets where natural demand of stables correlates to the ebb and flow of demand.
The yield on stables in Crypto are a bit complicated to explain but the rate will fluctuate based on demand. One example is how leverage effects rate, when the cost of leverage goes up, people will arbitrage it. This results in propping up the demand for dollars. Derivatives are a crucial component of Crypto given spot markets are inefficient and costly. This is a powerful driver for the demand of dollars/stables. The other example is with farming or liquidity mining, this is a native phenomena within Crypto where users can provide their crypto assets including stables to generate yield. The yield here comes from the native token emission which is less reliable and changes in value as the underlying token’s price changes. (H/T Su Zhu.)
It is rational to expect institutional players and large banks to take advantage of this opportunity. As there is an abundance of cash dammed and damned to low rates. Hopefully the individual retail depositor sees this too. Most who are holding dollars probably don’t want to buy crypto assets that they consider speculative. But, what about making your dollar work for you. In Crypto there is great demand for borrowing stables.
Retail banks have trillions in deposits from their clients. The total amount of fiat dollars in retail savings accounts dwarf the total crypto market cap many times over. I expect to see a major flow of fiat funneled into the Cryptoverse. The market is ripe for an entity to take the fiat, promise a short term return much like a 3 month treasury. They incur the protocol risk and are less constrained by regulations and the large spread on rates is more than enough to enable such a system.
While traditional institutions are encumbered by sticky and uncertain regulation, innovation in Crypto happens at breakneck speeds. Some might even say DeFi has its own native proto-banks, major protocols Compound and AAVE already operate as major borrowing and lending platforms. Take a look at https://app.aave.com/markets or https://app.compound.finance/ beware it might blow your mind. There are some risks, such as protocol/smart contract risk, but each passing day is more proof that these protocols are successful and sustainable. All loans are over collateralized and the protocols are churning out potent revenues. These proto-banks are a technological improvement, much like nuclear or battery power. Users will own the NIM and govern over the protocols making them open and inclusive. (H/T Arthur Hayes)
We all know too well how catastrophic dam failure can be, we should not want to live in a world where dams are too big to fail.
Acknowledgements- Arthur Hayes, Hasu and Su Zhu
