The unique advantages of DeFi make it impossible to redefine banks

The beginning of the rise of the World Wide Web coincided with the heyday of print media.

In the early years, paper media often had a monopoly power in the local market, making a lot of money by virtue of vertical integration and a wide audience.

Then, the internet came into its own. First, Craigslist upended the classifieds market, shrinking print ad revenue. Later, the advertising platforms and search-ethexc engines first divided the advertising revenue of the paper media, and then extended their grasp to the content-ethexc of the paper media. Social media has accelerated this trend, creating fierce competition for breaking news. The "record model" of paper media is declining, and the "single model (title party)" of Internet media has become the mainstream.

It wasn't until around 2020 that this war without gunpowder smoke died down. Monthly subscription services are gaining acceptance, but this business model is only available to the most reputable national newspapers. In the end, 60% of jobs in the print industry evaporated and the news production process was completely changed.

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In 2020, what was disrupted turned into a vital pillar of our daily lives - banks.

Bank of America has changed dramatically in the Internet age.

Handy banking has become the norm. The check can be deposited into the bank account by scanning, no need to go to the bank counter to process. Neo banks such as Monzo, Chime, and Revolut have emerged, mainly providing palm banking services, and constantly introducing new ones (get your salary two days earlier! Free currency exchange! No fee ATM service!) In some payment networks, bank transfers is real time. However, some odd features have not changed.

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- Long queues at Union Bank of America, 1931 (Source: Wikimedia) -

Banking hours are 9am to 5pm, Monday to Friday. (According to the latest statistics) there are 83,000+ bank branches across the United States. These bank branches are crucial for the small odd deposit business. Bank transfers still take days (at least in the US). Although regulation has played a role in protecting user funds, it will also increase the difficulty for individuals to set up a bank. Wire transfer fees are still high, and the remittance process is cumbersome (remittance method? account? beneficiary? address? bank address?).

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Even just opening a bank account can take anywhere from 2 to 36 days:

The time required for each bank to open an account

- Source: "Open Account", Built for Mars -

However, the era of Compound has arrived.

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It doesn't seem plausible that Compound, which holds only $117 million in deposits (JPMorgan Chase & Co. holds more than $1 trillion), should threaten banks.

The Compound protocol runs on the Ethereum blockchain in the form of smart contract code.

According to the latest statistics, only a few million users around the world know how to access the blockchain network. Compound, however, will revolutionize the banking industry.

In essence, the bank is a "gold swallowing beast". Depositors deposit funds in banks at lower savings rates; borrowers borrow from banks at higher lending rates.

Banks make money on net interest margins and making sure borrowers can repay their loans. Banks and governments aim to ensure that borrowers don't rush in to lend, lest there be a liquidity crisis.

By that definition, Compound is a bank. Depositors earn interest by depositing cryptographic assets; borrowers can borrow these cryptographic assets while providing collateral. Compound also makes money through spreads. However, Compound has some huge advantages that banks don’t.

There are three main points:

1. Compound is global

Everyone in the world can access Compound. Banks were prohibited from conducting international business until the Glass-Steagall Act was repealed in 1999. Today, there are very few global banks.

With smart contracts and blockchain, starting a global bank is no longer difficult.

2. Compound is governed by code, not people

Banks are strictly regulated, because banks control your funds, and there is a risk of running away or developing bad loans at any time. Regular bank reviews can not only protect user funds, but also raise the threshold for starting a bank and reduce competitive pressure.

Compound is self-governing: developers write protocols—programmers write rules into smart contract code—preserving as much power as possible for users or voters. Compound is not bound by traditional regulation, which is a big advantage. However, that doesn’t mean Compound is risk-free — there’s still the possibility of a borrower defaulting on debt or a bug in the code. However, the owner of Compound can't run away with the money.

3. The blockchain is like the Internet, 24/7, fast as lightning

Compound can complete global transfers in minutes or even seconds. Transfers of $1 billion only pay a fee of $0.50. By contrast, the U.S. banking system was cobbled together using the COBOL language popular in the 1970s and consolidated after the repeal of Glass-Steagall.

What I am saying is that we are not overthrowing the banking system, we are redefining the banking system. After all, we're redefining access to news in the 21st century through real-time reporting, social media, and news aggregators.

Banks don't change drastically overnight. It took 20 years for the internet to revolutionize print. We first need to give users the ability to access the blockchain. Smart contracts can be contested like constitutions or banking regulations. Risk management must become the norm. But the future is already here.

It's not just the banking sector that will be disrupted, Wall Street will be hit too. Since the birth of Bitcoin in 2009, cryptocurrency exchanges have proliferated, creating a veritable global financial system that trades assets 24/7. Smart contract projects like dYdX make shorting easier. Exchanges like Uniswap and Kyber allow users around the world to trade any type of asset in any amount.

While financial technology has been accelerating innovation over the past decade, the entire financial industry has only just ushered in a sea change.

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