Innovation in banking – that has been wanted for a long time. After the financial crisis of 2008, it was mainly the fintechs that shook up the traditional banking world by breaking the value chain. So-called neo-banks such as Revolut, Transferwise or N26 provided users with an aha moment here and there.
From an end-user perspective, this development has certainly improved the customer experience when it comes to banking services. However, the really big innovation seems to have not materialized so far. Even within the banks, this additional competition has so far hardly led them to reinvent themselves.
Blockchains as a new type of core banking system
The advent of public blockchain systems has brought new hope. With them, the innovation does not happen within the banks or along them, but in the “bank” model itself. The fintech banks are followed by the on-chain banks. Their name comes from the fact that these banks run as open source protocols on a public blockchain. As such, they are not based on the traditional legacy systems. Its foundation is the public blockchain, which in a sense functions as an independent, new core banking system.
In theory – and increasingly in practice – a public blockchain enables money, assets, storage of value, payment function, settlement, transfer, contracts, property registers and governance. On-chain banks make these properties their own by taking these financial building blocks and turning them into bank-like services.
Non-discriminatory banking
The starting point is always having an on-chain bank account. Due to the permission-free access to a public blockchain, these new bank accounts are open to everyone. One of the innovations of the blockchain is being able to use an electronic signature to prove that something belongs to you. In contrast to the conventional banking world, the use of a service does not require authorization by means of personal identification. Rather, it is about knowing a private access key for personal identification.
So you can say: At the present time, an on-chain bank does not care what the end user is called or who he is. Neither gender nor race nor age nor nationality nor religion play a role. This radical equal treatment means that banking services are available without any ifs or buts. For example, on-chain banks can now take out loans (comparable to Lombard loans) against collateral. Anyone who has the necessary security can be sure of receiving a loan.
This guarantee does not exist in the traditional banking world. If you fail the internal compliance checks, you may be refused credit. It is also possible that banks, due to internal directives, have so-called “De-RiskFollow and implement strategies. Customer relationships that are considered to be too “risky” are then terminated. Bitcoiners in particular can tell a thing or two about it to singas their assets are no longer welcome at some financial institutions.
That banks unabashedly resort to the means of censorship, shows also the affair around OnlyFans. Under pressure from banks, the video content platform has sexually explicit content forbidden. While some have argued that this would be done to prevent illegal sex content, others disagreed, blaming the high chargeback rate on financial transactions that are to the detriment of banks.
Whichever side you are on, the event illustrates the politicization of capital and the banking system. And this is likely in a world of ESG mandates and the corona opinion gap is likely to increase. For example, a fitness owner’s bank balance in the US was left without legal process confiscated, because he opposed the COVID rules and did not pay the fines that were subsequently waived.
Everyone is a cantillionaire
In European countries like Switzerland or Germany this is likely to be financial Deplatforming only be a problem at certain points. Much more problematic in these latitudes is the challenge of being able to keep pace with galloping asset price inflation. The latter is the result of an expansion of the money supply that has been going on for decades and particularly benefits those who have had assets for some time. The French economist Richard Cantillion already has this fact described and was later summarized under the term “Cantillion Effect”.
As so-called cantillionaires – that is, millionaires created by the cantillion effect – it was mainly the baby boomers who benefited from this continuous increase in money. Via the traditional banking system to leverage they use credit to their assets. Real estate or securities are deposited as collateral. In return, there are liquid financial resources without having to sell off one’s own assets. Thanks to the explosive growth of money over the past few decades, house or stock prices have risen continuously, which has made these leverage games an advantageous strategy. But not for younger generations. They are confronted with a financial system that is cementing ownership and making it increasingly difficult to build up wealth.
The on-chain banks come in handy. They enable digitally savvy millennials to benefit from those financial practices that are hardly accessible in the traditional banking world. the Tokenization Everyone and everything is currently creating new financial assets that can be deposited as collateral for liquid loans regardless of their own income. Against cryptoassets of various kinds – for example even NFT – You can borrow crypto stablecoins from on-chain banks without any ifs or buts. In concrete terms, this means: In addition to the millennials, thanks to the open access to the credit markets, millions of “unbanked” users can for the first time benefit from the ongoing financialization. Cantillion for everyone is the motto.
Banks are fun again
It is also interesting that the traditionally very hierarchical banks with their centralized structures are being broken up in the new world. On-chain banks are called so DAOs structured. This term stands for decentralized autonomous organizations. What sounds like a very cryptic definition has now become a very popular model in practice. On the basis of flat hierarchies, various DAO members work for an on-chain bank all over the world. Whether in community management or in the administration From funds held in smart contracts or the further development of one’s own protocol – work that the code cannot do itself is carried out by enthusiastic people of flesh and blood.
The DAO’s own tokens create enthusiasm and incentive to work on an on-chain bank. thanks to the Token network effect Everyone can be a user, shareholder or even an employee of an on-chain bank right from the start – and not just after an IPO. In the best case, the token entitles the holder to have a say and to receive dividends in the form of so-called network fees that are incurred when using the on-chain bank. For example, when borrowing or trading via the protocol’s own decentralized trading exchange for tokens of all kinds. Due to the lower fixed costs, a much higher proportion of the bank profits can be returned to the token holder.
The possibility of participation right from the start turns the users of an on-chain bank not only into their customers, but above all into their fans. Also for the fun factor contribute do elements of gamification. So enables the blockchain dividend payments on which the on-chain banks are based in real time. This not only has addictive potential, but also reduces opportunity costs. Network fees can be claimed at any time via the user interface and thus reused immediately.
Corporate governance has also received a similar upgrade. Various on-chain banks grant their token holders voting rights in order to have a say in the further development and strategic direction of their own protocol. General meetings are meanwhile held every month. Any token holder can use the proposed applications from the comfort of their own home participate. Such on-chain governance is not only transparent, it also creates the necessary sense of belonging.
It seems like the future should indeed belong to on-chain banks. Of course we are still at the very beginning. The individual elements will have to consolidate over time. Further innovations, which blockchain technology makes possible in the first place, will be added.
About the author
Pascal Hügli is a moderator, debater and lecturer at the HWZ. As an analyst for the German-speaking Newsletter Insight DeFi he would like to inform the broad masses competently and concisely about the events and opportunities of the new decentralized world of Bitcoin and Co. He is also the author of Ignore at your own risk: The new decentralized world of Bitcoin and Blockchain.