We are witnessing an extremely turbulent time for wealth creation. We also experience this with high inflation, rising interest rates and stagnating wages. Facing this reality, one has to ask whether crypto is a viable solution to revitalize ailing economies around the world and support widespread economic development, or is this just another scenario destined to play out in guessing the same old cycles we’ve seen before? Is crypto really a viable hedge against inflation and is decentralized finance (DeFi) a practical addition to stabilize an imperfect financial system? Let’s examine some of the cycles and trends that may help show what the future of finance holds for the world.
Alternative finance avenues
Annual inflation in the US accelerated to a whopping 9.1% in June this year, the highest in 40 years. And this while food and gas prices continue to rise and homeowner interest rates now exceed 5% on a 30-year fixed-rate mortgage. Stagflation, as Larry Summers described it, is a perfect storm that combines slowing GDP growth and rising inflation, with a long-lasting effect. Seeing the US economy contract by 1.4% in the first quarter of 2022 could herald this economic malaise. Combine that with the average APR on traditional savings accounts of a feeble 0.10%, a minimum wage not raised at the federal level in over a decade, and it’s obvious we need new ways to make our fiat money strengthen. based economy and complement our investments.
Our current economy is one that does not necessarily encourage or reward traditional savings mechanisms to adequately keep up with inflation. This is one of the reasons DeFi has become popular. For many, DeFi represents a more immediate opportunity to grow their wealth in ways that are more accessible than the traditional banking system. When one can get orders of magnitude more returns from investing in cryptocurrencies, investing in cryptocurrencies and digital assets becomes a very intriguing value proposition.
economic cycles
In his book The Changing World Order, hedge fund titan Ray Dalio describes economic cycles that repeat themselves throughout history as the power of nations shifts. When a country becomes the dominant world power, its currency becomes the reserve currency for the rest of the world. For example, during the reign of the British Empire, sterling once powered the global economy. However, in 1944, the Bretton Woods Agreement made the US dollar the de facto reserve currency of the world. Regardless of who is in charge, one constant remains: in times of rising inflation, the easiest way for a government to deal with rising debt is to print more money; in other words, to inflate their way out.
Crypto as the next dominating cycle
There has been a lot of talk about central bank digital currencies (CBDCs), but if we already have deflationary stablecoins in the ecosystem whose value can be pegged to collateral like other cryptocurrencies or even traditional assets, what is the real benefit of a CBDC? ? The whole idea of a stablecoin is to offer a crypto asset whose value is not susceptible to extreme volatility. Most stablecoins achieve this stability by pegging their value to a fiat currency like the US dollar, or a basket of assets that could include fiat and cryptocurrencies.
Additionally, most stablecoin projects also incentivize people to stay invested in the ecosystem by offering derivative versions of assets they’ve locked into liquidity pools, allowing investors to get involved with other DeFi protocols, even if their main ones assets remain blocked. They can earn generous interest and still use derivatives to borrow from us, or earn returns elsewhere, augmenting their initial investments.
DeFi offers new avenues for economic growth, restoring power to everyone, not just the super-rich. Because DeFi protocols are not tied to a nation-state currency and instead fuel the broader development of the crypto-powered economy, they can provide generous incentives to save, earn, and borrow with very little initial investment capital.
Macroeconomics may be pointing us towards crypto
In times of high inflation, alternative savings and assets like cryptocurrencies become more attractive by offering investments that aren’t as directly tied to a global reserve currency. As demand for these assets increases, they become more valuable and therefore more viable in other struggling economies around the world. We have seen examples of this in Turkey and Venezuela, where their national currencies remain unstable. This ultimately lends more credibility to the idea that cryptocurrencies like Bitcoin are becoming a legitimate player on the world economic stage. The recognition of a currency not tied to a nation state but based on an agreed decentralized currency on an immutable, public blockchain is a major shift in the world’s macroeconomic models.
A decentralized system that allows individuals to trade directly with one another in a more efficient and transparent way is a monumental new step in our approach to creating more just and inclusive global economies. With all of this in mind, it is reasonable that we consider crypto as one of the most viable solutions currently available to us to answer the fundamental questions that inspired this article. While history may not repeat itself, it does rhyme – and Krypto seems to offer a very different tune.
DeFi certainly offers people an opportunity to invest in deflationary assets with significant potential for returns not currently seen in traditional finance, and this is helping create the potential for a new way of creating generational wealth. If historical cycles continue, crypto could simply be the best hedge against the declining strength of fiat-based economies. If talented developers continue to focus on removing barriers to entry, demystifying the DeFi experience, and allowing everyone to interact with the crypto markets, we can continue to advance crypto and help expand economic inclusion and development.
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