A traditional savings account earns an average of 0.05% yearly interest. Meanwhile, banks turn around and lend depositors’ money to borrowers at interest rates ranging from 2% to 10% keeping the difference to themselves.
Voluto users can earn higher interest rates because it’s powered and enabled by open financial technology called DeFi (decentralised finance) and the Compound platform. It removes the middleman (a bank) and automates the whole process of lending and borrowing.
So, rather than depositing your money in a bank (a middleman), you supply funds to an open digital cash pool on the Compound platform, which can be directly accessed by others who want to borrow. Once someone takes out a loan from the pool the interest is distributed directly to all the suppliers of the pool.
To take out a loan from the digital cash pool on the Compound network, borrowers must lock collateral worth 150%-200% the value of the loan. Thus, for example, a €100 loan would require collateral worth €150 - €200. This ensures that a loan from the digital cash pool is always repaid. Otherwise, collateral is liquidated and is transferred to the pool covering the original loan amount.
The Compound network also guarantees that significantly more funds remain in digital cash pools than the amounts that have been provided to borrowers, so you can withdraw your supplied funds with all the earned interest anytime.
Additionally, digital cash pools are controlled, audited, and supervised by the network and by third parties. This level of oversight ensures that digital cash pools work as intended. For more detailed information on the security measures please visit this page.
On top of that, we protect all Voluto accounts with Apple Passcode, Face ID, or Touch ID as well as encrypting all the data.
Since the DeFi (decentralized finance) ecosystem is still young and evolving, there are certain risks that you should be aware of. The following are two of the most significant.
“Bank-run” risk. If all of the suppliers to a pool should decide to withdraw their contributions from the pool at the same time, the surplus would disappear, and, for a short period of time, some contributors would be unable to withdraw their funds. However, should such a situation occur, the lending interest rate would increase to the maximum (currently 20%), and the borrowing rate would increase significantly, too. These developments would, in turn, motivate borrowers to repay their loans and attract new contributors to the depleted pool. In fact, throughout the entire history of Compound, this problem (“pillow drain”) has only arisen once, and it was resolved in a few minutes without any impact on users’ funds.
“Smart-contract” risk. Even though DeFi smart contracts (which are simply rules written in code for facilitating digital transactions) have been in active use for several years, some bugs may still remain to be discovered. However, most smart contracts have already been assessed by renowned third-party auditors, such as OpenZeppelin and Trail of Bits. Moreover, the Gauntlet Network has successfully performed extensive stress tests to evaluate Compound’s robustness.
Individuals who are considering opening accounts are accordingly advised that certain risks are involved when they contribute funds to a Compound digital cash pool through the Voluto app and that they should exercise discretion.
When you transfer funds from your bank account, our partner converts them into a form of digital cash called USDC. We then send these USDC funds to Compound, and they begin earning interest. When you make a withdrawal, the USDC is converted back into EUR and is sent to your bank account.
A digital cash pool is a virtual money network to which some people supply funds and from which others borrow in accordance with established rules. Rather than placing your money in a traditional bank account, you deposit it in an open digital cash pool that starts paying interest right away. Anyone who does want to borrow must secure the loan by putting up digital assets worth 150%-200% of the value of the loan as collateral. Once the loan has been issued, the borrower automatically begins paying interest into the pool.
To get a better understanding, check our video explainer.
In the digital cash pool, interest rates fluctuate in response to supply and demand. Suppose, for example, that suppliers start withdrawing their funds from a pool. This reduces the supply, so the interest rate rises. The higher interest rate, in turn, motivates more suppliers to enter the market, and the increase in the supply of funds to the pool reduces the interest rate. The lower interest rate then encourages more borrowing, and the cycle continues.
The funds you deposit are never locked and can be withdrawn anytime with all the earned interest. It is made possible by the Compound network that ensures that the funds on the supply side of the pool always exceed those on the borrowing side. This gives Voluto users the freedom to withdraw their funds from a pool quickly and at any time.
Simply put, DeFi is a financial technology that enables the operation of global decentralized financial products. A global lending pool like Compound, and firms like Voluto that partner with it, are powered by DeFi. These financial systems are open, meaning that they are accessible to anyone anywhere.
Recently, the prominent and highly successful venture capital firm Andreessen Horowitz invested $25m in Compound. Such industry leaders are now looking to DeFi as the future of finance.
Of course, you don’t need to know what DeFi is to use Voluto; but for those who are interested, we highly recommend that you read more on Forbes or DefiPulse.