Distributed Finance, the Future of Banking and Savings Deposits

Editor's Note: This article comes fromEditor's Note: This article comes fromEuroco Capital Research Institute

, author Michael Graczyk, translator Teng Jiaqi, reprinted with authorization by Odaily.

MakerDAO recently launched a product called Dai Savings Rate (DSR), a smart contract that pays account holders interest just like a traditional savings account. Shortly after the launch of the product, digital asset exchange OKEx announced that it would allow customers to deposit their DAI deposits into DSR, earning DSR interest and perks funded by MakerDAO.

So what does the launch of this new product mean for distributed finance (DeFi) and the more general digital asset ecosystem? On the face of it, interest payments are just another ploy to attract customer deposits that can bring them lucrative profits. Coinbase launched a similar product in October, and Gemini also offers a similar arrangement through BlockFi.

In addition, many exchanges have their own ways to support stablecoins, including Coinbase’s USDC, Bitfinex’s Tether and Gemini’s GUSD, and even OKEx has a compliant and complete USD stablecoin USDK. Although the interest items of these stablecoins have diversified interest rate strategies, and these stablecoins have different properties and uses. But, at the end of the day, exchange support for stablecoins is nothing new under the sun.

In this case, why is MakerDAO's smart contract different?

For those who do not know MakerDAO, MakerDAO is only a foundation that launches financial products, including the DAI stable currency. DAI is a digital asset, especially the ERC-20 token based on Ethereum. Its market value is anchored at $1. The stability of its market value anchoring depends on the well-designed smart contract mechanism and the active efforts of MakerDAO itself. and continuous governance. The latest DSR product is just the latest DAI stabilization tool created by MakerDAO; this tool is equivalent to adding a knob to DAI, which can increase or decrease the demand for DAI as needed.

First of all, we should notice that MakerDAO is a huge and complex part of the DeFi ecosystem, and it accounts for more than 50% of the wealth of the entire DeFi ecosystem. It’s unbelievable how much financial infrastructure can be built on-chain, and I’m really excited to have DSR on board.

Second, and more importantly, this effort to offer high savings rates echoes general trends in consumer finance and foresees a convergence between the traditional and distributed consumer finance worlds.

Banks and depository institutions make most of their profits through "net interest income," which is the difference between "interest earned on loans and other assets" and "interest paid to consumers on deposits."

For example, about 22% of JP Morgan's revenue in the third quarter of 2019 came from consumer and commercial loans, the bulk of which came from net interest income. Since banks derive the majority of their revenue from consumer deposits, they often engage in acrimony with each other by constantly changing and publishing their savings rates and convincing customers to move their funds into non-interest-bearing accounts such as checking, investing, etc. compete.

While digital asset exchanges also compete for customer deposits, the incentives they employ are quite different from those employed by depository institutions such as banks. Banks earn net interest income from customer deposits, while digital asset exchanges earn fee income from transactions. Customers deposit money in banks because they want security and stability, whereas users of exchanges are often the exact opposite. For them, this is an opportunity to "speculate" or "invest".

As a result, digital asset exchanges have competed on access (more digital assets), legality, user experience (simpler, more secure website design), and lower fees. With the development of the digital asset market becoming increasingly stable and digital assets gradually entering the mainstream, digital asset exchanges began to find new ways to encourage deposits: Coinbase’s USDC rewards, OKEx’s DAI savings interest.

In fact, whether it is a bank or a digital asset exchange, they are all fighting for the same thing: consumer deposits. Banks hope to use consumer deposits to expand their balance sheets and make more loans. Digital asset exchanges need deposits because...well, we don't have to worry about how exchanges have long-term money making plans now (I'm not even sure they figured it out themselves). Put it this way, exchanges are starting to look more and more like traditional banks.

What does this trend mean for the future development of DeFi? I believe it's actually a pretty good sign. DeFi introduces new points on the Risk-Return Trade-off Curve (Risk-Return Trade-off Curve) to consumers. These points are infinitely close to the "risk-free" level and can be judged as "safe", but these points The big difference is that it's well above competitive interest rates; currently, it's difficult for consumers to get such rates anymore.

Global interest rates have been falling for decades. According to a report from the Federal Reserve Bank of New York, this trend is the result of increased demand for safety and liquidity, as well as slower global economic growth. These driving forces seem unlikely to reverse anytime soon, so we tend to expect to see interest rates remain low or fall further. However, interest rates on DeFi have been consistently higher than those on savings accounts.

It is undeniable that even simply holding DAI carries immeasurable risks: if there is an error in MakerDAO's smart contract, the FDIC will not restore your DSR account.

In the near future, bond yields will turn negative, mortgages will cost 2% APY, and everyone will be desperate for consumer deposits. So who gets these deposits? For now, the banks that offer the highest savings rates and the digital asset exchanges that offer DeFi rates will be the winners. But in the medium term (3-5 years), those deposits will be acquired by depository institutions that can convince customers that they are "safe" despite the small, unknown risks. Such as the collapse of DAI, the failure of Ethereum (Ethereum), or the risk of the entire system shared by MKR owners. Difficult to calculate and difficult to occur, but these risks are foreseeable and exist.

DeFi will enter the vision of mainstream users from bottom to top. Before institutional investors start buying MKR, CDPs, or holding DAI, we will see traditional banks offering DSR-like services to consumers. These possibilities will originate in countries outside the US, or with digital-asset-focused banks like Silvergate. I'm not sure exactly what this service will look like and how long it will take, but banks that can't compete with DeFi savings rates will end up losing consumer deposits, which will go to companies like OKEx and Coinbase.

Thanks for reading. In the next few articles, I will discuss in detail how MakerDAO works, delve into the stablecoin ecosystem and review the interesting white paper.