In this episode highlight, we go into more detail about how Decentralized Finance (DeFi) savings account work and what features to look for.
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If you’re a saver, you already know that your options to earn any interest from your savings account these days are close to zero. Banks savings yields are a joke and parking your money in a savings account will end up costing you money thanks to fees and inflation. Of course, the bank will still make money since they will borrow YOUR money to lend it to other people and charge them a nice interest in the process.
Welcome to DeFi, where you can effectively skip the middle man (the bank in this case) and earn a decent interest rate from your savings when you and other people like you, make your money available to a pool of pre-qualified borrowers.
How Does DeFi Savings Work?
In essence, by using digital cash pools, borrowers can have access to funds through an entirely automated process. The system includes lenders and borrowers and it automatically tabulates the savings yield for the lenders as well as the interest rate for the borrowers. For both parties, all of the funds come from and go into one big digital cash pool according to well-established rules.
For example, once a loan has been issued, the borrower automatically pays the interest into the cash pool, from which it is distributed to all of the lenders which are the people that set up their savings accounts. The important part is that all borrowers pay the interest to the entire pool of lenders rather than to a particular individual, therefore, savings accounts start accruing interest from the moment they are created and their funds are added to the pool. All of this without middle men, bank fees or lock-up periods that you find when using Certificates of Deposit.
What about security or loan defaults?
Since these accounts are NOT FDIC insured, they do have some risk involved but so does investing in the stock market if that’s your alternative. However, to protect the lenders’ funds (read: your savings), the borrowing parties must provide between 1.5 and 2 times the value of their loan in digital assets as collateral.
The savings and borrowing interest rates are dynamic and vary constantly based on supply and demand, but it is not unusual to see rates starting at 4% and go as high as 10% or 12% for some of their options.
Companies like AAVE, Compound and Voluto offer these types of DeFi savings options and you can visit
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Note: this article is for entertainment purposes only. It is not intended to be financial advice. The opinions and views expressed on this article and podcast, (written, video or audio format) are solely of their respective authors and do not express the views or opinions of MGR Consulting Group, its employees, clients or affiliates. Individual results will always vary depending on your individual investment experience, work ethic, business skills, perseverance and diligence in applying your own business plan, the economy, the normal and unforeseen risks of doing business, and other factors.
