While the entire world seems powerless against inflation, certain types of stablecoins have the potential to outsmart.
Most fiat currencies, including those of major economic powers, are vulnerable to hyperinflation. Of course, whoever refers to inflation implies decrease in purchasing power. That is why 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 making Bitcoin legal tender.
It is true that cryptocurrencies have yet to prove their worth when it comes to fighting inflation. However, the evidence points at the fact that they could at least slow it down. Some stablecoins have the potential to limit the effects of inflation on the purchasing power of citizens.
What Is the Stablecoins Contribution?
In the world of decentralized finance (DeFi), stablecoins are everywhere. In fact, stablecoins are used by dApps, market makers, crypto lending platforms, derivatives exchanges, and asset managers to optimize the experience for their users.
Beyond DeFi, stablecoins have created new opportunities for the most vulnerable categories, especially in countries where banking services are limited. Thanks to this asset class, citizens of certain developing countries can now participate in international financial markets safely and conveniently.
For example, international wire transfers, which used to require cumbersome procedures, are now much simpler and more affordable for foreign workers who want to send funds home to their families. Most of these workers discovered cryptocurrencies and stablecoins during the 2021 bull run, and governments have tried to tarnish the reputation of this asset class ever since.
Certainly, stablecoins offer many advantages, but their algorithms have not developed as fast as other segments of crypto. In addition, rising dollar inflation has caused new problems for this asset class.
Most stablecoins are backed by inflation-vulnerable fiat currencies. Therefore, when the purchasing power of fiat currency decreases, the stablecoin that follows its value also depreciates. Although the performance from yield farming rigs can be attractive, it should not be forgotten that the annual inflation rate in the United States is over 7.5%.
A New Generation of Stablecoins to Fight Inflation
Despite their drawbacks, algorithmic stablecoins are increasingly being used to fight inflation. Instead of replacing fiat currencies, this new generation of stablecoins tries to coexist with them.
For example, Volt Protocol is a lending platform that offers a native 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 at $1.07.
To prevent stablecoins from losing their credibility, their issuers must be able to provide reliable data on the Blockchain. This will allow investors to understand how fluctuations in the inflation rate affect their purchasing power and investments.
By Audy Castaneda
