With inflationary pressures being felt by individuals around the world, countries are adopting different ways of dealing with the situation. In LatAm, over a third of individuals have embraced stablecoins as everyday payment alternatives. This surpasses the global average of 11 per cent according to IOV Labs.
The new IOV Labs report, titled Taming Inflation: How DeFi is Reshaping Finance in Hyperinflationary Countries, examines the power of decentralised finance (DeFi) solutions to relieve inflationary pressures in areas of the world experiencing hyperinflation. The report looks at global surveys and provides actionable recommendations for various stakeholders on how to leverage different Bitcoin-based blockchain technologies.
Examples include Rootstock and RIF which enable cheaper, faster, and more inclusive inflation-protection solutions.
Mitigating inflation through blockchain
Blockchain technologies have the potential to mitigate the effects of inflation if used correctly. According to the report, they can enable individuals, businesses, and traditional financial institutions to protect their wealth against these pressures. In fact, by 2030, blockchain technologies are expected to save financial institutions $10billion in reduced cross-border transaction costs.
However, while fintech companies in Latin America have received significant funding in recent years, the region has yet to establish the regulatory sandboxes needed to test innovative DeFi products. The report reveals that different regions are coping with inflation differently:
- Seventy-five per cent of total deposits in the Uruguay banking system are in dollars, predominantly held by households.
- Remittances make up a significant part of the GPD reaching almost 25 per cent in El Salvador, Honduras and Jamaica.
- Sixty per cent of consumers use instalment plans to pay for e-commerce.
Speaking on the new report, Toby Box, head of financial services and user services, IOV Labs comments: “Our new report underlines the role that blockchain technologies and stablecoins can play in helping people to safeguard their savings and navigate the challenges of hyperinflation. If you live in a challenging inflationary environment you might seek comfort in the US Dollar. As digital assets gain traction, they are quickly becoming useful for people who need to move value into US Dollars.”
The DeFi impact
Stablecoins and other DeFi features can help consumers in the fight against inflation.
Intuitive crypto wallets ensure that both Web3 businesses and fintechs can integrate protection services into their products. This then helps, with stablecoin movement. These digital assets reduce the risk associated with traditional cryptocurrencies and help people in countries with an unstale local currency.
Box adds: “Most people think, live, and breathe in terms of fiat or normal money, and this is one reason why stablecoins exist. If you live in a challenging inflationary environment you might seek comfort in the US Dollar. As digital assets gain traction, they are quickly becoming useful for people who need to move value into US Dollars.
“This explains why USD-pegged stablecoins are so popular with normal everyday people. The fact that you can then send them across borders very quickly and easily is an added bonus.”
Daniel Fogg, CEO of IOV Labs, comments: “Today, the Rootstock blockchain is maintained, upgraded, and supported by hundreds of committed engineers and builders around the world. For many of them, getting access to US Dollars, protecting assets from inflation, and securing savings from bad actors is not an abstract philosophical problem, it is an everyday reality.
This is why Rootstock exists. To act as the best foundation for a new economy. Designed by, and built for, people who need this new economy to exist.“
Solutions for the future
As IOV Labs’ report highlights, more blockchain-backed alternatives are still needed in the fight against hyperinflation. However, recent developments, such as the launch of RIF US Dollar (USDRIF) represent steps in the right direction. Developed on the Bitcoin sidechain, Rootstock which brings smart contract functionality to Bitcoin, the stablecoin provides a stable asset for individuals and businesses who want to save or send money, but who may be disincentivized due to currency instability and inflation.