It’s human nature to want the opposite of what we get, hence the famous saying “opposites attract” — and this couldn’t be more true with regards to the world of crypto.
In times of market volatility, many want the exact opposite. People want stability, security, and familiarity. This is why the rise of savings accounts, more commonly known as “Savings Vaults”, have experienced massive user adoption over the last couple of months.
But how did they come about, and what made them possible?
The source: What are stablecoins?
Stablecoins are a type of cryptocurrency programmed to track the value of assets such as government monies or gold. There are many types of stablecoins, but these are the three most common ones:
Commodity backed stablecoins – These are stablecoins that are linked to physical assets like precious metals, oil, and real estate, with the most popular asset linked to stablecoins being gold.
Example: Paxos Gold – each PAXG token is redeemable for 1 troy ounce of gold custodied in vaults by Paxos.
Fiat-collateralised stablecoins – These are stablecoins that are backed one-to-one by an underlying government currency (such as USD or EUR) stored in a traditional financial institution.
Example: USDC – a stablecoin made by Circle and Coinbase. Both companies have achieved regulatory compliance, and the stablecoin is fully backed by a 1-to-1 value with an actual US Dollar.
Crypto-backed stablecoins – These are stablecoins that are backed by other cryptocurrencies. In order to reduce price volatility risks, these stablecoins are often over-collateralized (150%-200%) so that they can absorb price fluctuations in the collateral. For example, a 150% collateralisation ratio means that you can only take out a $1 000 loan when you put up $1 500 worth of Ethereum as collateral.
Example: DAI – a stablecoin with a value pegged to $1. Yet, unlike fiat-collateralised stablecoins, it’s value is backed by Ethereum, not fiat.
Therefore, stablecoins are just a digital version of an asset or fiat money and is pegged to that particular asset or currency.
The backbone: Why is this important? (DeFi)
With the creation of stablecoins comes the formation of a whole new world, the wonderful world of Decentralised Finance (or simply DeFi).
DeFi refers to an ecosystem of financial applications that are built atop blockchain networks. These financial applications aim to create an open-source, permissionless, and transparent financial service ecosystem that is available to everyone. It also operates without any central authority, making it that much cooler!
Simply put, DeFi aims to democratise finance by replacing existing centralised institutions with peer-to-peer systems; no middlemen here! And what’s even better is that these systems can provide a full suite of financial services similar to that of the institutions they aim to replace, while giving you more control over your money in the process.
DeFi challenges our current centralised financial system by disempowering middlemen, intermediaries and gatekeepers, and empowering everyday people to interact directly with each other via peer-to-peer exchanges.
DeFi is powered by decentralised apps called “dapps” and other programmes called “protocols” — both of which handle all the transactions in the world of DeFi.
The product: How will this help me save?
Both protocols and dapps make it possible for the Savings Vault to be born.
Unlike a traditional savings account, a Savings Vault uses these protocols to give you the full return you deserve.
Here’s how it may play out at a basic level.
“Today, you might put your savings in an online savings account and earn a +1% interest rate on your money. The bank then turns around and lends that money to another customer at +5% interest and pockets the +4% profit. With DeFi, people lend their savings directly to others, cutting out that +4% loss in profit and allowing you to earn the full +5% return on your money,” says Brett Hope Robertson, Investment Analyst at investment platform Revix
Finally, you are getting the full bang for your buck!
Currently, the US Dollar savings account rate is around +0.6%, while the equivalent Savings Vaults, such as a USDC Savings Vault, can offer anywhere between +2-8% per year.
South African Benefits
South Africans have a unique need for US Dollar exposure, and this is simply due to the fact that over the last 50 years the South African Rand has depreciated roughly -6.2% a year against the US Dollar. In fact, it’s been around -7.7% a year for the last 10 years.
But what does this mean?
This means that it’s getting increasingly difficult for South Africans to accumulate international wealth while they save in a currency that is making them -6.2% poorer every year.
“Despite the Rand having strengthened over the last few months, South African’s are still struggling with Rand depreciation over the long term. An average deprecation of -6.2% actually translates to around a -70% loss of your international wealth in just 20 years. This is a serious issue that many don’t understand,” Hope Robertson continues.
Stablecoins and Savings Vaults can help stop this wealth erosion and make it work for you, not against you.
By using these Savings Vaults, you can gain US Dollar exposure while picking up an extra +2-8% return on your US dollar stablecoins. Therefore, you gain two-fold. One, by not holding a depreciating currency (+6.2% gain) and two, by earning an additional +2-8% on these assets.
Assuming you got +8% on your Savings Vault, this two-fold gain will translate into a +14.2% net return on your South African Rands. That’s a substantial return for something that was grown in a stable manner.
Where do I find these products?
Investment platform, Revix, is releasing a USDC Savings Vault on Friday the 23 July 2021.
This is a flexible US Dollars denominated savings account that offers an interest rate well above market (Prior 12 months: 4.27%) with no lockup periods.
Unlike traditional banks, Revix does not give you a reduced interest rate on your money, nor does it hold your interest till month-end. Instead, the full interest will be returned directly to you on a second-by-second basis.
So if you are looking for a Rand hedge and a stable way to grow your wealth, then this is the product for you.
Visit Revix today, and start saving.