While global crises are never welcome, they tend to push people to find solutions to crucial challenges.
After the 2008 financial crisis, for example, interest in impact investing grew. The COVID-19 crisis has further demonstrated the need for cooperation through investment strategies guided by values and ethics as much as profit.
Since the pandemic began in early 2020, we’ve seen an increase in the number of companies building dedicated ESG teams, according to the head of JP Morgan’s Development Finance Institution. And institutional investors are launching more impact-focused investment funds to meet the UN’s Sustainable Development Goals.
More than $715 billion in assets under management are now committed to impact investing. This is a paradigm shift that is reshaping the future of investing. That’s why there’s a natural fit between impact investing and DeFi, which, of course, hasn’t just overturned the traditional order in finance. It is also providing impact investors with a powerful tool to track performance.
DeFi allowed anyone with the internet and a digital wallet to earn passive income.
The idea behind impact investing is straightforward – you invest your money to drive positive change in the environment, human rights, labor practices and equality. The expectation is that you generate a financial return on your capital, or at least, your capital is returned.
But the true impact of impact investing is often questioned. Many investors believe that doing good is a trade-off between social and environmental returns and risk-adjusted financial returns.
As a result, social enterprises often face greater scrutiny, with investors analyzing performance down to the last dollar.
That’s where DeFi comes in. Driven by innovative leaders, decentralized finance projects are already taking impact investing efficiency to a new level.
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DeFi could be our most powerful ticket out of poverty
In the past year, millions of people around the world have discovered how blockchain technology is lowering barriers to accessing wealth creation, helping people access finance in a way they never could in the past.
As NFTs became Collins Dictionary’s “word of the year”, racking up a total of $14.1 billion last year, up from $65 million the year before, artists from developing countries used NFTs to get a full-time income. And play-to-win games helped villagers break out of cycles of poverty. Meme coins turned teenagers into millionaires.
Beyond simply holding and trading, DeFi has allowed anyone with the internet and a digital wallet to earn passive income – a wealth-generating tool traditionally limited to those already privileged to own wealth, earn income, helping millions break free. from financial slavery and accessing anti-inflationary assets.
This has become a critical tool for survival in countries like Argentina or El Salvador, which are suffering from a falling peso.
The power of Tokenomics and DeFi’s Incentive Economies has introduced a new tool that is bringing more people and, consequently, more liquidity into the wealth-generating pools. By rewarding cryptocurrency holders for participating and betting in economic ecosystems, people can not only invest and see a company grow, but also access additional income for their stake in betting, with rates of return never seen before in traditional finance.
Connecting DeFi to the real world of impact investing
And in DeFi, rates of return can be higher than traditional impact investing projects because you are opening up investing to a decentralized pool of investors, where anyone can choose to lock down digital assets as a way to get APY.
This has become the perfect recipe for success with impact investing.
So how do we overcome the challenge of encouraging more people to do good with their money? Make impact investments in blockchain. With the powerful tokenomics of DeFi, investors no longer have to sacrifice a) impact or b) financial rewards. They can achieve both.
The value of DeFi is that you can easily invest in a project that is doing well, and by betting the project’s native token, you are bringing greater liquidity and returns to both the project and your own portfolio.
The tokenomic model of a blockchain infrastructure project or an L2 solution can exist in the same way as an impact investing project. Except, at the other end of the smart contract, there are real people and social enterprise projects in the supply chain.
We have the power to build fairer and more efficient systems for unbanked farmers around the world thanks to the power of DeFi, crowdfunding and building sustainable supply chains where farmers are no longer the weakest link.
In our case, these farmers are in Mexico, Brazil and Honduras. Crypto investors in this model have two options: they can simply borrow a stablecoin for a stable and modest return (even higher than most traditional banks) at 8% APY, or they can choose to stake the native token to get a higher yield by locking your funds into a pool of collective guarantees.
Unbanked farmers have access to new financing tools and are able to produce more volume and improve the quality of their crops.
Both options trigger capital to be provided for various agricultural projects to help smallholder farmers generate new business and income. Funds from lenders (also known as stakers or traders) lock assets in a collective loan smart contract until the agreed-upon amount is reached, and then it is automatically released into the farmer’s cooperative account. This also allows farmers to better plan and project their land works and expenditures, rather than calculating how much they can harvest and sell.
Ultimately, this opened the door to pioneering mutually beneficial ecosystems that are connected to the real world. Unbanked farmers have access to new financing tools and are able to produce more volume and improve the quality of their crops, while investors can see remarkable returns while contributing to the socio-economic and environmental impact on small farming communities.
Buyers can access a stable market with a sustainable product that is fully traceable throughout the entire supply chain. Middlemen are removed so that smallholder farmers benefit from the final price of their crops, improving their standard of living through their own productivity, and are less exposed to pressure to sell their crops at lower prices to put food on their families’ tables. families on time.
Loan capital comes with a risk. What happens if a farmer on the other side of the protocol cannot repay the loan?
Going one step further: Can DeFi eliminate trade-offs and risk?
Thanks to the power of blockchain technology, if a farmer defaults, pools of collective guarantees and liquidity in DeFi can significantly reduce these risks. The guarantee guarantees payment to creditors in the event of default. After testing this theory, we can safely say that in 100% of cases, creditors were fully compensated with their principal and interest.
How is this possible? Inspired by the security model of the Aave protocol, a clearing pool locks in native tokens and loan originators on the other side of the smart contract – in the real world – must stake their own contribution of the native token to act as collateral for their own loans. Stakeholders stake 100% of their collateral, so there is almost zero chance that creditors will make a loss.
In circumstances where a farmer defaults on a loan, enough tokens are sold in the clearing system to clear the default to ensure that lenders get their return on interest, starting with the loan originator’s participation, then the auditor’s participation. , then the stakeholder community, and lastly, if those tokens were not enough, the clearing system reserve which consists of 50% of the total native token supply.
DeFi betting pools
All of this is possible thanks to the power of crowd-collateral in the form of DeFi staking pools, which ensures that there is always enough to compensate investors at any given time. For the world’s 1.2 billion unbanked farmers who do not have the money or data to be eligible for credit scores or do not have assets that can be tokenized, this system becomes a ticket out of poverty.
The challenge of seeing impact investing ecosystems grow at a critical time in history will simply be to get more people involved in DeFi. Educating people about the benefits of DeFi and getting more people involved will help with that.
Incentive Tokenomics are powerful new tools for creating change, and we will see more use cases of this surface in 2022. It allows people to be rewarded for their participation, both financial and socio-economic, as they contribute to achieving United Nations Sustainable Development. goals.
The pandemic has become a catalyst for change, putting investors around the world into action, trying to solve some of the most challenging problems we face today. DeFi is not just a way for crypto professionals to make gains. DeFi has become a lifeline for many, and we will see more liquidity pools and smart contracts connected to real-world projects.
For investors, we have the opportunity to be proud of our investments. The DeFi community is full of bright and empowered changemakers, and we’re excited for the innovation coming from this space in 2022.
*Gabriela Chang is co-founder of EthicHub, a blockchain-based platform that provides financing and guarantees to smallholder farmers in emerging economies.
Disclaimer : The text presented in this column does not necessarily reflect the opinion of CriptoFácil.
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