DeFi and Cryptocurrencies In Modern Economy

A detailed dive into how cryptocurrency and DeFi are impacting the global economy, reducing global inequality, and supporting traditional financial institutions

Here, we’ll cover both how crypto has affected the global economy so far and theorize how it could further push us beyond the limits of fiat currency in the future. The focus here is on how the technology can change the way our financial systems operate while simultaneously removing a lot of issues that currently plague a fiat-based global trade system.

There are two sections in this article. The first deals with how cryptocurrency has been an equalizing force in the global economy and offers developing countries a chance. The second deals with its utility in the developed world and traditional finance.

Cryptocurrency was created by a mysterious figure who preferred to remain anonymous, even though they could have soaked in the fame and celebrity that would have come with the invention of one of the most significant financial revolutions in history. The mysterious identity of Satoshi Nakamoto perfectly encapsulates the premise behind cryptocurrency: It is meant to be greater than any individual, party, government, or coalition.

Pretty much every cryptocurrency has built-in safeguards to prevent abuse and ensure that the currency’s integrity is protected. This is precisely why it is preferred by those that embody an innate distrust of the government, the central banks, and mainstream financial institutions.

While I won’t say that I embody that same distrust, I would like to cite a few examples of how cryptocurrency can potentially eradicate economic inequality in the world.

For such countries, cryptocurrency represents a way out. While there are inherent issues with volatility, cryptocurrencies, on the whole, are much more stable than certain currencies. It is not difficult to imagine people in certain countries having more faith in Bitcoin than in their native fiat currency. Cryptocurrency may be exactly what is needed to extinguish the notion of third-world countries altogether.

While fears of hyperinflation are only on the fringes in the US, there is no country in recent times that better encapsulates how crypto could be beneficial than Venezuela.

Cryptocurrency is a total revolution for countries that do not have robust financial institutions that can quickly and cheaply transact with foreign nations. For the first time in history, anyone can send money anywhere in the world in a matter of minutes.

Let’s go through a few ways crypto can impact the modern financial landscape.

Traditionally, gold has been considered the most stable store of value. Peter Schiff, one of the foremost critics of crypto, cites the fact that gold has been used as a currency for over five millenniums and has numerous real-world applications due to its conductive and thermal properties.

More importantly, while gold may be a store of value, it is almost impossible to imagine that we will ever use gold coins for trade once again. Crypto, on the other hand, is seeing an ever-increasing use in business every day. When Schiff says, ‘Bitcoin is never going to be money’, he is wrong because it already is.

Cryptocurrency not only offers new ways of using money, but it also supplements personal finance by making it way more versatile than it ever has been.

You may be wondering how this relates to the global economy. Well, holding cryptocurrencies and related assets can be a great way to manage your finances during a financial crisis. With increasing pressure on the US Dollar, cryptocurrencies are a viable asset for people in developing nations and those living in regions with robust financial systems. Bitcoin and other currencies can simultaneously be a financial asset, a medium of exchange (money), and a hedge against local currencies across the world.

It may sound strange that cryptocurrency can be both anonymous and transparent at the same time. However, it is possible thanks to the blockchain technology used to power cryptocurrencies.

Your wallet is not linked with anything, and there is no way for anyone to know that any coins are yours unless you disclose it yourself. At the same time, every transaction is recorded in the digital ledger, ensuring transparency and weeding out any chance of fraud. Since a transaction requires multiple confirmations (the number of confirmations changes depending on the currency), it is fundamentally impossible to have two copies of the same coin.

Perhaps the most significant advantage of crypto is its security. For the first time in history, you can travel anywhere in the world and carry your “cash” with you on your phone. Even if your phone is stolen, your encrypted wallet cannot be entered without your private key. In case you need to exchange your crypto for fiat currency, there are numerous services out there that can help you do it in less than 5 minutes.

Decentralized Finance, which is finance based on decentralized assets such as cryptocurrency, has picked up steam in recent years. A total of around $275 million of crypto collateral was locked in the DeFi economy in early 2019. By February 2020, the number had increased to $1 billion, and it eventually hit $14 billion in February 2021. The number now? Well, it’s a staggering $170 billion according to data from Chainalysis. That’s a 12x increase in less than 9 months.

As cryptocurrency continues to gain a foothold in the developing world, we should see many problems traditionally associated with the financial systems fade away. While I expect to see local start-ups capitalize on the crypto boom in these countries, the best thing is that cryptocurrency sees no borders. As long as local governments do not ban the major exchanges, anybody with an internet connection could make use of mainstream platforms such as Binance and Coinbase.

Over time, cryptocurrency can play a pivotal role in reducing the wealth gap between the developed and the developing world. Whether it helps people invest their cash in foreign assets or protects hard-earned wages from inflation, it will open up new opportunities in places where people have previously struggled to thrive because they can barely survive.

Cryptocurrencies will also continue to supplement the traditional financial and banking systems currently in place. While I do not think that the world will be primarily transacting in cryptocurrency anytime soon, I do believe that its role within our financial systems will become more significant as time goes by. Its security, anonymity, and transparency, coupled with its utility as a financial asset and a store of value, will make it quintessential to survive the turbulent times ahead, regardless of whether you live in the US, Africa, or under a rock.

Related posts:

If someone were to tell you they were afraid of being successful, you’d probably think they were crazy, right? After all, people want to avoid failure as much as possible. But not everyone feels that…

Every data scientist (or machine learning engineer) at some point has to deal with projects with a ton of spaghetti code. I’ve been building machine learning systems for the past 5 years and saw this…

The holiday season has arrived and many people start to think about what they are planning on cooking for Thanksgiving and Christmas. Turkey is a staple on the table for a lot of people, but many…