Learn How To Defi Part 4

By xuanling11 | Crypto Learning | 18 Feb 2022


Here is part 4 of the Defi guide and you can reference the detail here.

 

TL;DR

What is TradFi or CeFi

Problem of TradFi

Traditional Finance Vehicles

Stock

Stock is rigged

Bonds

Bond is rigged

Mutual Funds/Index Funds/ETF

Mutual fund is rigged

Index fund is rigged

Bank Products

Savings Accounts/Money Market Accounts/Certificates of Deposit (CDs)/Federal Insurance

What is TradFi or CeFi

TradFi or Traditional Finance or CeFi or Centralized Finance is retail banking under regulations a.k.a. U.S. Code: Title 31: Money and Finance.

Prior to cryptocurrency, there was a shadow banking system. They were unregulated and without government involvement at all.

The problem of the shadow banking system was lack of transparency, highly over-leveraged, and lack of access to formal liquidity (source).

During the 19th century, there were none of a few regulated banks but fewer people were able to access the bank rather than in the 20th century when there were regulated banks and few unregulated banks since the majority of people nowadays have access to banks.

The problem of the “TOO BIG TO FAIL” doctrine is pursued under the Federal Reserve mission to prevent financial collapse.

Yet, the 2008 financial crisis marked the unprecedented beginning of monetary accommodation through “quantitative easing” or printing more money. (further reading here)

Since then, printing money is a solution to the financial crisis (source).

 

So, some unknown person named Satoshi Nakamoto proposed a solution as a new open-source P2P e-cash system called Bitcoin on February 11, 2009, at 22:27.

 

And he highlighted that

The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.

The rest is just history.

Problem of TradFi

5 problems:

  • Centralized control → hold custody of customers’ funds (can freeze accounts)
  • Limited access → servers as intermediaries (can censor transactions and charge fees)
  • Inefficiency → near 0% interest earn (high overhead cost or service fees)
  • Lack of interoperability → high costs to switch services
  • Opacity → in-transparent processes

Referring to 1. Overview of Defi

But the real problem is a trust-based system. Banknotes or fiat currency was built on trust to foster value due to its hard to forgery and low inflation rate (source). Fintech tries to fix the trust issue but it seems they did a terrible job (source).

Trust in the financial system has been breached.

We only have a solution on how to resolve the financial crisis through printing more money but there is no solution to how to get out of printing forward.

To put it simply, once we are in, there is no way out (source).

And forget to mention, we still do not know if QE is actually a solution or a problem to introduce at the beginning (source). Further reading here.

What we know is once starting QE, there is no end (source).

Here is a breakdown of what the Fed did in the COVID-19 induced financial crisis.

And worse, the global is following QE everywhere.

So, does Bitcoin a saver? We do not know either (source).

But surely, cryptocurrency is a type of investment.

Traditional Finance Vehicles

There are many types of financial vehicles to engage finance. However, they are all rigged or broken.

And risk ≠ reward, risk means you are permanence lost.

 

Stock

Stock is a share of the company investors purchase and hope to gain profits along with the company they choose to believe (source).

 

Stock is rigged

It is rigged because of a combination of high-frequency traders from the institutional, exchange, and hedge funds (source and source). Plus, the stock market is easily manipulated through pump and dump (source).

 

Bonds

A bond is debt security or a form of loan an investor makes to an entity such as a corporation, government, federal agency, or other organization in exchange for interest payment over a specified term plus repayment of principal when bond hits the expiration date (source).

This is how bonds suppose to work: bond yields signal economic confidence.

 

Bond is rigged

The Fed actually artificially manipulated interest rates through buying bonds without caring about any investments. Bonds’ performance is based on the Fed's judgment or in other words, the Fed controls the bond yield.

Mutual Funds/Index Funds/ETF

They are pools of assets put together and offer as one stock for investors to own.

The differences:

  • Mutual funds: actively managed and costly (ave. 1.4% management fees)
  • Index Funds: passively managed and inexpensive
  • ETF: at 24/7 available index funds

Mutual fund is rigged

No matter the performance, fund managers charged you the same price.

Index fund is rigged

Once index fund companies went bankrupt, it is not like a company you can sue to remedy rather than you simply totally lost your funds.

Also, the bigger the size of the winner in the market will win more index funds investment which makes the market riskier and more polarized.

 

Bank Products

Savings Accounts/Money Market Accounts/Certificates of Deposit (CDs)/Federal Insurance

When the interest rate is higher than the returns rates from the bank, your money is losing value every year.




Stay tuned for the next part of the Defi Guide!


Photo by Etienne Martin on Unsplash
Note: the post was shared on multiple platforms here.

You can refer my previous article lists here
Digital Commodities- the Unlimited Resources of Commodities Has Born
Universal Income in Crypto Way
DeFi 1.0 is Officially Dead - Welcome to DeFi 2.0
NFT Has a New Purpose
How Many Ads Are Too Much - Floki Inu Ads Got Backfire
Metaverse - Second Life Era
Bitcoin ATM Adoption and Its Potential Security Vulnerabilities
When Corporations Are Running By Everyone
The Fundamental Value Is Irrelevant
Coinbase At Huge Reputation Crisis
CBDCs' Flaw Design
Regulations Start Hitting Crypto Exchanges
From Bitcoin Standard To Zero-Knowledge Proofs - Decentralization 2.0
Shiba Hits 1 Million Users (Army) Milestone: What is Next?
How To Avoid Crypto Scammers
Crypto Philanthropy
Shiba Game - When Meme Meets Metaverse
Twitter CEO Steps Down - A Full-Time Bitcoiner
Change of Macroeconomy Landscape
CBDC Is Losing The Game
Crypto AWS
Doge The Future
El Salvador's Bitcoin
Market Sentiment Has Changed
Brief History of Ethereum and How Ethereum 2.0 May Over Promise
Crypto Is Getting Real
Who Cares If Craig Wright Is The Real Satoshi
Institutional Investors vs. Whales
What Happened In BadgerDao
A Proposal To Move Bitcoin Mining PoW Away
IMF Keep Crying Out, Crypto Adoption Keep Accelerating
Dogecoin Is Back to Top 10 But The Moon Shot Is Looming
How to Avoid The New Wallet Scam
Defi Enters To Crypto Bond Phase
What Types of Metaverse You Want
Global Regulations Are Coming Or Can They
IMF Did Have A Plan to Run Global Regulations
Doge Starts Moving
A New Malware Will Steal From Telegram
Smart Money Is Out, Institutional Money Is In
Wait, Web3 or Web 3.0 or web3
Airdrop?! Not So Lucky Anymore!
2022 Prediction #1: L1 Scalability
2022 Prediction #2: L2 Bridges
2022 Prediction #3: Zero-Knowledge Proofs or ZKPs
2022 Prediction #4: Regulated Defi On-Chain KYC
2022 Prediction #5: Institutional Crypto Adoption
2022 Prediction #6: Defi Insurance
2022 Prediction #7: NFTs-Based Communities - DAO 1.5
2022 Prediction #8: Metaverse and NFTs
2022 Prediction #9: Web2 Companies’ FOMO
2022 Prediction #10: Time for DAO 2.0
Craig vs People
Polygon Enters ZKPs - Plonky2
Crypto.com Backfire - When Centralized Crypto Service Panic
Coinbase NFT Marketplace
Crypto Paycheck
Coinbase Customer Service Alive
When Meta Patented Metaverse
When You Want Someone Forget About What You Did, Just Change You Name
When YouTube Enters Into NFTs
Facebook Just Did the Rug Pull
Bridging Between Web2 to Web3 Through NFTs
DAO The Way Part 1
DAO The Way Part 2
Who Is The Winner of The Crypto Adoption
Phishing Attacks
DAO The Way Part 3
What You May Expect NFTs After 6 Months and Beyond
DAO The Way Part 4
Licensed NFT vs. IP Law
Wormhole Hack - It May Not Be a Bad Thing
Preventing Rug Pulls
DAO The Way Part 5
Lessons Learned From Wonderland DAO
DAO The Way Part 6
Learn How To Defi Part 1
DAO The Way Part 7
Discord Scams
DAO The Way Part 8
Learn How To Defi Part 2
Learn How To Defi Part 3
DAO The Way Part 9
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Disclosure: The article was written by a delusional author who is possibly a nut job without any questions whatsoever about expertise in the subject matters. You should not believe any words this author wrote or you may experience similar symptoms or even possibly become a nut job.

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