DeFi as a solution in times of crisis

Article by Wolfgang Ruckerl

Bitcoin helped pioneer this new era, but the future envisioned by Satoshi Nakamoto requires our continued efforts. The 2020s have been a challenging decade so far, yet the transformative power of blockchain technology offers a better path forward.

Born from crisis

Around the globe, times are tough for many everyday people. Increases in cost of living minimized any growth in wages last year as inflation continues to take its toll. Additionally, world powers such as China and Russia are increasingly challenging the dominance of the USD as geopolitical tensions flare up.

In this precarious new world, decentralized cryptocurrencies can potentially be a source of stability and freedom. Bitcoin first emerged in the wake of the 2008 banking crisis and the impact of events like the Lehman Brothers collapse is evident in the writings of Bitcoin’s pseudonymous creator Satoshi Nakamoto.

While the subprime mortgage crisis was in full swing in February 2009, Nakamoto proposed an “e-currency based on cryptographic proof” that enables secure and effortless transactions without the need for a trusted third-party middleman. But has crypto lived up to its promise so far, and can DeFi help solve the ongoing instability of the 2020s?

A better system is possible

Cryptocurrencies like Bitcoin indeed help overcome issues with the current banking and monetary system in several different ways. For example, self-custody of DeFi assets protects individual investors against risks like institutional insolvency and bank runs. The collapse of Silicon Valley Bank in March 2023 shows that even large banks are still vulnerable to failure. But instead of requiring trust that their money is still there, Web3 users can verify their holdings directly on chain.

Additionally, blockchain technology allows for a more efficient and decentralized financial landscape. The peer-to-peer network pioneered by Bitcoin means that investors can hold their own assets and transact directly with no middlemen and significantly lower fees. And unlike with traditional banks, the rise of DeFi sectors like DEXs, lending and liquid staking means individuals can now have full control over exactly how their deposited assets are used.

Inflation is yet another ongoing problem that crypto and DeFi help solve. Unlike fiat currencies, cryptocurrencies like bitcoin have a fixed total supply. This means that your holdings in BTC cannot be easily diluted like if you hold a currency such as USD. While a return to the gold standard of years past is sometimes proposed as a potential solution to inflation, adopting crypto as legal tender would have a similar effect while also delivering a range of other benefits like enhanced efficiency.

CBDCs: A potential alternative?

As global superpowers battle for financial supremacy, everyday people around the world can benefit from decentralized and censorship-resistant assets like Bitcoin. Yet because cryptocurrencies pose a threat to the dominance of the current monetary system, many governments are taking measures to issue their own centralized digital currency.

Institutions such as the Federal Reserve and European Central Bank have been actively exploring the issuance of Central Bank Digital Currencies (CBDCs). In some ways, it is possible to equate the benefits of CBDCs with the utility of crypto. For example, a so-called digital dollar could help deliver faster and cheaper transactions while expanding access to the financial system.

However, CBDCs lack several of the key benefits of cryptocurrency. For one, they are still highly centralized like traditional fiat currencies. This means that true self-custody is not possible and your assets can be frozen by financial authorities at any time. CBDCs may also not help stem issues with inflation since they still allow central banks to print money through measures like quantitative easing. Overall, CBDCs only deliver a fraction of the benefits of decentralized cryptocurrencies.

Why not CEXs?

The Web3 community proposes a better alternative. With decentralized cryptocurrencies like Bitcoin, ordinary people can enjoy the benefits of digital money without facing the same problems that plague existing fiat currencies. Especially in times of crisis, DeFi is a great way to keep your money secure and under your direct control. Yet in order for DeFi to truly explode, the user experience needs to catch up with centralized finance.

Currently, the easiest way to buy and send crypto is with a centralized exchange (CEX). Like CBDCs, users of platforms like Coinbase and Binance must sacrifice some transparency and decentralization for a streamlined user experience. But events like the FTX collapse show centralized exchanges can become over-leveraged and insolvent just like traditional banks. Since many users are unaware of the advantages of DeFi and self custody, further education is key.

While writing down your seed phrase in a secure location is harder than quickly making an account on a CEX, the benefits are definitely worth it. When you have self custody, you can always track your assets directly on the blockchain and even move your funds to a hardware wallet for extra security. Plus, investors can make solid passive income on their investments at the same time with low-volatility DeFi strategies such as stablecoin farming.

DeFi could be the answer

In addition to continued instability within our financial system, the 2020s have also featured a heightened level of geopolitical turmoil. However, decentralized finance offers the chance to safeguard our financial freedom. We must stand up together to build a fair digital economy and a better fiscal world. While DeFi already offers a range of revolutionary opportunities for small investors, the community needs to keep pushing for more applications, improved education and a better user experience in order to achieve worldwide mass adoption.

Bitcoin helped pioneer this new era, but the future envisioned by Satoshi Nakamoto requires our continued efforts. Once the mainstream population can access DeFi as easily as walking into a traditional brick and mortar bank, the sky is the limit for Web3 adoption. In the meantime, it’s important to maintain a critical lens about the potential downsides of CEXs and government attempts to replace crypto with their own watered-down digital currencies.