Fri. Jul 19th, 2024
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The recent report from IOV Labs sheds light on the significant role that cryptocurrencies and decentralized finance (DeFi) play in preventing the adverse effects of inflation.

The present analysis pertains to the transformative impact of decentralized finance (DeFi) on the financial landscape of Latin American nations grappling with the adverse effects of hyperinflation. 

Hyperinflation

Hyperinflation is characterized by an exceptionally elevated level of inflation to the extent that individuals resort to utilizing foreign currencies instead of their domestic money.

During hyperinflation, the rapid and frequent escalation of prices renders denoting them in the local currency economically unviable.

It is advisable to designate said amounts in a currency possessing a more consistent valuation, subsequently effectuating their conversion into the domestic currency at the moment of remittance.

Typically, a twofold escalation of prices within three years meets the criteria for hyperinflation, wherein the underlying factor can often be attributed to a sustained augmentation in the money supply that surpasses the rate of GDP expansion.

In essence, the designation of hyperinflation is warranted when a sustained period of inflation spanning a minimum of three years exhibits a cumulative increase of 26% or higher.

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Latin America

At present, it is noteworthy that a total of five Latin American nations have surpassed the threshold above. These countries include Venezuela, with a staggering rate of 318%; Argentina, with 138%; Suriname, with 54%; Cuba, with 37%; and Haiti, with 31%. Additionally, Colombia stands at 11% while Brazil maintains a relatively lower rate of 5%.

The issue at hand pertains to hyperinflation, which, on occasion, poses a substantial risk to the sustenance of a considerable segment of the populace. Consequently, it becomes imperative for governing bodies to address this matter as a paramount challenge.

Cryptocurrency-based decentralized finance (DeFi) technologies present a potential avenue for addressing the issue above.

According to the report, it has been observed that a significant proportion, exceeding one-third, of individuals residing in Latin America have adopted the usage of stablecoins as a means of conducting routine transactions. This percentage is notably higher than the worldwide average of 11%.

Additionally, the implementation of blockchain-based technologies has the potential to generate substantial cost savings for financial institutions. Specifically, by the year 2030, these technologies could result in a significant reduction of approximately $10 billion in cross-border transaction expenses.

It is important to note, though, that even though Latin American fintech companies have been getting a lot of money lately, the region still needs to be able to set up the regulatory sandbox that is needed to test and evaluate new financial technology products thoroughly.

Cryptocurrency and Decentralized Finance, Both Based on Blockchain Technology, Offer Protection Against Inflation

Stablecoins have emerged as the prevailing blockchain-based solution currently in widespread utilization.

The report highlights USDRIF, a stablecoin developed on a bitcoin sidechain (Rootstock). This stablecoin aims to add new contract features to the Bitcoin network. This will make it a more reliable asset for people and businesses that want to store or send money but are hesitant to use traditional currencies because of their volatility and tendency to rise in value.

It is important to note that countries like Argentina are currently experiencing a form of informal dollarization, which means that the dollar is being used more naturally than through official means.

Even so, the fact that it is hard to get foreign currency forces people to look for other ways to get it, like the black market, where exchange rates change all the time, or use stablecoins to get around these restrictions.

Simultaneously, global leaders are closely monitoring the developments in decentralized finance (DeFi). Their official position is to fix problems with the current financial system and create new economic systems that are interoperable, efficient, convenient, and easy to access. However, they also aim to regulate instances where DeFi operates beyond conventional regulatory frameworks.

It is essential to have a complete set of rules and technologies for blockchain-based solutions to fully work and be widely used as a powerful tool against hyperinflation. However, the inherent potential for such solutions to address this economic challenge remains evident.

On the contrary, one of the conventional measures suggested in Argentina, for instance, is the implementation of dollarization, which entails a top-down imposition and, thus, theoretically devoid of limitations. Stablecoins eliminate existing restrictions, thereby affording unrestricted flexibility.

The Comments: How Crypto and Defi Can Help Fight Inflation

About the report above, Toby Box, the esteemed Head of Financial and User Services, expressed his thoughts as follows:

The newly released report sheds light on the potential of blockchain technologies and stablecoins in mitigating the adverse effects of hyperinflation, thereby enabling individuals to protect their savings and effectively navigate the associated difficulties. In the context of residing in an economically demanding inflationary setting, individuals may seek solace in the stability and reliability offered by the United States dollar. With the increasing prominence of digital assets, they are progressively proving practical utility for individuals seeking to convert value into the United States currency.

Incorporating the perspective of Daniel Fogg, the Chief Executive Officer of IOV Labs, it is worth noting that:

Currently, the maintenance, updates, and support of Rootstock’s blockchain are undertaken by many committed engineers and builders dispersed globally. For many individuals, acquiring U.S. currency, safeguarding assets against inflationary pressures, and preserving ill-intentioned individuals’ savings are not merely theoretical difficulties but practical matters that permeate their daily lives.
The existence of Rootstock is predicated upon this very notion. To establish a more robust framework for a developing economic system. This product has been meticulously designed and expertly constructed to cater to the individuals reliant on this emerging economic paradigm.
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Jake Coleman

By Jake Coleman

Jake Coleman, a prominent author and cryptocurrency enthusiast, brings his deep understanding of the blockchain world to Crypto Education Hub. With his insightful articles, Jake empowers readers to navigate the complex world of cryptocurrencies with confidence.

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