Every day, open finance products — known collectively as DeFi — gain more traction. One of the most popular DeFi services is “savings account alternatives”. The main differences are that DeFi enabled products deliver high interest rates, have no lockup periods, and make a middleman, who takes its cut, unneeded.

Before getting into how DeFi savings account alternatives operate, let’s recap how traditional savings accounts work.

When you open a regular savings account provided by a bank in Europe, you deposit your savings or spare cash and lock them away for a set period, usually several years. Then, the bank takes your funds and lends them out at an interest rate of anywhere from 2% to 10%. When the freeze period on your account is over, you can withdraw your funds, on which you earn an average of 0.05%, while the bank keeps the rest of the interest that it has earned on your money. Some savings accounts even have negative interest rates, so that you pay the bank to keep, borrow and profit of your savings.

How are DeFi products like Voluto able to offer higher interest rates?

Voluto, a DeFi enabled savings account alternative, is connected to an open digital cash pool, Compound. Compound is a virtual network through which people like you pool their funds and make them available to borrowers who meet strict qualifications. The interest generated by the borrowers is then distributed directly back to you, without any middleman taking a cut.

Let’s dig a little deeper into how digital cash pools work.

Using digital cash pools, borrowers, rather than relying on friends and family or a bank, are able to access funds through an entirely automated process. The system also includes people who supply the funds that borrowers make use of and pay interest on. For both parties, all of the funds come from and go into one big digital cash pool according to well-established rules.

After a loan has been issued, the borrower automatically pays the interest into the pool, from which it is distributed to all of the suppliers. It is because borrowers pay the interest into the entire pool rather than to a specific person, suppliers start earning interest from the moment they contribute funds to the pool, irrespective of the borrowers. As a consequence, there are no middlemen, no exorbitant fees, and no lock-up periods.

In order to ensure the safety of the lenders’ funds, the borrowers must lock in 1.5 to 2 times the value of the loan in digital assets as collateral. Moreover, the dynamic interest rate ensures that there are always more funds on the supply side than on the demand (i.e., the borrowers’) side.

In summary, DeFi digital cash pools enable to provide alternative savings accounts comparable to a regular savings account. On top of making this opportunity accessible to everyone, it cuts the middleman, who takes its share, offers significantly higher interest rates, allows flexible withdrawal and provides necessary security and liquidity measures.

To experience it yourself head to Voluto.