339: How To Make Money with BlockFi, Dai, and the Evolving DeFi Ecosystem

Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode, 339. It’s titled “The DeFi revolution, and how to earn a 9% yield.”

Challenges With Centralized Finance

My son Bret has worked with me part-time for almost three years. I pay him, obviously; this is a job. He recently switched banks. It took him a while to get that set up, so I needed to make a payment. It had been a month or so. I went to wire the funds to him, and his new bank wasn’t set up to receive wires. So then I decided I’ll just send an ACH. Well, my bank wanted me to sign up for a $10/month service in order to send ACH’es.

I then tried Apple Pay. I had to verify my bank account, which required me to call my bank on the phone to get it set up. I was finally able to get Apple Pay set up, thinking the money would get there right away. But no, it took several days, even despite all that effort.

During this whole process, I thought it would just be easy to send him cryptocurrency, and then he’d have the money. But then he’d have to convert it back to dollars, and if I send him Bitcoin, I’d have to pay taxes on the gains I had on Bitcoin. It seems like personal finance shouldn’t be that difficult. But we work in a system of centralized finance, where there’s centralized control. We typically only have one bank, maybe two, and switching banks can be a real pain.

In the U.S, the four largest banks have a 44% share of insured deposits, compared to 15% in 1984. The concentration of banks is even higher in other countries. In our current financial system, the central bank, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan, are highly influential in the financial system from a regulatory standpoint, but also setting interest rate policy, which can influence other interest rates. Money supply creation—central banks are very involved in that, as we have explored in recent episodes.

Banking can be incredibly inefficient. It’s expensive. When somebody joins Money For the Rest of Us Plus, I pay up to 3% to have Stripe process the credit card. Individuals trying to send remittances overseas can pay 5% to 7%. There are 1.4 billion people in the world that are bankless. They don’t have access to a traditional banking account. Many consumers are forced to go to payday lending stores to cover shortfalls they might have and pay extremely high-interest rates.

There’s a lack of interoperability with banks. The pieces don’t always fit together, which is why it can take days to send money from one bank to another. And the banking and financial system isn’t particularly transparent. We don’t always have a good sense for what the risks are with our banks. That’s why deposit insurance exists.

I started doing online banking in the year 2000. I used a bank called Netbank for a number of years until they went broke and were taken over by the FDIC. I had no idea that they were in a difficult financial situation.

These are some of the challenges with our current financial system. They were pointed out in a paper I read this week, titled “DeFi and the future of finance” by Campbell Harvey, Ashwin Ramachandran, and Joey Santoro. The paper’s authors believe that DeFi (decentralized finance) will meaningfully replace all the elements of centralized finance. 

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