Inflation occurs when the prices of goods and services exceed economic growth. Rising costs often result in the creation of new currency, while newly circulating currency tends to cause a reduction in purchasing power. Traditionally, investors favor interest-bearing assets like stocks and gold during times of inflation. However, understanding how to beat inflation using blockchain and Web3 could help you and your family to protect your purchasing power and retain financial independence.

From Bitcoin to decentralized finance (DeFi) and non-fungible tokens (NFTs), the Web3 landscape is full of opportunities to preserve purchasing power and financial freedom. In this article, we explore how to beat inflation using Web3 and blockchain technology. Furthermore, we'll look at different ways you can use Web3 to protect your purchasing power and hedge against financial uncertainty.

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What is Web3?

Web3 is an umbrella term that refers to the next iteration of the internet. The first iteration of the internet (Web1) consisted largely of static images and text. Web1 offered little opportunity for interactivity. Plus, only a handful of programmers were able to create content. However, Web2 changed this by introducing interactive social media platforms and marketplaces. Web2 is the version of the internet with which most of us are familiar. It features interactive websites that enable anyone to create and share content. Unfortunately, a small group of powerful companies and individuals who profit from and have ultimate authority over our online experiences controls Web2.

Furthermore, the Web2 landscape serves as a data mining machine that prioritizes shareholder profits over data security and the well-being of users. This is where Web3 comes into play. Web3 aims to take power out of the hands of big tech and place it back into the hands of users. The use of permissionless protocols that exist on the blockchain allows users to interact with an array of decentralized applications (dapps) powered by smart contracts without intermediaries. Also, the Web3 industry lowers the barrier to entry for financial instruments by developing open financial protocols that anyone can use, regardless of wealth, status, or geography.

Cryptocurrencies play a crucial role in Web3, as they facilitate decentralized token economies. These token economies can be created to give artists and content creators the freedom to express themselves outside of the constraints of Web2. Not only does this help to protect against censorship, but it also allows creators to receive royalty payments on time and in full. Additionally, Web3 places the utmost importance on user privacy. Accordingly, many decentralized social media platforms allow users to select what types of adverts they see and monetize their data.

What is Inflation?

The term “inflation” refers to a rise in prices or a decrease in purchasing power represented as a percentage. There is a consensus among economists that inflation occurs when the growth of the money supply of a nation exceeds economic growth. Economists use a basket of goods and services to determine the average change in prices for consumers over time. This is what we call inflation. Conversely, when purchasing power increases and consumers can buy more goods and services than they could previously, we call this deflation. 

Furthermore, economists commonly use the consumer price index (CPI) and the wholesale price index (WPI) to measure inflation. The CPI takes a cross-section of staple goods and services, including food, materials, healthcare, entertainment, and labor. If the price of goods and services in the selected basket increases by 10%, we say that inflation is 10%. However, both inflation and deflation can be viewed as positive and negative. This largely depends on the fiscal and monetary goals of the government overseeing the economy in question and the broader implications of short-term changes that occur. Also, inflation affects people differently depending on their wealth and assets.

Generally speaking, a rise in inflation tends to coincide with an increase in asset prices. So, if you have cash under the mattress, you may find that it buys you less when fiat currencies are inflated. On the other hand, if you hold assets such as gold or stocks, their value could increase during periods of inflation.

Demand-Pull Inflation

Demand-pull inflation refers to an increase in money supply and credit that causes the demand for goods and services to increase faster than production capacity can cater to. When this happens, prices tend to increase as goods and services become scarce. Also, when consumers feel they have more money (or purchasing power), they are likely to spend more, which exacerbates the price hikes. In turn, demand-pull inflation causes a snowball effect where an increase in consumer demand leads to higher prices, which causes supply chain shocks and further price increases.

Cost-Push Inflation

Cost-push inflation occurs when price increases are felt throughout the supply chain. For example, when new money enters circulation via asset or commodities markets, it can cause the price of related goods and services to increase. In particular, cost-push inflation is felt when the supply of essential commodities is disrupted. When this occurs, the increasing cost of components, manufacturing, and distribution coincide with overall price increases.

Built-In Inflation

Lastly, built-in inflation relates to the shifting expectations toward inflation. When prices increase, some consumers forecast a continuation of price rises. As a result, employees often demand wage increases to account for a rise in the cost of living. When employers need to pay staff more, the prices of goods and services tend to increase. This also results in a snowballing effect.

How Does Inflation Work?

Inflation occurs when the money supply grows faster than an economy. When newly printed money enters circulation, it can reduce the overall value of that currency. When inflation looms, central banks and governments have several options to help keep inflation within an acceptable range and improve economies. 

One of the most common methods for curbing inflation is printing money. Monetary authorities print new money and give it to citizens during times of financial hardship or unprecedented economic turmoil. Another popular method is creating new currency units and loaning them to banks, institutions, and corporate entities in the form of bonds. However, the result in each of these scenarios is quite similar; currencies lose purchasing power.

How to Beat Inflation Using Web3 Tools

Now that we understand inflation and Web3 a little better, let's take a look at how to beat inflation using Web3 tools. Below, we discuss the best tools in blockchain and crypto to help you protect your purchasing power during periods of inflation and economic uncertainty.

Bitcoin

Bitcoin is arguably one of the best ways to hedge against inflation. Investors often compare Bitcoin to gold, as it is a scarce, fungible asset with a limited supply, and it requires work to produce. However, the actual scarcity of gold is unknown. The discovery of new pockets of gold happens regularly. Also, gold enters circulation in an unpredictable way. Furthermore, gold can be forged. Most holders of gold don't know if they hold real gold or what the percentage is of gold in the bars they own.

Bitcoin is verifiably scarce. We know that there will only ever be 21 million Bitcoin. Also, each Bitcoin can be traced on-chain. Furthermore, unlike fiat currencies, Bitcoin cannot be inflated. Accordingly, we can trust math and science that Bitcoin's supply will not be debased. Moreover, Bitcoin is decentralized, meaning there is no single point of authority that can change the underlying protocol selfishly.

DeFi

Decentralized finance (DeFi) is an umbrella term that relates to a new paradigm in finance and technology. The DeFi ecosystem consists of open financial protocols that operate using smart contracts on public blockchains. Also, these protocols operate without the use of intermediaries. Furthermore, rather than being controlled by one single entity or central authority, DeFi protocols use token economies to incentivize community governance.

DeFi provides a suite of financial tools and services that emulate services in the traditional finance sector, such as borrowing, lending, bonds, yields, derivatives, and insurance. However, unlike traditional finance, DeFi protocols don’t require users to provide personal information. In fact, anyone with an internet connection can use DeFi to put their idle assets to work.

DeFi is one of the best tools for learning how to beat inflation. With DeFi, users can earn yields and interest on a range of tokens. From yield farming and liquidity mining to staking, DeFi presents an abundance of opportunities. As such, you can preserve wealth and generate a passive income. Furthermore, because DeFi protocols don't use middlemen, most earnings are passed on to users.

Moreover, DeFi is helping to bank the unbanked by providing equitable access to inflation-beating financial tools. A Wall Street financier has access to the same DeFi protocols as a farmer in Zimbabwe. As such, anyone can use DeFi to better their financial position, regardless of status and wealth.

NFTs

Non-fungible tokens (NFTs) are one of the biggest drivers of Web3 adoption in recent years. NFTs allow anyone to tokenize assets on the blockchain. One of the most popular use cases for NFTs is in collectible art. NFTs create an immutable history of ownership and enable holders to prove the scarcity of their works. Accordingly, NFTs are becoming the go-to medium for contemporary artists.

Holding or owning physical art sometimes requires a lot of space. Also, owning multiple valuable collections requires security and temperature-controlled environments. NFTs make art collecting more accessible by enabling collectors to store works on the blockchain. All you need to store NFTs is a crypto wallet. 

How to Beat Inflation - Education

One of the best things about the Web3 community is that it encourages participants to learn about finance and technology. Understanding the benefits of cryptocurrencies such as Bitcoin and how they compare to fiat currencies puts you at an unfair advantage when it comes to learning how to beat inflation and retaining financial freedom.

The Blockchain & Bitcoin 101 course at Moralis Academy is the perfect way to get up to speed on Web3. In this course, we teach students about the core concepts of blockchain, including consensus mechanisms, blockchain security, smart contracts, decentralized applications (dapps), and more. Plus, it’s the perfect aid for anyone venturing into the world of crypto for the first time!

How to Beat Inflation Using Web3 Tools: Summary 

Understanding how to beat inflation could help you and your family to preserve your purchasing power for years to come. Furthermore, the Web3 landscape is continuously evolving to create new ways to preserve wealth outside the legacy financial system. Nonetheless, risks are still associated with investing in cryptocurrencies and interacting with smart contracts. As such, always conduct your own research and exercise caution before entering the world of Web3.

There has never been a better time to learn a new skill. Web3 developers are in high demand sector-wide. Plus, they can earn a handsome salary! If you want to become a blockchain developer but have no experience, check out the JavaScript Programming 101 course at Moralis Academy. Here, we teach students how to build a decentralized exchange (DEX) on Ethereum. Also, check out Moralis Projects to learn how to create your own decentralized versions of popular Web2 apps and games using Moralis.

Take your programming game to the next level with Moralis Academy. Also, don’t forget to follow us on Twitter @MoralisAcademy! We’d love to hear your thoughts about how to beat inflation using Web3. Additionally, check out our “How to Invest During a Crypto Bear Market” and “Understanding Crypto Crashes” articles to learn how to navigate market downturns!