What comes up to your mind first when you say “Cryptocurrency”? As for me, it is associated with Elliot Wave Theory, trading, and mining. Being involved in a crypto market since late 2015, the times you could mine some PoW currencies by having a single GPU has definitely left a significant mark on my mind.
How about “Banking”? Well, I remember my first Deutsche Bank plastic card that I got in Frankfurt back in 2008. I’d never forgotten that feeling of becoming a part of something omnipotent, as I thought those days. The world was just a matter of days before its biggest crisis since the Great Depression.
Anyway, despite the negative consequences still reflecting the worldwide economy, have you noticed how the crypto industry has taken over the instruments of the traditional banking system, adopted them, and wrapped them into something really tremendous? It seems that whilst traditional banking was suffering its hardest times for the last decades, it has missed an upraise of really alternative power.
As you all guessed, that is about digital assets. So let’s take a look at how traditional financial tools are changing the cryptocurrency landscape.
The Transformation Begins
I tend to consider 2014 as a starting point of mainstream crypto adoption. That's exactly the year when the Living Room of Satoshi appeared. The team behind this project has made a significant contribution that tended to simplify cryptocurrencies' usage and utilize them as a convenient tool for paying their bills in crypto of their choice.
Another sign of the transformation was noticed in 2016 when Bitmex had introduced its perpetual futures. Although there were plenty of order types for spot trading before 2016, futures have further influenced the industry's maturation. Being a high-risk tool for professionals, futures contracts have brought up some institutional-level traders to the sphere.
Adoption of Banking Tools
Regular banking operations committed by an average peep could be divided into two fundamental types: daily transactions and lending/borrowing operations. While the first was duplicated on the digital economy's side back in 2009 by the emergence of Bitcoin, lending has come to the crypto space much, much later. Among the pioneers of crypto-loans, CoinLoan was launched back in 2017 as a P2P platform and later transformed into a leading CeFi lending player.
Since cryptocurrencies remain volatile, loans are likely to be overcollateralized to mitigate the risk of the lender’s reward in the case of a sudden price drop. On the other hand, this forces a borrower to maintain LTV (Loan-to-Value) on a predetermined level to keep his collateral safe from liquidation.
The crypto sphere has adopted savings with almost no differences from bank deposits. Although there is a key advantage of crypto savings over traditional deposits - it is the interest rate. For instance, Binance offers up to 7% interest for a fixed saving of stablecoins (BUSD, USDT), while major European and U.S. banks offer less than 1% APY rate for EUR or USD savings. It’s quite interesting to see whether the rates for stablecoins deposits will decrease, as the community demand seems to be on top according to google trends.
"Crypto Savings" search item. Source: Google Trends
DeFi Lending Tools
The emergence of the DeFi sector and the rapid development of DApps have adopted CeFi tools' mechanics, making it more accessible for the entire crypto community. There is no KYC procedure in DeFi, unlike the centralized and regulated market players, so the process of getting a loan is even simpler and faster.
For instance, to get a loan or interest on market-leading DeFi lending protocols, such as Aave or Compound, the only thing you need is connecting your Metamask, Ledger, or any other supported wallet with the platform. Once done, you can take advantage of saving or borrowing options.
While the key advantages of DeFi lending platforms over CeFi are clear enough (full control over your funds, enormous and transparent liquidity), decentralized tools now have two significant disadvantages. The first one is related to DApps that utilize the Ethereum blockchain, as the gas fees are rising dramatically, which makes less sense for small retail users to try themselves at DeFi lending.
Ethereum average transaction fees. Source: BitInfoCharts
This, however, may be overcome by utilizing BSC rather than ETH as a base. Additionally, the long-anticipated Ethereum 2.0 should lower gas prices.
The latter issue with decentralized liquidity platforms is lower yield interest than centralized services, which makes opening interest account on Binance, BlockFi, CoinLoan, and other parties bring higher APY.
Frankly, traditional financial tools are gaining popularity across the crypto market. Thanks to the assets management mechanisms adoption, seen the traditional finances, the blockchain world is continuously evolving, gaining maturity, and changing the landscape of the modern economy. Nonetheless, we’re far ahead from the days when cryptocurrency was only considered a cheap borderless payment option. Let's see what will happen next.