CeFi Weather Balloon

The full article was originally published by HelloIOTA. Read the full article here.

After exploring the world of traditional finance in our recent piece, we now understand lending, securitization, interest rates, and the markets that arise around tradable assets. It’s time to dip our toes into some of the newer innovations in the world of finance.

As we established, traditional finance centers on large institutions that are supremely well capitalized. We saw that some of the largest banks in the world have more than one trillion dollars on their balance sheets. All of this money is rabidly searching for returns in any place it can find. The search for returns has become so desperate that we’re seeing record amounts of negative yielding debt instruments.

This is where the new world of decentralized money and its friction-less payment rails comes into play. There has been a surge in something called “decentralized finance” (DeFI) over the past few months. DeFi exists in contrast to “centralized finance” (CeFi), which is the term that encapsulates any money transfers that take place through a centralized institution. Centralized financial institutions look like brokerages, exchanges, and banks. CeFi is another term for these entities in “traditional finance”.

In CeFi, I deposit my money into a bank savings account and earn interest on that money over time. Or I take out a mortgage from the bank, and then slowly make payments over the next 30 years. If I want to buy stock in Apple Inc., I’ll need go through a brokerage which can purchase and custody the shares for me. Some would argue that the worst aspect of CeFi is the draconian regulation. Take a look at how much regulatory compliance wastes each year, they say. When you do, you see that compliance costs large financial firms $200+ million per year. Do the benefits of such an extensive compliance system outweigh that cost? When applying that cost on a per employee basis, it comes out to be around $10,000. In other words, employees of financial institutions could be making an extra $10,000 per annum in a hypothetical world of fewer financial regulatory burdens.

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