5 Reasons Why DeFi Needs Fiat Inflation Data
As crypto enthusiasts, we rave about DeFi’s independence of fiat and the financial markets. But the truth is, the two are not as separate as we’d like to think.
In fact, there is a growing interest in fiat inflation and inflation data within the crypto land, and for a good reason.
Here is some rationale why DeFi needs to stay up to date with inflation:
1. Stablecoins are pegged to fiat.
DeFi (Decentralized Finance) as we know it today — the multitude of lending and borrowing protocols, liquidity pools, and DEXs, rose to their prominence thanks to stablecoins pegged to fiat.
Dai, USDC, or UST are now a crucial component of DeFi protocols, with a combined market cap of $181B (as of February 2022).
Stablecoins became a crypto volatility hedge, medium of exchange, and an easier way to offramp into fiat. However, they remain susceptible to the same inflation as their fiat counterpart. In effect, even when earning your DeFi yields on your stablecoins, you always have to adjust for inflation, currently at a 7.5% yearly loss.
2. Buying anything comes with inflation.
Your investments are not the only thing getting hit by inflation. Most of us still live in a fiat-dominated economy. We pay rents in fiat, buy groceries in fiat, pay the skyrocketing gas in fiat.
Even if we are the lucky few who can pay in crypto, the prices of almost everything are still denominated in fiat and affected by the highest inflation in decades.
Since each time you pay for something, you unwillingly offramp into fiat, it’s beneficial to know the real inflation rate to calculate the loss of your purchasing power.
3. Reliable data helps choose the right investments.
Due to inflation, your money becomes worth less and less. You can have the same $1000 as a year ago or equivalent in whichever token you like. And yet you can buy significantly less for that amount.
How much less? The government tells you it’s -7.5%. Alternative sources claim anything between -10% and -60%. But your personal inflation exposure will depend on what you buy and what wage growth and investment yields you are gaining annually.
To see how much DeFi yields you need to offset your losses, you need reliable inflation data, preferably tailored to your purchases.
4. Inflation news affects the crypto markets.
Crypto markets seem to be more and more correlated to the stock markets recently, which raises some concerns about their value as a risk hedge. Both reacted violently to a few recent announcements related to the US fiscal policies and inflation.
The recent overlap might be connected to higher crypto adoption by retail, hedge funds, and traditional finance in 2020 and 2021 and a sign of TradFi (Traditional Finance) exiting their positions to recover liquidity whenever stocks crash.
Public access to current inflation trends could help investors predict the DeFi market directions and the spurs of increased volatility.
5. Inflation could increase DeFi adoption.
Finally, our favorite reason: Due to massive inflation and volatile markets, many investors are desperately seeking higher yields to protect their wealth which might become the main driver of DeFi adoption.
The growing interest from hedge funds and traditional investors to seek out better profits and inflation hedges was mentioned last January by the Chainlink founder, Sergey Nazarov when the official inflation was still only 1.4% and not the current 7.5%.
Now, more than ever, inflation data could help create a new range of DeFi inflation hedges to entice CeFi (Centralized Finance) capital and attract retail investors to join the market.
Decentralized inflation solutions could range from inflation-adjusted stablecoins and inflation insurances to prediction markets, as long as blockchain developers have access to reliable on-chain data.
The importance of public data
Inflation data is the first step to the next stage in DeFi: the emergence of more efficient inflation investment strategies and hedging.
There is a growing need within DeFi for more current, frequent, and independent public data that would allow investors to gauge fiat inflation trends and their effects on DeFi markets, users purchasing power, and the actual prices of goods.
Currently, the inflation rates are released by the US Department of Labor once a month with over one month of delay. The government’s black-box approach and the potential conflict of interest have been criticized by researchers all worldwide.
Truflation offers independent daily inflation data available on-chain and ready to incorporate into smart contracts and DeFi solutions.