Why do banks pay so little interest and can DeFi provide a solution?
The following article explains why banks are currently paying so little interest and why high yields can still be generated in the decentralized finance (DeFi) space. In addition, the weaknesses of DeFi are discussed and what solutions CeDeFi offers for this.
Why are banks paying so low interest today?
Currently, banks do not pay interest on current accounts, or pay vanishingly low interest, but even for fixed-term deposits, the maximum interest rate is 1.5%, although most offers are far below this. The inflation rate in Germany for July was 3.8%, but even with an inflation rate between 2–3%, savers lose part of their wealth every year due to such low interest rates. To understand why banks currently pay so little interest, it is necessary to know why banks pay interest in the first place. Banks pay interest on deposits at the bank to have money available for lending. But because of the corona crisis, fewer companies need loans, and in addition, the base rates of the central banks are extremely low to ensure that the economy gets back on track. Since banks can obtain money for loans from the central banks virtually free of charge, it is not at all attractive for banks to have to acquire money from private customers. Customers are still dependent on bank accounts and additional services of the bank, the banks take account management fees and further charges from the customer but offer no interest in return. Currently, customers are willing to play this game and have no real options.
Why is it possible to achieve high interest rates in the decentralized finance (DeFi) sector?
The fact that high yields can be achieved in the decentralized finance DeFi space is the result of several factors. Unlike banks, DeFi platforms have a great interest in attracting new customers and therefore pay out high interest rates to be attractive for them. DeFi platforms also cannot access a central bank to raise capital, and instead rely on liquidity providers, for example. For the liquidity providers, therefore, an incentive must be provided through interest rates. Another reason is that banks have to spend a lot of money on their IT infrastructure, but DeFi providers can rely on blockchain technology and need little infrastructure. In addition DeFi projects are usually managed by very small and agile teams, which also results in low costs. Banks, on the other hand, usually have a huge number of employees, a branches structure, a board of directors, stakeholders, regulatory and other costs. DeFi platforms can pay out more interest on deposits due to the low operational costs.
So why aren’t more people using DeFi already?
Currently, the barriers to entry are relatively high, and some of the processes are complicated and not user-friendly. In addition, inexperienced users run a high risk of losing access to their deposits or investing in scam platforms. In the DeFi sector, there is still virtually no regulation and many platforms are operated in the gray zone. The DeFi market is also quite new and subject to constant change, and sometimes still has teething issues to contend with. According to Gartner the solution for this could be CeDeFi platforms that combine traditional banking services with DeFi, greatly reducing entry barriers and providing legal security. Paycer is one of these CeDeFi platform and is developed by a very experienced team based in Hamburg, Germany. The Paycer platform is currently not yet live and under development but is expected to be launched in 2022 and will then offer innovative blockchain-based services for mainstream customers. Paycer will offer attractive investment opportunities for customers who simply want to put money in a bank account and earn high interest. Paycer will enable exactly this with a passive income that is generated in the background with different DeFi protocols without the customer having to know anything about it. Find more information about Paycer at paycer.io.