Hisham Khan, CEO of Aldrin, a Solana-powered crypto exchange.
In 2021, we saw crypto become more accessible to those who truly need it. In 2022, we could finally see the wealth gap start to narrow.
While a significant portion fueling the adoption of crypto has been hype and speculation, crypto, blockchain, and decentralized finance (DeFi), key developments in the technology have undoubtedly helped people in need.
NFTs (Non-fungible tokens) are helping artists in developing countries access new avenues of income, while play-to-earn games such as Axie Infinity are helping small-income earners in the Philippines generate wealth.
Digital assets have also grown in accessibility, from the rise in crypto ATMs to the uptick in digital wallet creation from developing nations, as well as data that shows lower-middle-income countries are investing and holding crypto at much higher rates, with adoption surging over 880% this year in more than 154 countries.
On a national and political level, countries, cities, and traditional financial institutions are also embracing crypto to increase wealth generation, from El Salvador establishing its own Bitcoin CIty to Miami generating USD 7m in yields with an intention to reduce taxation for citizens through its own token.
These are all part of the silver lining of the impending dark clouds, as the world of finance is set for a rocky start transitioning into 2022.
Evolution of finance from 2021 to 2022
Across the world, communities are feeling the effects of inflation. The US inflation rate has accelerated, raising fears the Federal Reserve has “lost control”. Inflation in ASEAN (the Association of Southeast Asian Nations) is also increasing.
With the USD being 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.
The rise in inflation and debt across the world, coupled with the issues with developing countries accessing capital, and wealth continuing to erode away from fiat inflation has driven more people to seek ways to preserve and grow the value of their assets.
While hype and speculation have fueled mainstream adoption and attention on crypto, blockchain, and DeFi, the discovery of anti-inflationary possibilities are helping the less-wealthy improve their financial literacy and provide greater financial inclusion.
However, there is still tremendous untapped potential as newcomers to wealth generation are not fully equipped with the knowledge of how yield-bearing assets work, but this is steadily changing with education and time.
The power of DeFi for passive income and wealth generation
As the ultra-wealthy reap the benefits of passive income streams and can avoid as much as USD 163bn of taxes yearly, crypto has finally provided an opportunity for those who are forced to work 50-60 hour weeks in endless cycles of financial bondage to have an opportunity to break free.
For the first time, anyone can access passive income.
The barriers to earning passive yield have become democratized and accessible to anyone with the internet, and wealth generation via passive income is finally not withheld to the already wealthy.
We now know 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.
In comparison, DeFi staking and yield farming offer much greater wealth generation opportunities, with relatively safe yield farming methods on stablecoins generating anywhere from 6-20% through methods such as earning interest through lending, and liquidity mining through stablecoin pools.
Single-sided staking, which is one of the yield farming methods, has also become a key way to build mutually beneficial platform-investor relationships.
By allowing token holders to gain yield together with the growth of the platform/protocol, similar to how stock/stakeholders gain dividends from the company in traditional finance, but with comparatively higher returns, investors can earn anywhere from 15% to as much as 45% a year.
The staking also benefits the platform by reducing the number of tokens in circulating supply, reducing inflation and dilution of the assets, and also increasing the total value locked, providing more stability and capital for investments and other business activities for the platform to work with.
Of course, the yield farming methods are not without their own risks, including price volatility, vulnerability to hacks, and exploits of smart contracts just to name a few.
Investors will still need to do their own research on platforms before deciding to do yield farming on those, and factors 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.
The path towards greater financial inclusion
As there are still issues to be fine-tuned in making passive income available for anyone, adequate education is necessary to help users understand, safely and easily access the fast-moving, nascent, and constantly evolving ecosystem of crypto, blockchain, and DeFi.
Regulation also needs to catch up to ensure investors can have their assets better protected from online scams and hacks.
Currently, in 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.
In 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.
Hence, if both regulation and education are done well, DeFi can serve to level the playing field for less affluent retail investors and the wealthy.
Regardless of whether they have a few dollars or a few thousand to invest, there is no preferential treatment in this area, allowing retail investors to overcome financial barriers existing in TradFi.
DeFi also offers more individual control over investment decisions compared to traditional finance, without requiring custodians and intermediaries like banks, portfolio, and fund managers, which also take a significant percentage of profits.
We could very well see a future where traditional financial institutions actively integrate DeFi staking and yield farming opportunities to increase returns to remain competitive and attract investors.
TradFi institutions are merely delaying the inevitable and could result in DeFi catching up in mainstream usage for investment and wealth generation opportunities.
Despite the gloom and doom caused by the pandemic, resultant inflation, and other financial woes there is tremendous potential for the world to come out better, and the wealth gap to be narrowed.
One thing is for sure, as the crypto, DeFi, and blockchain ecosystems continue to evolve and intermingle with the world of TradFi, retail investors will benefit from improved and greater access to investment opportunities and financial inclusion.
– DeFi Trends in 2022: Growing Interest, Regulation & New Roles for DAOs, DEXes, NFTs, and Gaming
– How Bitcoin & Crypto Might Help Ease Wealth Inequality (Without Miracles)
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– Bitcoin and Ethereum Can Coexist With DeFi Bridging the Two