Category: Crypto

Crypto Banking and Decentralized Finance ExplainedCrypto Banking and Decentralized Finance Explained

The emergence of bitcoin and other digital currencies has revolutionized the financial sector. It has created a new alternative to the traditional financial services and now, crypto businesses are moving their operations to the traditional banking sector. 

Which are the banking services offered by crypto businesses?

Lending and borrowing are the most important banking services crypto businesses provide. Investors can get enough earnings from their digital asset holdings. This amount can be higher than the interest rates they get from their bank deposits. People can also borrow cryptocurrencies in the same way they take a bank loan. As the transactions get the backing of digital assets there are no credit checks for these crypto loans. 

Who is doing this business?

There are several companies in this sector. BlockFi is a popular crypto business that provides interest-bearing accounts, very similar to the traditional banks, and also has lender licenses. Kraken bank is another one on the list that will be taking retail deposits soon to computer code-controlled markets, where users will govern the market through a token distribution pattern. The Compound is also an automated system for lending and borrowing, which has more than $18 billion in assets now earning interests.

What is the difference between crypto offerings and bank services?

Some may look similar, like the BlockFi. BlockFi interest accounts allow users to deposit cash or cryptocurrencies to get monthly interests like a bank. The major difference is in the interest rate. BlockFi offers 100 times more earnings than a bank account. 

However, there are some risks associated with these rewards. The deposits do not have any guarantee from the Federal Deposit Insurance Corporation. The extreme conditions in the market, a cyber attack, or other technical or operational issues may affect the transfers and withdrawals. 

How do crypto offerings provide high yields?

What the traditional banks do is that they lend the deposits of the customers and offer a part of their profits as interests. The same method is used by crypto banks. The deposits are pooled and offer loans to provide the depositors with interests. But the bank laws ask the banks to keep reserves so that depositors can withdraw their funds even if some loans do not go well. Crypto banks do not have to keep reserves and the institutions take the risk in this regard. 

What is a stable coin?

Cryptocurrency is highly volatile and it cannot be used well for loans or payments. This issue is solved by stablecoins. Stablecoins are cryptocurrencies that are pegged to certain stable assets, generally the dollar. They will provide the accurate value of the money issued by the government in digital form to execute blockchain transactions. However, these stablecoins will be issued by certain private entities. USD Coin and Tether are popular stablecoins pegged to dollars. Reports state the number of stablecoins is increasing every year.

The central bankers handle the demand and supply of government-issued money to maintain their stable value so that there will be enough reserves. The issuers of stablecoin also hold and track reserves similarly. However, there is no guarantee that they are holding the one-to-one dollar pegging they claim for.