It’s been over 14 years since the Global Financial Crises of 2008. A lot has changed since then including the introduction of cryptocurrencies and the rise of personal banking. While the two may seem unrelated, a closer look reveals that it was indeed the 2008 financial crisis that led to the current DeFi movement.
What Happened in 2008
To understand how the Global Financial Crisis (GFC) inspired today’s advanced DeFi services you first need to understand the GFC and its causes. The GFC was a massive financial meltdown that took place across the globe.
The failures began with a small default but eventually led to a near-complete collapse of the global financial system. To stave off the impending collapse, governments stepped in and issued billions in bailouts to financial organizations and corporations.
The resulting years following the crash are referred to as the great recession by economists. It’s worth mentioning that the Great Recession was the worst economic period in the US since the Great Depression. The Great Depression occurred in 1929. It was the darkest time for American economics with the nation seeing multiple bank failures and double-digit inflation, homelessness, and unemployment.
For obvious reasons, the government wanted to avoid another Great Depression no matter the cost, even if it meant paying privately held corporations and nontransparent banks using your tax money. Interestingly, anyone could have seen both of the crashes coming from a mile away and some did.
Those who were smart enough to recognize the eminent collapse made significant profits. However, they were the minority. Many people lost their livelihoods and generational wealth.
What Led to the Collapse
The 2008 financial crisis begins years earlier with the slow deregulation of the financial markets. The removal of protections that prevented predatory lending and the creation of new financial instruments that maximized profits are two contributing factors to the massive collapse.
The rise in predatory lending meant that banks were giving out high loans to individuals with fewer requirements. These buyers were often uninformed and coerced into taking out funds for other tasks like remodels and refinancing. This desire to chase profits led to a peak in house prices in 2008. The market was riding an artificial high that was fueled by hedge fund trading with derivatives and preying on lower-income families.
Signs of Failure Emerge
It only took a few years of this behavior before the results began to show. There was a sudden oversupply of new homes coupled with a rise in unpaid refinance loans. These actions caused mortgage-backed securities to rise in value as well. The sudden and unexpected drop in home values in 2008 left many buyers stuck with a property that was now worth much less than their loan.
As more people began to default, it became obvious the banks had over lent. The true depth of the predatory lending became evident as bank after bank failed. However, it still took months before builders realized which left the housing market highly oversaturated for years following the crash.
The Fallout Begins
It’s at this moment that the true breadth of the situation set in as bank after the bank began to go insolvent, fail, or get acquired. There were 25 US bank failures in 2008. The failures culminated with the massive Lehman Brothers institution collapsing at the end of September 2008. This collapse led lawmakers to fear a complete collapse was imminent. As such, they went on the offensive with their aggressive bailout plans.
Lack of Investor Confidence
After attempting to solve the issue by throwing money at the problem it became evident that a new solution was needed. For one, unlike other recessions, this crash left the public concerned about the solvency of the nation’s economic system.
At first, the government wanted to buy its way out. On October 3, 2008, an $800 billion injection into the economy failed to slow the collapse. This bailout was followed by numerous other similarly sized attempts which all failed to slow inflation.
The solution that economists considered the most effective was the introduction of quantitative easing. This term describes when a central bank creates money to act as reserves. It is different than regular printing which comes in the form of bank notes. This strategy brings some advantages that helped to reign in the wild economy at the time.
Quantitative easing reduced interest rates which helped to spur economic activity. It injected more funding into the economy via the purchase of bonds. This approach drives bond values up while keeping interest rates low. Today, Quantitative easing is still used to keep the market stable.
Benefits of Quantitative Easing
Quantitative easing worked because it provided some key benefits to the market. For one it encourages spending. When you have low-interest rates, people are more likely to take out loans and spend. This helps to level out the market and drive growth. These factors are still the main benefits that quantitative easing brings to the table.
Risks of Quantitative Easing
Of course, anytime your answer to a runaway economy is to create more money, it’s going to be controversial. Many people are against the practice. They argue that there are high inflationary risks when you use this solution. Ironically, they seem to have been correct as today there is 40-year high inflation in many countries.
In theory, Quantitative easing can avoid inflation due to the use of a fractional reserve banking system. However, the scenario breaks down when you add in unexpected inflationary catalysts like war, supply chain disruptions, pandemics, and more. These factors can begin an inflationary cycle that if left unchecked, will result in hyperinflation destroying peoples’ savings.
Bandages not Long-Term Fixes
All of the solutions that have been used to date are simply bandages that don’t address the root cause of the problem. There are inherent flaws in the current centralized financial system that need to be corrected to create a more just and stable alternative in the market. Unfortunately, there is little incentive for the exclusive few to open the door for the rest of humanity to succeed.
The GFC wasn’t Bad for Everyone
The 2008 financial crisis wasn’t bad for everyone. Some traders saw the event coming and positioned accordingly. These same individuals are sounding the alarm about the economy’s current state.
Birth of Cryptocurrencies
It was no coincidence that Bitcoin entered the market at the same time as the finical collapse. It was at this time that many people became aware of the true level of integration between high-level financial executives and government officials. Bitcoin alludes to these practices in its genesis block when it shares a headline from the Times regarding the issue of bailout money to a massive bank.
Since Bitcoin, the crypto market has expanded and developed considerably. Today there are thousands of different tokens that serve vital roles within the blockchain sector and beyond. For example, some cryptocurrencies focus on payment systems, file storage, security, and personal banking. Today cryptocurrencies are faster and more flexible.
The People are the Bank in 2023
One of the best developments to result from the introduction of blockchain assets is the ability for people to become their own banks. It used to take massive funding, regulations, and fees to gain access to basic financial services. Today, they’re networks that enable you to provide yourself with the same level of service and even higher ROIs.
DeFi Banking Returns the Power to the People
DeFi (Decentralized Finance) is a term that describes the growing movement of blockchain-based financial applications. These platforms offer some unique benefits compared to their centralized counterparts. For one, decentralized banking solutions are more transparent. Anyone can see the network’s health via a blockchain explorer.
In comparison, there is no way for you to walk into your bank and get real-time data on their holdings or other vital information to help you confirm their stability. Also, you must rely on the bank to provide you with this data when they get around to it. There is no way to double-check this information as well. It’s easy to see why bank failures catch their patrons off guard. They have no way of being on guard,
A better solution is to eliminate the middleman and leverage technology to provide banking services to the entire planet. DeFi networks replace bank employees with smart contracts. These digital decentralized protocols eliminate human error and bias. As such, DeFi banks are far more democratic and open.
Banking is about Creating Wealth
One of the main aspects that the centralized banking system has hidden from the public is that banking originated as storing wealth and creating more. Even the banks saw this as a beneficial agreement when they decided to use their patron’s wealth to secure more wealth.
The centralized banking system doesn’t offer many ways to get life-changing wealth for the average person. The national savings account only pays out 0.03% which doesn’t even keep up with today’s high inflation rate. As such, fiat savers are losing future buying power by using these options.
A Better Solution
DeFi banking can provide higher rewards because of the elimination of the added overhead. Running a bank is expensive. You have rent, security, employees, electricity, insurance, and the list goes on. All of these costs are part of the reason the APY on most savings accounts doesn’t keep up with today’s inflation rate.
High Yield Savings is the Way to Go
DeFi banks like the META VAULT offer high-yield accounts that payout 10% APY. This APY is enough to still ensure returns even with today’s high inflation. Additionally, it’s much easier to join the META VAULT versus your local bank branch. You only need to connect your network wallet to begin securing returns. This approach means that you can start using the META VAULT to beat inflation today.
Anyone can enter the META VAULT and the greater METANOMICS ecosystem using the Onramper portal. This interface enables you to convert your fiat into cryptocurrencies in seconds. It saves you time and is cheaper than using a third-party CEX like Coinbase or Binance.
Focus on Stability
Of course, it doesn’t matter where your holdings are if you use an asset that suffers from inflation like fiat currency. A better solution is to go with a self-appreciating asset like META 1 Coin or gold. The latter will require much more effort and overhead costs. Additionally, you can’t easily ship or spend it compared to META 1 Coins.
META 1 Coin leverages a basket of gold-related assets to remain stable and decouple from the market volatility. This strategy has helped the token to secure self-appreciation alongside the value of its reserves. The token is also unique in that it integrates some protections to keep the asset value safe.
Stability was a vital concern across the board. As part of their strategy, the developers created a system that requires all token trades to meet the minimum asset value. This move enables the token to prevent massive sell-offs that could hurt long-term savers.
The META 1 Coin was the first ever to ban “non-humans” from the ecosystem. This decision helps to reduce trading volume which makes the token more stable. It also helps to keep the token value more stable by reducing the groups most likely to commit this type of manipulation from the network.
Problems are Back in the Light
One of the main reasons why DeFi is on the rise is that people are realizing that many familiar circumstances are occurring compared to the 2008 crash. Already there have been two bank failures and housing prices seem to have peaked in January in many places. All of these concerns have helped drive more people towards DeFi options which are more transparent and easier to join.