I see ad after ad these days inviting me to deposit stablecoins in this or that defi app in return for anywhere from 8 to 12% annual interest.
That sounds good on the face of it and I'll admit to have even put some stablecoins on deposit feeling good about such huge interest rates.
If we buy the illusion printed on the home page of the Bank Of England website https://www.bankofengland.co.uk/ that inflation is currently at 0.5% and the target is 2%, we'll be some seriously happy savers.
The problems we have are:
The exposure to exchange rate volatility. Say if I take my earnings in GBP, turn them into USD based stablecoins and then put them on deposit. What if the pound gains value against the dollar? I'll get fewer GBP back when I sell my USD stablecoins. If GBP goes up 1% in value against USD while I have savings on deposit, the value of my savings in GBP goes down by 1%.
Inflation is highly unlikely to be running at 0.5% or 2%. It's on public record how much new currency has been created during the Covid crisis, let alone the last 12 years since the 2008 financial crisis. This creates additional inflation that isn't accounted for.
The main reason I call 2% inflation illusory is because of shrinkflation.
The basket of goods used to calculate the consumer price index which determines the rate of inflation doesn't reflect the fact that a loaf of bread may not have changed in price, but the quantity of bread is gradually being reduced to maintain an average loaf at £1 say.
To my mind, shrinkflation isn't limited to just food products. I extend this concept to the build quality and durability of goods.
Yes you still may be able to buy an entry level new car for £8,000, but the quality of the product you get now is woeful compared to the first new car I ever bought (which was £6,000). The quality of the materials is down along with everything else. Entry level and even medium grade products just feel hollow to me these days.
It's only if I put the effort in to seek out true premium products that any notion of quality returns. FYI almost none of these products appear in the major supermarkets (with a few exceptions).
So back to the point then.
Does it make sense to earn any amount of interest on a fiat denominated stablecoin when the underlying supply is rapidly increasing?
Initially, the very fact that fiat is being printed to oblivion was what caused me to seek out greater yields. But after thinking more broadly about it there is one principle that trumps all. It simply doesn't make sense to save money in an asset that isn't scarce, no matter what the interest rate.
Please let me know your views on this in the comments below. As always crypto tips for the best comments. My upvote value is currently running at about $0.25 I think.
I did come across a tool like SteemWorld.org that tells me the current value of my vote on Hive. If you know what that is please share it with me in the comments.