Boston-based Fidelity Investments Inc. has today announced (via CNBC) that it’s opening its brokerage doors to partial stock trades, following in the footsteps of similar moves from modern online trading platforms and stock brokerage firms.
I am in my early 20s, bad at saving, have an average credit score and am about to begin paying off my debt from college. For a while, I didn’t really know what was in store for the future, so I didn’t care much about planning on it. Suddenly, I heard about DeFi and became a bit more interested in my personal finance.
Not to say that I’m a crypto maximalist now, or that I’m even confident of Bitcoin lasting long into the future, but the tech behind it inspired me to learn more about money. There are two main things that appealed to me and likely appeal to others in my situation: Being your own bank, and earning real interest.
Take control of your personal finance
Like many others, I’m not a big fan of banks. I don’t care about the corruption, or whatever they’re doing with money behind the scenes. I simply don’t like them because they’re slow, hard to access and I don’t feel like even a small monthly fee is worth paying for their services.
My credit union doesn’t have many locations, so it’s always hard to deposit cash. When I return something at Best Buy, it doesn’t process on the weekend and takes 24 hours at the minimum. I get paid on the first and fifteenth, and it won’t process on Sundays. My savings account is essentially useless, with interest ranging from 0.05% to 0.15% APR.
Basically, ever since I opened a checking account at 16, I’ve experienced inefficiencies and a lack of incentives that have never changed. This effected my optimism on managing money effectively.
If I am receiving no returns from storing money, I might as well take complete ownership of it. Blockchain tech allows me to do just that. It’s pretty simple for me to get paid, convert cash to Dai, then lock a portion of it in a lending protocol to hedge against any small amount of volatility. Dai ranges +-5% of the USD, so through dollar cost averaging and earning interest through protocols, I now have a real incentive to save money.
I may not have ownership of the Dai while it is earning interest, but I have the ability to choose where it goes or to leave it in cold storage.
Earn actual interest in DeFi
Because of Maker splitting into Sai and Dai, this isn’t a great time to brag about how high potential interest is, but I can still earn about 80x more than my savings account. The APR for MakerDAO’s Dai Savings Rate is 4% right now, and by taking on more risk through other platforms, you can get up to 7.5%. Also, if you are more comfortable using a stablecoin backed by fiat dollars, loaning USDC can return around 3.6% of your cash.
Some money management protocols lock your coins into a contract that expires after a certain amount of time, and others allow you to pull out coins whenever you’d like. Similarly, some protocols have higher risk than others. For instance, protocols that let users take money out as they please are pooled, and pay higher interest depending on how full that pool is. If the protocol is paying 7.5% and is loaning 75 million out of 80 million, then 25 people with 100k decide to pull out, your money will be stuck until more people put their money in. At the same time, this will likely increase the interest paid.
So as long as you know what you’re getting into, these managing money through decentralized applications can be relatively safe. You may need to monitor lending pool usages and be wary of the amount you put into one protocol. For people like me who are saving a couple thousand dollars, I don’t worry about anything besides hackers.
DeFi isn’t perfect for everyone yet
Decentralized Finance is supremely illiquid, so people with real money to manage don’t like it. What it is able to do is trigger the interest of people like me who just haven’t been impressed by the traditional financial system. I’ve introduced DeFi lending protocols to a friend who cares about personal finance and is almost completely uninterested in crypto, and he couldn’t help but gravitate towards it.
I’m sure there are ways to earn similar interest rates through the traditional means but there’s a very small learning curve to get into crypto. You literally start a Coinbase account, send Dai to Maker and start earning 4% APR.