2021-09-10
Crypto & Blockchain; The Future of Banking & Finance
El Salvador has undergone tremendous turmoil after legalising Bitcoin as their legal tender. Later to follow suit is Ukraine, where they have adopted a new law and regulations to accept and regulate cryptocurrency.
These events mark another milestone for cryptocurrencies and blockchains to shape the future of banking and finance as a whole. As of today, apart from fiat money, we are also able to use cryptocurrencies as a medium of exchange for goods and services.
Firstly, cryptocurrencies are not new, but it is still unknown to most people in the world. Cryptocurrency is a digital asset that can be used as an exchange medium for goods and services but uses an online ledger with solid cryptography to secure online transactions.
Cryptocurrencies started booming in 2017, with many other financial services emerge to facilitate the ecosystem. There are several innovations made in the crypto ecosystem that will change how traditional finance works.
Centralized Exchange (CEX) is an online cryptocurrencies trading platform that matches buyers and sellers transactions via order book. It acts as an intermediary between buyers and sellers as well as custodians for user data and funds. The characteristic of cryptocurrencies centralised exchanges behave the same way as online fiat exchanges.
Orders requests are made to buy or sell a certain amount of a specific cryptocurrency at a certain price. CEX later aggregate orders from traders then later match their orders using a software to match and execute trades accordingly.
Centralized exchanges (CEX) behave the same way as fiat online currencies brokers like Etoro and XM. Most currencies listed on the exchanges are paired up with several currencies only. This means a few turns have to be made in order to reach your coin of choice.
For example, you want to trade your Polkadot (DOT) to Solana (SOL). However, there is no direct DOT/SOL pairing on CEX. Then you have to trade your DOT to USDT with DOT/USDT pairing then later swap from USDT to SOL with SOL/USDT. Well known centralized exchanges available are Binance, Gemini, Huobi, Kraken and many more.
DEX is an acronym for decentralised exchange which means a peer-to-peer (P2P) exchange that allows cryptocurrencies transactions between buyers and sellers to take place online without a middleman. It usually runs as a decentralised application (DApp).
In layman terms, it is the ability to change USD to GBP without any intermediary. Every transaction will be conducted via an app. With just a click, you can change from one currency to another. Before connecting your wallet to perform the transaction, always check for the best currency rate as some exchanges might offer different rates compared to the others.
Decentralised exchange is a focused and privacy-oriented type of exchange that primarily addresses self-execution on a smart contract. Each transaction is written on a blockchain. However, DEX needs developers to support the system’s automation functions and ensure the smoothness of the DApps.
There are 2 things to take notes on. First, every transaction made on DEX will be recorded on a blockchain. Thus it may lead to traffic and network congestion. Secondly, DEX requires no mediator to facilitate the transaction. All transaction’s responsibilities lie upon the trader. Every transaction is fixated and can’t be nullified. If you made a bad trade, even if it is by accident, there would be no way to reverse it.
Examples of DEX available are Uniswap, Pancake Swap, dy/dx, Sushi Swap, Serum DEX and more.
The traditional method of gathering capital for business always results in obtaining a bank loan. That way is unlikely to be approached by blockchain and crypto projects. It gives direct participation with institutions and the general public to be part of their project funding by gathering funds through crowdfunding, pre-sale token, angel investors, and many more.
Blockchain makes the funding process safe and transparent. It gives security to both projects and investors. The early stage of the crowdfunding process can either be gathered and collaborate through crypto exchanges with the launchpad program. Crowdfunding platforms that use blockchain can help to maximise the success of a project as the tendency of misflow funds can be avoided.
Early days of crypto adaptation, it is harder to liquidate or be used as daily usage. However, many crypto exchanges and wallets have collaborated with VISA and MasterCard to create market liquidity and demand on the ecosystem.
Crypto debit card with Visa and MasterCard facilities can be used in almost every merchant that has a debit card terminal. It is available worldwide. Thus, Crypto Visa cards can be used anywhere, and the currency conversion will be handled entirely by the card operator.
You can now go out to Starbucks and swipe your crypto card to purchase a cup of coffee. The scenario might seem unreachable in 2010 when Bitcoin was first introduced, but now, everything is possible.
Staking is the process of actively participating in transaction validation (similar to mining) on a proof-of-stake (PoS) blockchain. Staking participants require a minimum balance of a specific currency for transaction validation to earn staking rewards.
For example, Solana staking is the process of locking up a sum of Solana for a specific period of time in order to contribute to the blockchain and earn network rewards.
Most exchanges and DeFi Apps have 2 options of fixed staking and flexible staking period. Fixed staking periods usually have higher APY compared to flexible staking periods. It is because by locking with a specific period, it acts as a guarantee. Some exchanges come with extraordinary staking rewards that conventional banks are unable to counter.
For example, standard mutual funds offer up to 10%- 12% annual returns, while fiat fixed deposits offer only 2% maximum. However, rare and new coins/ tokens offer up to 100% return. DOGE Coin staking programme on Huobi offers 50% APY while CAKE staking on Pancake Swap offers 86% APY staking rewards.
This is the revolution that cryptocurrencies are able to unfold. It shows that a higher return for staking is possible. Staking offers are almost the same as fixed deposits by a bank but with a whole magnificent return.
However, do not disregard the fact that cryptocurrencies are highly volatile. Depending on the length of time an investor decides on the staking process and the market situation.
It is possible that an investor could lose their entire investment even with the staking rewards. For example, if you locked your asset for 90 days, and later the price of your asset dropped by 50% and your APY offered only 15%, then you are still at a loss.
It may seem almost the same as staking, but crypto exchanges do offer yield for crypto saving.
In crypto saving, your coins are loaned out to an institution that then lends them to various clients. However, for staking, your tokens are used in their respective verification process. By helping out the network, you earn a reward.
In layman's terms, saving yield is like an interest you get from holding cash in your saving account whereas staking is like putting aside cash for a period of time like in a fixed deposit. Thus, the yield on crypto saving is not as crazy as staking but is significantly higher than traditional saving accounts. Yields on cryptocurrencies mostly range from about 2% to 8% or more. The main reason for higher yield is that crypto banks have to attract investors without the ability to produce money supply. Crypto finance supply and demand mechanisms are driven by interest rate.
There are many institutional offers for crypto savings. For example, Nexo offers an interest rate even with less than 24 hours holding period; their yield offers can be a maximum of 8% on Bitcoin. Ledn is another well-known crypto savings account facility. They offer up to 9% on USDT and earn interest on your cryptocurrency.
It is possible to get a loan without going to the bank or an illegal loan shark. Yes, it is through crypto.
Crypto Loan is a cryptocurrency-backed loan where it behaves similarly to a securities-based loan while the borrower will have to use their crypto as collateral. The basic principle works like a mortgage loan or auto loan. You will collaterate crypto assets to obtain the loan and pay it off over time.
Do bear in mind that the service providers cannot guarantee your cryptocurrencies price stability and safety, however, it is considered relatively safe and reliable in the crypto space.
Their borrowing interest is relatively lower compared to the traditional loan rate. It range between 1% to 12% APR depending on your collateral amount. The higher the amount of the crypto being a collateral, the lower the interest borrowing rate.
Most major exchanges like Huobi, OKEx, and Binance offer the services as well as other financial cryptos institutional-like Block Fi, Celsius and Aave.
The purpose of collateral acts as a security for the institution. On occasion, if you cannot pay back your crypto loan, the lender will have to liquidate several or all of your assets to cover up losses. This may either result to capital gain or capital loss depending on the currency rate at the time.
Some may wonder why one needs to get a crypto loan and not just sell their crypto and use the cash? They expect their crypto asset’s value to increase, thus, taking a cash or stable coins loan is better.
There are many innovations created on top of cryptocurrency evolution. It is no longer foreign; cryptocurrencies have changed the way of financing. It creates more opportunities without bias. Everyone with a passion for learning can take part in the new way of life. It is essential to do extensive research before placing all your money on any coins. Research on their tokenomics, projection, project usage, use case, future road map execution and many more.
Don’t fall for the emerging of scams along with the greed to make instant money. Remember, a person who invested $100 in Solana during their ICO period makes their first million as the coin hit $220 yesterday (9 September 2021). So plan your investment accordingly.
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