While the whole world seems powerless against inflation, some types of stablecoins can outsmart it.
Stablecoins and purchasing power
Most fiat currencies, including the currencies of major economic powers, are vulnerable to hyperinflation. Of course, whoever speaks of inflation speaks of a decrease in purchasing power. Therefore, it is recommended to invest in inflation-resistant assets.
Cryptocurrencies can reduce the effects of hyperinflation, experts say, but Bitcoin’s performance over the past twelve months belies this. For example, El Salvador has lost over $60 million since bitcoin became legal tender.
Admittedly, cryptocurrencies have yet to prove themselves when it comes to fighting inflation. However, everything suggests that they could at least slow it down. Indeed, some stablecoins can limit the impact of inflation on the purchasing power of citizens.
What do stablecoins give us?
In the world of decentralized finance (DeFi), stablecoins are everywhere. Indeed, dApps, market makers, crypto lending platforms, derivatives exchanges, and asset managers use stablecoins to optimize their user experience.
Beyond DeFi, stablecoins have created new opportunities for the most vulnerable, especially in countries where banking services are limited. Thanks to this asset class, citizens of some developing countries can now safely and conveniently participate in international financial markets.
For example, international transfers that previously required tedious procedures are now much easier and more accessible for foreign workers who want to send funds to their families. Most of these workers discovered cryptocurrencies and stablecoins during the 2021 bull market, and governments have since sought to tarnish the reputation of this asset class.
Of course, stablecoins have many advantages, but their algorithms are not developing as fast as other segments of cryptography. In addition, rising dollar inflation has caused new problems for this asset class.
How do stablecoins work?
Most stablecoins are backed by fiat currencies that are vulnerable to inflation. So when the purchasing power of a fiat currency declines, the stablecoin that follows its value also depreciates. While crop platform revenues can be tempting, it should not be forgotten that the annual inflation rate in the United States is over 7.5%.
Another interesting point: the use of stablecoins is increasing as cryptocurrencies proliferate. In contrast, global banks issuing some fiat currencies no longer have sufficient reserves to protect the value of their banknotes.
For example, the dollar could drop to 0 if most countries in the world decide not to use it anymore. Therefore, the value of the dollar is determined by its use in international transactions. Similarly, when there is an excess of money in circulation, it becomes unstable.
What slows down Bitcoin adoption?
To enlighten our readers on this matter, we reached out to Aki Balogh, founder and CEO of DLC.Link, a New York-based bitcoin app startup.
“Bitcoin was designed to be a digital asset that is resistant to censorship and government control. But Bitcoin is difficult to use for those who do not have enough technical knowledge. Also, its high volatility makes it unpredictable.”
Stablecoins are easy to understand and easy to buy and use, making them the digital asset of choice for beginners. However, they pose a security risk because the networks they operate on can be compromised. However, these risks are minimal compared to the problems inherent in the banking systems of developing countries.
A new generation of stablecoins to fight inflation
Despite their shortcomings, algorithmic stablecoins are increasingly being used to fight inflation. Instead of replacing fiat currencies, this new generation of stablecoins is trying to coexist with them.
For example, Volt Protocol is a lending platform that offers its own stablecoin called VOLT. To stabilize the token, the platform adjusts its price according to the consumer price index (CPI). For example, if inflation reaches an annual rate of 7%, VOLT will be indexed to $1.07.
Why is CPI important?
The Consumer Price Index (CPI) is a measure that determines the real value of a currency based on the average purchasing power of the country in which it is used. In the United States, it is calculated by the Bureau of Labor Statistics, which studies the price fluctuations of goods and services consumed by households. This is how the Federal Reserve tracks inflation.
Currently, the US government releases monthly inflation data more than a month late. However, the validity of these data is often questioned by experts. Indeed, the Federal Reserve System (FRS) is often criticized for its lack of transparency and possible conflicts of interest.
In order for stablecoins not to lose credibility, their issuers must be able to provide reliable data about the blockchain. This will allow investors to understand how inflation fluctuations affect their purchasing power and their investments.
Truflation example
The new generation of algorithmic stablecoins relies on two mechanisms: a system that tracks inflation rates and another that adjusts DeFi returns based on network data sources like Truflation.
Truflation is a blockchain platform that tracks changes in US inflation using reliable data sources and calculations. Every day, the platform publishes a detailed dashboard of inflation dynamics. The latter can be used by smart contracts and DeFi protocols.
The goal is to provide an efficient method for collecting real price information. This information will be used to monitor and automatically adjust the value of stablecoins. The project also plans to launch more instruments to help investors hedge against inflation.
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