DeFi, a futuristic savings solution?

Decentralized Finance seems to be the solution to the losing savings products of traditional finance


In the face of exploding inflation, traditional finance savings products are proving to be losers. Decentralized Finance, on the other hand, can generate double-digit returns on stable crypto-currencies.

Traditional savings products are running out of steam

With nearly 60 million holders, the Livret A is undoubtedly the preferred savings product of the French. Created in 1818, this investment solution is still very popular today because it offers great liquidity of funds, a guarantee of deposits and no taxation.

To date, the Livret A offers an annual interest rate of 1%. However, last month, INSEE announced an increase in the Consumer Price Index of 2.8% over one year. With inflation higher than what our savings earn, the Livret A is eroding our wealth by several points each year - in terms of purchasing power.

A better return on savings in Decentralized Finance

Unlike traditional savings products, interest rates on Decentralized Finance are not fixed. They can even vary by several percent from one day to the next. The reason for this variation is that returns are governed by the law of supply and demand. An algorithm therefore updates the rates in real time according to the number of users of DeFi financial services.

It is true that an unfrozen interest rate for a savings product can be discouraging for some. Nevertheless, smoothed over the year, these rates have the advantage of being much higher than those found in traditional finance. Indeed, even by selecting the most secure Dapps, it is possible to generate a return of over 10% per year on stablecoins.

There are many reasons for this return. The most obvious is that Decentralized Finance does not use intermediaries. It does not have the heavy costs of traditional finance such as bankers' salaries, rent for expensive offices, etc. The saver is therefore remunerated at his fair value.

The basis of DeFi savings: stablecoins

The first step to generating a return is to acquire stablecoins. With a price that fluctuates close to 0, stablecoins are the best option for making DeFi as simple as possible.

Just like a Euro that is sitting in a current account, simply owning stablecoins is not enough to generate a return. To be able to generate a passive income, it is necessary to make these stablecoins "work" via different mechanisms, as one could do when one invests one's euros in a Livret A.

Although they will be the subject of a dedicated article, the main mechanisms of savings on Decentralized Finance are :

  • Lending : a strategy that consists in lending liquidity to other users of the DeFi protocol against a guarantee of at least 100% of the value of the loan ;
  • Liquidity providing : method based on a liquidity providing (at least 2 different stablecoins) in order to allow other users of the platform to exchange stablecoins against others.

Is it safe to save on Decentralized Finance?

When you entrust your money to your bank to invest in a Livret A, the funds are guaranteed by the State. Thus, in case of bankruptcy of the banking establishment, the savers are compensated within 7 days. This is one of the main advantages of the financial products delivered by traditional banks!

On the other hand, funds deposited in Decentralized Finance cannot be guaranteed. This ecosystem is in essence independent of any trusted third party or other control body. It would be contradictory for the State to come in and guarantee the funds of all its savers. The DeFi user then becomes his own bank.

Decentralized Finance remains a young ecosystem that involves technological risks. Smart contracts, oracles, protocol governance, are all risks that can lead to a partial or total loss of capital. Thus, it is essential to educate oneself on how to limit one's exposure to all the risks that weigh on Decentralized Finance.

Although the funds on DeFi are not as secure as in a traditional bank, it is nevertheless possible to protect oneself from a potential hacking or other failure. For this, it is highly recommended to use insurance available directly on the Blockchain. Just like insurance in the traditional financial world, a DeFi insurance aims to protect users in exchange for a premium based on the amount of their assets and the platforms on which they are deposited.

What are the fees for saving on Decentralized Finance?

The DeFi ecosystem was built on Ethereum, the first blockchain to introduce smart contracts. Indeed, it is thanks to these automated programs that developers were able to create decentralized protocols. However, with the popularity of DeFi users, many programs have been developed on Ethereum. Supporting only 15 transactions per second, the network then became a victim of its own success. Transaction fees, based on an auction system, have exploded during the year 2020: they represent today, on average, 100 €. The DeFi was thus reserved only for a certain elite with very large funds.

Following the explosion of Ethereum's transaction fees, many alternatives have appeared. Networks that support many more transactions per second have drastically reduced the costs of use. Like the Polygon blockchain, which can perform 7,200 transactions per second, the fees are now only a few cents. This makes DeFi accessible to everyone again, including the smallest wallets.

Which tax system for DeFi savings ?

Unlike the Livret A, savings on Decentralized Finance are subject to tax. This is the flat tax which corresponds to a single flat rate of 12.8% plus social security deductions of 17.2%, a total rate of 30%. Nevertheless, the gains on crypto-assets are taxable only from the moment they are converted into euros and this if the total of the transfers of crypto-assets over the year is higher than 305 euros. It is then possible to generate passive income in stablecoins without having to pay taxes.

The data and figures in this article are provided for information purposes only and in no way constitute investment or tax management advice.


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