A recent report by IOV Labs has highlighted the power of crypto and DeFi in the fight against inflation.
In particular, it analyses how DeFi is transforming finance in Latin American countries suffering from hyperinflation.
Hyperinflation refers to a situation of particularly high inflation to the extent that citizens use currencies other than their own.
In hyperinflation, prices rise so fast and so often that it is no longer worthwhile to denominate them in the local currency.
Instead, it is better to denominate them in a currency with a more stable value and then convert them into the local currency at the time of payment.
In general, a doubling of prices in three years is enough to qualify as hyperinflation, and the cause is usually trivially a persistent increase in the money supply that is excessive in relation to GDP growth.
In other words, it only takes three years of inflation of 26% or more to speak of hyperinflation.
There are currently no less than five Latin American countries above this threshold: Venezuela (318%), Argentina (138%), Suriname (54%), Cuba (37%), Haiti (31%), with Colombia at 11% and Brazil at 5%.
The problem is that hyperinflation is sometimes even threatening the livelihoods of a significant proportion of the population, making it a key challenge for governments to tackle.
Cryptocurrency-based DeFi technologies can be used to try and combat the problem.
For example, the report shows that more than a third of people in Latin America now use stablecoins for everyday purchases, well above the global average of 11%.
Furthermore, blockchain-based technologies could save financial institutions $10 billion by 2030 in terms of reduced cross-border transaction costs.
However, while Latin American fintech companies have already received significant funding in recent years, the region has yet to establish the regulatory sandbox needed to test innovative products in this regard.
Blockchain-based solutions: crypto and DeFi to protect against inflation
By far the most popular blockchain-based solution already in use is stablecoins.
The report mentions in particular USDRIF, a stablecoin developed on a bitcoin sidechain (rootstock) that brings smart contract functionality to the bitcoin network, providing a stable asset for individuals and businesses that want to save or send money but may be deterred by currency instability and inflation.
The fact is that a kind of informal dollarisation is now taking place in countries such as Argentina, i.e. emerging from below and not yet imposed from above.
However, restrictions on the purchase of foreign currency drive citizens either to the black market, where exchange rates are volatile, or to stablecoins.
At the same time, however, world leaders are keeping an eye on DeFi, officially to address problems with the current financial infrastructure or to create new interoperable, efficient, convenient and accessible financial systems, but also to try to curb the phenomenon when it occurs outside traditional controls.
There is probably not yet a regulatory and technological framework that would allow new blockchain-based solutions to be an effective, far-reaching weapon against hyperinflation, but the potential seems to be there.
On the other hand, one of the traditional solutions proposed in Argentina, for example, is precisely dollarisation, imposed from above and therefore theoretically without restrictions. With stablecoins, there are already no such restrictions.
The comments: the usefulness of crypto and DeFi against inflation
Commenting on the report, Toby Box, Head of Financial and User Services, said:
“Our new report highlights the role that blockchain technologies and stablecoins can play in helping people safeguard their savings and meet the challenges of hyperinflation. If you live in a challenging inflationary environment, you may be looking to the US dollar for comfort. As digital assets gain traction, they are quickly becoming useful to people who need to transfer value into US dollars.”
Daniel Fogg, CEO of IOV Labs, added:
“Oggi, la blockchain di Rootstock è mantenuta, aggiornata e supportata da centinaia di ingegneri e costruttori impegnati in tutto il mondo. Per molti di loro, ottenere l’accesso ai dollari statunitensi, proteggere i beni dall’inflazione e garantire i risparmi dei malintenzionati non è un problema filosofico astratto, è una realtà quotidiana.
Ecco perché esiste Rootstock. Fungere da base migliore per una nuova economia. Progettato e costruito per le persone che hanno bisogno che questa nuova economia esista”.