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Introducing Banking on the Blockchain

Mar 29, 2021

Blockchain and cryptocurrency have the potential to change the way we think about money, and particularly how we store and manage money online.

One big trend in recent years has been big banks taking steps to adopt cryptocurrency and implement blockchain into their processes. A technology that was either unknown or maligned just a decade ago is now being used in mainstream financial institutions.

But is traditional finance the best framework for handling cryptocurrency? We sat down with Calvin Liu from Compound Finance to talk about what they’re doing to build new banking tools for the blockchain.

What’s stopping the widespread adoption of crypto?

Why has it taken so long for mainstream finance — and society in general — to get comfortable with and adopt cryptocurrency? In addition to the early misconceptions and mistrust, there are some lingering barriers that stop people from getting into this space.

Calvin talks about the exclusivity of the crypto world. It contains a lot of fringe communities, rife with insider jargon and highly technical concepts that in many cases seem designed to confuse newcomers and maintain secrecy.

Educational materials can be hard to find and even harder to interpret. Calvin believes this is not always a coincidence — in many cases, crypto experts have an incentive to keep things mysterious and hold onto proprietary information to maintain their role as sought-out gatekeepers of the space.

But things are changing. Compound Finance is one example — a service built to help ordinary users manage their crypto funds more easily. So how does it work?

What is Compound and who is using it?

Compound is a smart contract-based interest rate protocol built to generate yields on crypto funds. In other words, users can quickly take cryptocurrency they have stored in other crypto wallets, deposit it into a smart contract protocol, and start earning interest.

Compound has a wide range of users. That includes small crypto hedge funds, but also ordinary users. Many applications now integrate with Compound, making it easy for their users to quickly interface with the service.

For example, challenger banks and FinTech startups who currently have no crypto association but want to earn stablecoin interest rates can use protocols like Compound to do so.

Blockchain banking vs traditional banking

Calvin is quick to stress the difference between Compound and actual banks. He explains that banks like Compound aren’t really banks in the way we usually use the term. Instead, they work more like an API for interest rates.

Traditional banks can integrate with this kind of service and allow you to earn interest from it. A key difference between Compound and banks is that Compound’s code is public, auditable, and heavily audited — any user can come and look at the code that makes up Compound and verify it.

What’s the future of banking on the blockchain?

Calvin notes that the current blockchain banking ecosystem is becoming competitive, and the technology behind it is attracting attention from multiple areas. However, the way many projects are going about it is, he thinks, a little misguided.

Lots of FinTech startups and challenger banks are gravitating toward blockchain banking services, but they’re trying to build new and shiny online experiences on top of existing traditional finance rails.

This is a bold and promising idea, but this infrastructure is decades old and was built in an age before the internet even existed. This makes these rails outdated and not really fit for a decentralized web.

As Calvin explains, decentralized finance is all about going deeper. Instead of just building shiny interfaces on top of existing financial rails, it aims to replace the rails themselves with something faster, more transparent, more trustworthy, and better suited to the internet and digital world.

What’s next for Compound?

Calvin is excited about the future for Compound. Two interesting new developments are Compound Cash and Compound Chain.

Right now, if you’re a user of Compound, you get COMP tokens, which you can use to create and vote on proposals for how the system itself should change.

Compound Cash is different. It’s a cross-chain, interoperable, interest-bearing unit of accounts. In simple terms, that means it can be used to transfer value across different public and private chains.

The future for decentralized, blockchain-based banking services is fascinating. As this infrastructure becomes more refined and accessible to the mainstream — driven by projects like Compound — it’ll make it much easier for ordinary users to start taking part in the decentralized economy.

To find out more about decentralization, crypto, blockchain, and all related topics, tune into The Unstoppable Podcast, where we host regular discussions with all kinds of people in the space, at a level everyone can understand.

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