Why do people lock up their funds in DeFi protocols like Compound when we have traditional banks? Isn’t it way riskier since it’s run on smart contracts? You can’t even call a support desk in case something goes awry!
In some ways, DeFi is indeed riskier, since the protocols are new and there is no middleman to reverse transactions in case of a mistake. With this risk in mind, the rewards are far greater than traditional centralized banking structures. If you’re well versed in DeFi and security, these permissionless protocols can become far more lucrative than any offer in the world of traditional finance.
The main criticism of traditional banks is that their interest rates have been too low for far too long. A common rate you would get today is 0.05% (based on your jurisdiction) if you lock it up in a savings account. You would be lucky, you could probably hunt for a bank that offers interest rates as high as 2%.
In DeFi, an interest rate of 6% or more is quite common because of the current mechanics of crypto. Although 6% seems high when compared to traditional finance, crypto’s valuation has seen massive spikes, so locking up your funds in a protocol would be well worth it if the price of cryptocurrencies’ continues going up.
Another benefit of protocols like Compound is that there are no mandatory Know-Your-Customer (KYC) loops that you have to hop through to make an account, You don’t have to risk revealing your identity by giving your passport or income, which makes it more convenient and secure for a person to use.
Add this to the fact that 31% of the world is unbanked (2017 data), making decentralized finance a way for those who haven’t had what should be a fundamental right – a chance to have free access to global money markets. Having an account where you can pull money from should be the bare minimum for most people. Decentralized finance and protocols like Compound fix