A global economic recession will be the catalyst for the mass adoption of decentralized finance, the technology behind cryptocurrency and other digital payments and finance innovation.
DeFi is an alternative to the traditional financial system. It builds trust using code and mathematics, instead of needing trust in people and centralized companies, who act as intermediaries.
The current financial system is associated with high costs and lacks transparency. DeFi allows people to manage and own their assets without any intermediaries, solving a huge problem in the financial system.
Past economic recessions have spurred forward fintech innovations. The financial crisis in 2008 taught people that financial intermediaries are not always trustworthy. This led to the development of the bitcoin network. Now, the world faces another financial crisis, and there is no doubt that DeFi will thrive in these economic conditions, presenting solutions to real world problems.
There will be a number of stages to the success of DeFi in the context of the impending crisis. The world of cryptocurrency will suffer first, then prosper. The three phases are: Liquidity Crisis, Suffering, and Thriving.
First, the cryptocurrency market will face liquidity issues, as will all financial assets. All financial assets will face price pressure and see a huge price drop in a very short period. This happened in March 2020, as BTC price dropped roughly by half. In a financial crisis, everyone is looking for liquidity because their normal cash flow is interrupted. Workers get laid off and companies' business activities decrease. Globally, outstanding debt is over $250 trillion. People and corporations will find it difficult to pay back the accrued interests, let alone the principal.
Next, cryptocurrencies will suffer for a long period together with other businesses and industries. In this phase, a lot of companies will go bankrupt and people will lose their jobs. With their high debt loads and pressure of clients' withdrawals, financial institutions may default. Central banks will then step in and print more money to protect consumers' deposits. This will lead to inflation, which also erodes the savings of individuals.
Finally, people will lose faith in the existing financial system and look for alternative ways of managing their savings — such as DeFi. It’s cheaper, faster, and gives people full control of their wealth. For the next several decades, more and more assets will be managed through blockchain, and the world of digital assets will thrive.
