Is DeFi a hedge against inflation?

When Bitcoin emerged as a solution to the problem of monetary policies, Satoshi Nakamoto said that the cryptocurrency’s supply would increase “by a planned amount” that “does not necessarily result in inflation.” As a result, with a supply capped at 21 million coins, Bitcoin’s inflation rate has been fixed. By contrast, fiat currencies have no finite supply: governments can simply print more money when they need to.

In recent years most countries globally have expanded their money supply by keeping inflation rates low. But this is believed to higher inflation, which is defined as the devaluation of a currency amidst the rising cost of goods and services. This year, the USA’s inflation hit a 30-year high and in the Eurozone it’s at a 25-year high.

Speaking to Cointelegraph, Chris Kline, COO at Bitcoin IRA said this expansionist monetary policy is forcing people to “find an alternative to protect their assets.” He added that investment options, such as gold and real estate, are no longer viable for the average American investor, but that Bitcoin now forms part of the “inflationary hedge mix” because its supply cannot be manipulated the same way the supply of fiat currencies can.

However, the high volatility in the crypto sector does make many question if Bitcoin and other cryptocurrencies could be a viable inflation hedge.

Speaking up for DeFi (decentralised finance), Adrian Kolody, founder of non-custodial decentralized exchange Domination Finance, said that while BTC could be a hedge against inflation, there were other options available as a hedge, such as the DeFi sector. He suggested that by using stablecoins — cryptocurrencies with a price control mechanism — and decentralized applications (DApps), investors could “outpace inflation” while resisting the “risks of a spot position.” All the investors would have to do is find a way to earn interest on their stablecoins that would be above annual inflation rates.

To hedge against inflation, investors have a plethora of tools at their disposal: these include BTC, gold and even DeFi protocols that help them outpace inflation.