Learn How To Defi Part 4
Here is part 4 of the Defi guide and you can reference the detail here.
TL;DR
What is TradFi or CeFi
Problem of TradFi
Traditional Finance Vehicles
Stock
Stock is rigged
Bonds
Bond is rigged
Mutual Funds/Index Funds/ETF
Mutual fund is rigged
Index fund is rigged
Bank Products
Savings Accounts/Money Market Accounts/Certificates of Deposit (CDs)/Federal Insurance
What is TradFi or CeFi
TradFi or Traditional Finance or CeFi or Centralized Finance is retail banking under regulations a.k.a. U.S. Code: Title 31: Money and Finance.
Prior to cryptocurrency, there was a shadow banking system. They were unregulated and without government involvement at all.
The problem of the shadow banking system was lack of transparency, highly over-leveraged, and lack of access to formal liquidity (source).
During the 19th century, there were none of a few regulated banks but fewer people were able to access the bank rather than in the 20th century when there were regulated banks and few unregulated banks since the majority of people nowadays have access to banks.
The problem of the “TOO BIG TO FAIL” doctrine is pursued under the Federal Reserve mission to prevent financial collapse.
Yet, the 2008 financial crisis marked the unprecedented beginning of monetary accommodation through “quantitative easing” or printing more money. (further reading here)
Since then, printing money is a solution to the financial crisis (source).
So, some unknown person named Satoshi Nakamoto proposed a solution as a new open-source P2P e-cash system called Bitcoin on February 11, 2009, at 22:27.
And he highlighted that
The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.
The rest is just history.
Problem of TradFi
5 problems:
Centralized control → hold custody of customers’ funds (can freeze accounts)
Limited access → servers as intermediaries (can censor transactions and charge fees)
Inefficiency → near 0% interest earn (high overhead cost or service fees)
Lack of interoperability → high costs to switch services
Opacity → in-transparent processes
Referring to 1. Overview of Defi
But the real problem is a trust-based system. Banknotes or fiat currency was built on trust to foster value due to its hard to forgery and low inflation rate (source). Fintech tries to fix the trust issue but it seems they did a terrible job (source).
Trust in the financial system has been breached.
We only have a solution on how to resolve the financial crisis through printing more money but there is no solution to how to get out of printing forward.
To put it simply, once we are in, there is no way out (source).
And forget to mention, we still do not know if QE is actually a solution or a problem to introduce at the beginning (source). Further reading here.
What we know is once starting QE, there is no end (source).
Here is a breakdown of what the Fed did in the COVID-19 induced financial crisis.
And worse, the global is following QE everywhere.
So, does Bitcoin a saver? We do not know either (source).
But surely, cryptocurrency is a type of investment.
Traditional Finance Vehicles
There are many types of financial vehicles to engage finance. However, they are all rigged or broken.
And risk ≠ reward, risk means you are permanence lost.
Stock
Stock is a share of the company investors purchase and hope to gain profits along with the company they choose to believe (source).
Stock is rigged
It is rigged because of a combination of high-frequency traders from the institutional, exchange, and hedge funds (source and source). Plus, the stock market is easily manipulated through pump and dump (source).
Bonds
A bond is debt security or a form of loan an investor makes to an entity such as a corporation, government, federal agency, or other organization in exchange for interest payment over a specified term plus repayment of principal when bond hits the expiration date (source).
This is how bonds suppose to work: bond yields signal economic confidence.
Bond is rigged
The Fed actually artificially manipulated interest rates through buying bonds without caring about any investments. Bonds’ performance is based on the Fed's judgment or in other words, the Fed controls the bond yield.
Mutual Funds/Index Funds/ETF
They are pools of assets put together and offer as one stock for investors to own.
The differences:
Mutual funds: actively managed and costly (ave. 1.4% management fees)
Index Funds: passively managed and inexpensive
ETF: at 24/7 available index funds
Mutual fund is rigged
No matter the performance, fund managers charged you the same price.
Index fund is rigged
Once index fund companies went bankrupt, it is not like a company you can sue to remedy rather than you simply totally lost your funds.
Also, the bigger the size of the winner in the market will win more index funds investment which makes the market riskier and more polarized.
Bank Products
Savings Accounts/Money Market Accounts/Certificates of Deposit (CDs)/Federal Insurance
When the interest rate is higher than the returns rates from the bank, your money is losing value every year.
Stay tuned for the next part of the Defi Guide!
