Can DeFi narrow the wealth gap?
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An editor at Coincrop
06 Feb 2022 | 9 min read
hrough 2021, we saw crypto become far more accessible and more general public began to take note and start to accept a move to crypto. In 2022, we will hopefully see the wealth gap start to narrow. More average income people are taking up the adoption of crypto currencies through the hype and speculation of decentralized finance (DeFi), and key developments in the technology have undoubtedly helped people in need.
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We are also witnessing NFTs (Non-fungible tokens) that are helping artists in developing countries access new avenues of income, and the play-to-earn games such as Axie Infinity are helping small-income earners in the Philippines generate wealth.
Countries and traditional financial institutions are also embracing cryptocurrencies to increase wealth generation, like El Salvador establishing its own Bitcoin City to Fidelity launching its Fidelity Advantage Bitcoin ETF Fund.
As the global financial crisis looms in 2022 and the effects of inflation will take hold, we can see that there are opportunities to free ourselves from the World of traditional finance. As the US Dollar is the global reserve currency, the wealth gap also continues to grow, with 89% of US stocks reportedly being owned by the wealthiest 10% of Americans, and traditional investments like bonds bringing smaller and smaller returns.
With Global debt on the rise along with inflation across the world, the issues associated with developing countries accessing capital, and wealth continuing to erode away from fiat inflation, it leads to more people seeking ways to preserve and grow the value of their own assets.
The hype and speculation have fuelled the mainstream adoption on to crypto currency, blockchain, and DeFi, and anti-inflationary possibilities are helping the less-wealthy improve their financial status.
The recognisable power of DeFi for passive income and wealth generation for the masses has provided an opportunity for those who are forced to work endless hours a week the opportunity to break free.
The barriers to earning passive yield have become accessible to anyone with the internet, and wealth generation is not the privilege of the already wealthy.
It is all too apparent that traditional investment strategies, including bonds, trust funds, stocks, mutual funds, exchange-traded funds, and annuities, which typically range from 1-4%, are now declining together with the state of the economy.
By comparison both DeFi staking, and yield farming offer far greater wealth generation opportunities, with relatively safe yield farming methods on Stablecoins are generating anywhere from 6-20% through methods such as earning interest through lending, and liquidity mining through Stablecoin pools.
By allowing token holders to make yields with the growth of the platform/protocol, similar to how stock/stakeholders gain dividends from the company in traditional finance, but with higher returns, investors can earn anywhere from 15% to as much as 45% a year.
With staking it benefits the platform by reducing the number of tokens in circulating supply, importantly reducing inflation and dilution of the assets, increasing its total value locked in, this provides more stability and capital for investments and other business opportunities for the platform.
For investors you still need to do your own due diligence and research on platforms before deciding to do yield farming, such as tokenomics, security, future growth potential, lock-in period, rate of return, and additional benefits such as governance ownership will all have to be considered.
As there are issues that will almost certainly need to be fine-tuned to make passive income available for anyone, namely adequate education to help users understand the constantly evolving ecosystem of crypto, blockchain, and DeFi. Also, regulation also needs to take its part to ensure investors assets are better protected from online scams and hacks.
With TradFi (traditional finance), institutions such as banks, portfolio, and fund managers often have minimum financial requirements, restricting access to the same investment opportunities that the wealthy can enjoy.
By comparison, smart contracts in DeFi execute and process transactions on the blockchain for DeFi and crypto, treating everyone fairly without bias or minimum capital requirements and a few dollars or a few thousand to invest, there is no preferential treatment in crypto, allowing retail investors to overcome financial barriers faced by existing TradFi.
Another benefit of DeFi it offers more individual control over investment opportunities compared to traditional finance, without requiring custodians and intermediaries like banks, portfolio, and fund managers, which also take a significant percentage of profits.
Maybe in the future we may see traditional financial institutions actively integrate DeFi staking and yield farming opportunities to increase returns to remain competitive and attract investors.
TradFi institutions are delaying the inevitable and could result in DeFi catching up in mainstream usage for investment and wealth generation opportunities?
As we look forward there is a lot to worry about with the global economy caused by the pandemic which has resulted in inflation as well as other financial issues but there are massive opportunities as well that will bridge the wealth gap.
The positive to take from all this information is crypto, DeFi, and blockchain ecosystems continue to evolve and mix with the world of TradFi, retail investors will benefit from improved and greater access to investment opportunities and financial inclusion.
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