Why DeFi Is the Best Forum for Passive Income Generation in the 21st Century
Critics of the cryptocurrency sector call it an investment option for the young and reckless. These pundits have one fact right. Crypto investing is largely a pursuit for the millennial generation.
According to Fintech magazine data, cryptocurrencies as a long-term investment vehicle are three times more popular among millennials than any other generation. In the UK, for instance, over 20% of millennials hold crypto.
Data from Piplsay shows that 49% of millennials hold digital currencies in their investment portfolios, compared to 13% of Gen Z and 38% of Gen Xers. In addition, most millennial crypto investors are also affluent. As per Fintech magazine data, most UK millennial crypto buyers with over 20% of their savings in the crypto space have £25,000 worth of investable assets.
Millennials who invest in cryptocurrencies do so because they earn more from digital currencies than stocks. As an illustration, BTC HODLers have consistently gained higher returns on their investments in crypto than they would have with stocks in the UK since 2011.
The 2018 crypto winter year would be the only period that BTC investors reported negative gains. However, any person that bought mainstream cryptocurrencies even at their all-time highs and held them in their portfolios has enjoyed years of positive passive income generation due to the value appreciation of many digital assets.
For this reason, millennials have embraced crypto investing as a large part of their retirement portfolio. HOLDers are unfazed by volatility, acknowledging studies that show that a paltry 5% investment portfolio allocation to BTC could double portfolio returns in less than five years.
DeFi as a game-changing crypto investment opportunity
The world of digital currency trading is synonymous with extreme volatility. It is not uncommon to find the price of bitcoin, the world’s most popular cryptocurrency plummeting or gaining 20% of its value in a day.
The digital currency market’s relatively small size compared to mainstream finance gives crypto assets extreme price instability. While younger moneyed investors can embrace the “I’ll either be rich, or wrong” mantra, older generations facing retirement cannot take such financial risks.
Millennials embrace cryptocurrencies because they feel that the odds are stacked against them in the world of traditional finance at the start of their investment journeys. On the other hand, older investors have saved dutifully and will not invest their nest eggs in a turbulent and unregulated asset class.
The traditional saver would rather have their stack of fiat money savings in a bank account for their retirement than throw it at a turbulent asset class. These hardworking, thrifty, and hard-saving people would only invest in new asset classes if they were easier to grasp and had minimal risk.
Fortunately, tons of decentralized finance assets now target the emerging curious but cautious DeFi early majority investor class. These DeFi platforms open doors to yields that the traditional saver can only dream about in the legacy finance circles.
Most bank savings accounts earn a quarter percent yield per year. There are lending, yield farming, and staking protocols in decentralized finance with annual percentage yield (APY) rates of 6% to 20%! Cryptocurrency investors here are pocketing over 100% annualized yields in incentives and bonuses.
How Mimo and the PAR Protocol support DeFi passive income generation
Decentralized finance is a blockchain innovation and a development for the fintech industry. It makes financial services accessible to any person that has an internet connection and a smart device. Fueling DeFi use is the rising number of decentralized applications (dApps) that facilitate margin trading, crypto-asset exchange, algorithmic trading, financial derivatives, lending, and synthetic assets markets.
The most popular DeFi use case, however, is its high yield passive income generating dApps. Here investors deposit their cryptocurrencies in decentralized pools just like they would pour their savings into a savings account in a commercial bank.
They will, however, not earn a 0.1% APY that is the standard in most savings accounts. In DeFi, they have the opportunity to make a 10% APY rate in compound returns. Key to the decentralized applications compounding returns operations is stablecoins.
Stablecoins such as the Mimo Project’s Parallel Protocol (PAR) bring yield back to falling fiat currency values. PAR, for instance, is a Euro pegged stablecoin. For this reason, its value does not fluctuate when ordinary cryptocurrency values are rising or falling.
PAR’s value will match that of the Euro via its algorithmic protocols. Moreover, it is the first Euro-backed stablecoin in a USD denominated stablecoin market. By holding PAR and investing it in a wide variety of decentralized finance platforms, the investor has refuge from crypto volatility.
They can reap all the benefits that millennials enjoy from volatile BTC while limiting their savings exposure to price volatility. By placing PAR in DeFi wealth management, banking, lending, and yield farming dApps, they can earn an APY that can rise to the double-digit range.
For this reason, the Mimo project and the PAR protocol are perfect options for the DeFi early majority that seeks minimal risk investments in decentralized finance.
Staking in the Mimo Project
PAR stablecoin users that invest their savings in its secure, decentralized platform will watch their nest egg grow and earn an APY that will put the savings bank’s rates to shame. One way to do this is to make their first purchase of mainstream cryptocurrencies such as BTC or ETH and visit mimo.capital’s ‘Mint Par’ page.
After connecting their wallet to Mimo, they can mint their first Euro pegged PAR tokens by depositing their crypto assets to Mimo’s safe vaults. After that, they will receive PAR stablecoins collateralized by the cryptocurrencies that they deposited in Mimo’s vaults.
Investors can then deposit their PAR into a Balancer liquidity pool and earn liquidity provider commission from other users who want to purchase the PAR token without using Mimo vaults for minting. The Balancer liquidity pools levy a 0.2% charge on swap (buying/selling) transactions and redistribute these fees to liquidity providers.
PAR liquidity providers in Balancer will receive Balancer Provider Tokens (BPT) from these pools, which they can further stake in the Mimo Protocol to earn Mimo tokens and the protocol’s governance rights. The protocol’s Safety Reserve also insures all crypto assets deposits in Mimo’s vaults against flash liquidations by market volatility. Investors can withdraw their digital assets out of Mimo’s vaults whenever they wish to.
The PAR protocol offers the ordinary low-risk investor the opportunity to earn between 5–15% yield on a stablecoin price pegged to the Euro. Therefore, it is an excellent opportunity to make better rates in rising inflation and shrinking fiat value environments.
Investing makes money grow.
While it is true that savings accounts have certain protections that appeal to low-risk appetite investors, savers need to learn that there is a huge difference between savings and investing. Savings put money away while investments make money grow.
While fiat holders can invest in property, stocks, or fund shares, it is clear that the cryptocurrency market has better returns in investment compared to most traditional assets. Therefore, it pays to have a section of your portfolio in crypto assets.
Idle cash in the traditional savings account does not generate any return. The bank’s charges and inflation are slowly eating away part of a savings account kitty. Unlike the past when saving in an account was key to meaningful real returns, in a safe environment, the tide has changed.
Rising fees and high inflation are leading to the depreciation of savings. The estimated level of loss on savings is about 2% per annum, which may not seem like much until you extrapolate the value of these losses decades down the lane.
As an illustration, a 2% depreciation value on a $1000 over two decades will chip away over $300 in value. Were these savings accruing a growth rate of 2% over the same time, they would be worth over $1400. Savers that ignore the ravages of inflation on fiat money are throwing their money away.
Fiat money loses value over time.
Inflation is the rate of the rise of the price of goods and services. Inflation, therefore, lowers the value of savings when a savings account’s interest rate is lower than the inflation rate. Consequently, inflation makes fiat money worth much less in the future.
Savvy investors, therefore, are very keen on beating inflation to protect their money’s purchasing power. For instance, in the US, the value of a variety of goods has risen by 5% in a year, as per its consumer price index. As a result, people are spending more to buy the same quantity of goods.
Temporary rising low inflation levels are a normal market phenomenon, but sustained inflation has a long-term impact on savings. For this reason, a savings account can no longer generate passive income for the traditional saver. Instead, idle cash should be invested when wages fail to keep up with inflation rates.
People that hold cash and invest in assets whose yield rates fail to keep up inflation will lose their money’s buying power. Cash holders will also find themselves spending more as purchasing power declines. Should inflation levels escalate in the future and fiat loses more value, its holders will naturally find themselves buying goods and paying for services for future use instead of investing.
As these cash savers spend more to release depreciating currency from their hands, they will create a feedback loop that causes even more inflation. Since no one wants to hold depreciating currencies for lengthy periods, the economies in rising inflation zones will find themselves flush with cash with supply outstripping demand. This action will further escalate the loss of paper money’s purchasing power.
Why Fintechs cannot end poverty
DeFi is the best forum for passive income generation for the early majority and the unbanked. Backers of the centralized financial technology (FinTech) sector say that its processes are vital to eliminating long-standing barriers in financial inclusion in developing countries.
Both the World Bank and the IMF have been encouraging governments and regulators to embrace fintech to lower the levels of the world’s unbanked populations. True to word, the fintech sector has enhanced access to financial services amongst some of the world’s poorest people.
Data shows that 50% of all banking services users turn to fintech firms for financial services access. Over half of all adults in India and China use fintech platforms for payments and money transfers. Kenya’s mobile money service M-Pesa has increased financial inclusion from lows of 26% in 2006 to 75% by 2018 as per DW data.
M-Pesa has also supported income generation in over 2% of households that lived in extreme poverty before its convenient, simple, and easy-to-use financial services hit the mass market. Fintechs open doors to credit and affordable payments systems. Through them, the unbanked can access capital that helps them create businesses.
However, critics of the fintech sector say that it is easier to eliminate poverty by encouraging saving and investments than by encouraging borrowing. Microfinance and the larger fintech sector have improved the living standards of millions of people through their innovative digital services but are now caught up in a moral dilemma.
They are indebting the world’s most economically vulnerable people. As an illustration, the growth of Kenya’s fintech digital lenders has saddled over 14 million out of its 30 million adult population with high-interest debt that they cannot easily repay.
Consequently, these borrowers are now blacklisted by Kenya’s credit reference bureau and cannot access credit from traditional financial institutions. In addition, in 2010, microfinance institutions in India faced regulatory backlash after these lenders turned to illegal operations in their efforts to recover credit from India’s Andhra Pradesh people.
Modern fintech is changing the easy credit access strategy and encouraging savings via Robo advisors, easy and affordable money transfer services, and budgeting tools. They also link their users to safe investment options such as mutual funds that invest savings in bonds, stocks, securities, and money markets.
That said, savings are a luxury for most of the world’s unbanked, as long as financial freedom remains elusive in rising inflation environments. Low-income earners can save their bite-size quantities of cash via fintech platforms.
They will, however, earn very little interest from these businesses since their ability to offer high yields is curtailed by the conditions facing the larger traditional finance industry, which is the rail that centralized Fintechs run on.
For this reason, Greta Bull, the Consultative Group to Assist the Poor (CGAP) CEO and World Bank director, warns fintechs that they are losing their original vision of financial inclusion for the poor.
“The poor are definitely not the focus, even in the context of financial inclusion. Despite M-Pesa generating some initial inspiration for how financial services could be delivered differently to the mass market, financial inclusion has moved way beyond its origins as financial services for the poor,” she says.
Why DeFi as the best forum for passive income generation in the 21st century
Disruptive use of technology and the fintech industry’s close association with regulators and banks only make financial services expensive, taking them out of the reach of low-income earners. They will therefore not have the benefit of creating passive income from savings.
This population segment will also perpetually remain one emergency away from the full utilization of all their savings. Puneet Gupta, the co-founder of India’s Kaleidopay, says that offering savings features to low-income earners rarely works because they do not have enough cash to save.
“Customers would put aside small amounts every month… and then an accident or medical expense would wipe out their savings,” Gupta says. While Gupta, a microfinance enthusiast, says that insurance could cushion low-income earners and help them save, DeFi can significantly change the fortunes of these populations.
First, low-income earners can invest minute amounts of savings in decentralized applications at super-low charges and earn high yield rates over time. Second, they can easily convert these yields to fiat whenever they need to or re-invest it to make more passive income.
Decentralized finance platforms such as Mimo and the PAR stablecoin drift toward investing rather than credit because not all low-income earners want to start a business or succeed at running a business.
Businesses are difficult to maintain, and most people need tons of creativity, vision, persistence, and skills to make it in the difficult world of entrepreneurship. Therefore, dishing start-up credit to all and sundry is not the right method of eliminating poverty and only creates a debt cycle amongst the most vulnerable populations. After all, for start-ups to succeed, they need an environment that can sustain entrepreneurial activity.
As with any form of non-cash investment, the DeFi early majority and the low-income earners should only invest what they can afford to lose. Stablecoins may not be as volatile as bitcoin is, but they are not regulated assets.
PAR Protocol has investor asset protections such as its Safety Reserve, but many DeFi projects are in their testing phase. That said, as long as investors are depositing non-essential cash in DeFi liquidity pools, they will earn passive income from one of the most lucrative financial sectors in the world.