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How Decentralized Finance Solves Two Key Money Problems

Money, DeFi

Two problems are being solved by Decentralized Finance: money value & money ownership. Let’s get right into it…

Money Value:

The value of the dollar is determined by our central bank, the Federal Reserve Bank. They are the trusted third party that ensures the instrument continues to have value.

The Federal Reserve performs this duty through a variety of means, but for our purposes let’s just say you do not control the value of the dollar in your wallet.

Money Ownership:

The dollar in your physical wallet is a bearer instrument. In other words, you own it and may transact with it without permission.

When you deposit your dollar into a bank, you give up your ownership of that dollar. You only have a claim on the dollar you deposited; you no longer own it. The bank owes you interest for the right to use your dollar to make loans.

Web 3.0 Decentralized Finance Resolves Money Value & Ownership Problems

Money Value: Bitcoin is Stable

Bitcoin is a primitive crypto currency with a value determined by its utility and scarcity.

Think of Bitcoin as digital gold.

Even though you can mine more gold, there are limits to how much gold can be mined in any given year.

Bitcoin is similar in its scarcity and mining models. This means its value is stable, like gold. The value is determined by the market and not by central bankers.

Value: Depends on Who & Where

What we are beginning to see in countries such as El Salvador (Bitcoin) and the Philippines (Axie) are assets priced in crypto currencies.

In the decentralized finance world, the US dollar is considered unstable. It is Bitcoin and Ether that underpin financial transactions.

It is your point of view that makes the difference.

If you work, live and invest in dollars, then Bitcoin seems wildly inflated and a bubble. If you work, live and invest in Bitcoin, then the dollar seems wildly deflated and losing value.

Money Ownership:

Bitcoin ownership is immutable.

It is the ultimate bearer instrument and it allows you to become your own bank: you may perform all the functions of a bank on your own behalf without ever losing ownership of your money.

We are now beginning to see the democratization of finance.

When the US left Afghanistan, every businessperson from the bazaar to the banks moved into Bitcoin.

The top Bitcoin countries read like a Who’s Who of corrupt and communist governments. There are two exceptions: the United States and India, which are the technology powerhouses fueling the innovation.

What Does All This Mean to U.S. Financial Institutions?

To Investment Banks…

Investment banks have already started to issue guidance to shareholders and investors.

They are seeing a stark shift in new money going into decentralized finance. Smaller investment banks are discussing liquidations and cutting back. The impact to small and non-diversified investment banks will be great.

To Commercial Banks…

Commercial banks will see a dramatic decrease in foreign exchange business as large manufacturing and distribution business move into their own tokens to conduct business across international borders.

FX settlement is done via DeFi exchanges and the tokens may or may not get converted into local currencies. Corporate treasuries are starting to deposit liquid assets into crypto currencies getting no-risk 5% APRs. There are in-house white papers already circulating in the largest commercial banks describing this problem and its impact.

Meanwhile, at Retail Banks…

Retail banks will see the least impact. Their customers work, live, invest, and pay taxes in dollars. Retail banks provide significant value and services to customers. Ownership and value are not seen as problems for average Americans.

For Federal Credit Unions, this could be a boom. The structure of a membership union can take advantage of the network effects offered by decentralized finance. No other financial institution is set up as a membership – and membership is what drives decentralized finance. In another article, I discuss Social Tokens as the key to Federal Credit Unions thriving in the new era.

Up Next…An Introduction to the DeFi Movement

My upcoming article will introduce you to the decentralized finance (DeFi) movement, how these networks will become economies and why Ethereum should be considered a nation. Stay curious and stay tuned!

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