Can Blockchain Support the Solidarity Economy? Part 1 - DeFi



Investors are buzzing about blockchain, and many entrepreneurs are still trying to wrap their heads around this new technology, wondering what’s the hype around blockchain and questioning, “Should I adopt this technology into my business?”


At this point, many of you may be answering, no. And that may be because blockchain is primarily associated with Bitcoin and NFTs. If you’re not sure what an NFT is, check out our article on The Intersection Between NFTs, Cryptocurrencies, and Securities.


What is Blockchain?


Let’s first clarify that Bitcoin and blockchain are not synonymous. Bitcoin is a cryptocurrency that owes its existence to blockchain technology.


If you look up the definition of blockchain you’ll likely find Investopedia’s article on subject, which defines it as:


A distributed database that is shared among the nodes of a computer network… The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.


But what does this mean beyond the jargon?


The easiest way to think about blockchain is as a digital system for creating immutable, digitized documentation (blocks). It does this by creating copies of each block across computers (nodes) in a decentralized network.


It reminds me of the wild west days of the internet. While today people subscribe to centralized services like Spotify, music on the internet used to be downloaded from one user’s computer to another user’s computer via peer-to-peer networks. The internet has made it possible to send data cheaply.


Blockchain makes it possible to send value (such as currencies) cheaply. By adding a secure mechanism that allows computers on a network to reach a majority-based consensus, blockchain eliminates the need for centralized services from intermediaries (like banks).


How can Blockchain support the Solidarity Economy?


As a global movement, the solidarity economy’s goals are to build a just, democratic, and sustainable economic system prioritizing people and the planet over profit. It does so by supporting grassroots initiatives and a network of mutual support.


The foundation of the solidarity economy movement rests in the cooperative movements that came before it. As economist Jessica Gordon Nembhard points out in her book, Collective Courage, most of these cooperatives failed due to racially-motivated sabotage, governance issues and undercapitalization.


Given these obstacles, how can Blockchain technology help businesses in the solidarity economy succeed while furthering its just, democratic, and sustainable principles?


In this Part 1 of our series exploring blockchain and the Solidarity Economy, we’ll look at the potential impact of decentralized finance (DeFi) on the solidarity economy.



De-Fi and the Democratization of Finance


Whereas industrial capitalism ruled over markets in the 20th Century, this century saw the rise of financial capitalism. Profits are no longer hinged to product or service creation. Rather, profits are extracted from financial instruments, such as mortgage-backed securities, and companies cheaply borrowing money to pay out dividends.


Leading the way is the Federal Reserve (“The Fed”), a privately-owned corporation which the federal government has given centralized power over the U.S. banking system. It’s shareholders are member banks; more than one-third of U.S. commercial banks are members of the Federal Reserve System. National banks are required to be members while State chartered banks may join by meeting certain requirements.


The Fed has shown its willingness to create monetary policy that benefits its members, even if to the detriment of the American public. For instance, The Fed’s low-interest rate policies have helped to spike up the price of real estate, making banks and their investors very rich. Conversely, it has increased homelessness.


While banks are raking in profits through a ballooning financial sector and protecting investments in large corporations, Americans’ dollars buy them a lot less. The increase in the money supply has floated all the way to the top with the top 10 wealthiest men in the world doubling their wealth.


It used to be that small businesses’ primary source of external financing were community banks. But community banks have seen a sharp decline, suffering a 40% decline from 2008 to 2018. In 2019, over three quarters (77%) of businesses used business earnings as their primary source of funding, compared with 64% in 2016.


Blockchain technology has the potential to disrupt these money flows and build a new system whereby entrepreneurs have the potential to raise cheaper and sustainable financing. By decentralizing and democratizing finance and facilitating peer-to-peer exchanges, the technology allows capital to flow outside of the banking system.


What is DeFi?


Popular cryptocurrency news outlet Coindesk provides an excellent definition of DeFi:


DeFi is short for “decentralized finance,” an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries.


The most popular types of DeFi applications include:

  • Decentralized exchanges (DEXs) - this is like the cryptocurrency version of the New York Stock Exchange

  • Stablecoins - a cryptocurrency pegged to a fiat currency, like the US dollar

  • Lenders - platforms using smart contracts which allow peer-to-peer transactions that replace intermediaries such as banks and brokers

DeFi poses a digital alternative to our current banking system, with the potential to create more open, free, and fair financial markets that are accessible to anyone with an internet connection.


Increasing Liquidity in the Solidarity Economy


Here are some ways Blockchain could increase liquidity in the solidarity economy:

  • Capturing yields to recirculate capital within the solidarity economy. Yield is the income an investment returns over time. Yield farming involves lending (“staking”) cryptocurrency in exchange for interest and other rewards, such as more cryptocurrency.

  • With more people including cryptocurrency in retirement plans, they could redirect these funds away from mutual funds, pension funds, and insurance funds using Self-Directed IRAs, and invest in businesses furthering the solidarity economy.

  • Facilitating debt-based crowdfunding i.e. peer-to-peer lending. (For more details, check out our post on debt-based crowdfunding).

  • Replacing credit cards. This would allow a merchant to avoid onerous credit card fees, and not support the credit card business model which wrings money out of people using late fees, penalties and high interest rates.

  • Eliminating, or decreasing cross-border transaction fees (e.g. Western Union).

  • Providing loans that aren’t based on credit scores.

  • Providing peer-to-peer insurance.

  • Delivering aid and managing charitable donations.

  • Tokenizing assets, such as real estate. (We’ll take a deeper dive into this topic in a future posting).


De-Fi Sustainability Concerns


Some entrepreneurs in the solidarity economy are concerned with Bitcoin’s environmental impact. And while Bitcoin uses true Blockchain technology, which requires a tremendous amount of computing power, there are many protocols that are no more harmful than the climate impact of using Instagram.



In conclusion, Blockchain has great potential to further the solidarity economy and warrants further investigation into how businesses and organizations in this economy may implement this technology to further their movement’s goals.


If you’d like to explore how cryptocurrency financing may work for capitalizing your business, schedule a consultation today.



SOURCES:


Michael Hudson, “Financial Capitalism v. Industrial Capitalism,” Contribution to The Other Canon Conference on Production Capitalism vs. Financial Capitalism

Oslo, September 3-4, 1998


Federal Reserve Bank of Richmond, Banking and Supervision > Applications & Membership >

Federal Reserve Membership


Joseph Edgar, “Will Rising Interest Rates Burst The Housing Bubble?” Forbes, September 21, 2021


Andrew Khouri, “High Cost of Housing Drives Up Homeless Rates,” UCLA Study Indicates,” Los Angeles Times, June 13, 2018


Eric Lendrum, “Top Ten Wealthiest Men in the World Doubled Their Wealth During the Pandemic,” The Tennessee Star, January 19, 2022


Daniel Brown, Small Business Facts: Spotlight On Community Bank Lending, U.S. Small Business Administration Office of Advocacy, September 2019


FAQ, U.S. Small Business Administration Office of Advocacy, Revised December 2021


Ian Allison, “BlackRock Planning to Offer Crypto Trading, Sources Say,” Coindesk, February 9, 2002


Coinbase.com, Learn > Crypto Basics > What is DeFi?


Coryanne Hicks, “Yield farming: An investing strategy involving staking or lending crypto assets to generate returns,” Business Insider, November 9, 2021


Community Crypto, From Young Savers to Boomers, Crypto Is Increasingly Becoming Part of Retirement Plans, Coindesk.tv, October 14, 2021


Chanell Alexander, “Crypto Loans Unlock Cash, but They Carry Risks Borrowing against your crypto is possible, but its unstable value makes it a risky option,” Nerdwallet, October 14, 2021


Esther Boyle, et al., Peer-to-Peer Insurance: Blockchain Implications, Society of Actuaries, March 2021


Laurie Goering, “Red Cross Boosts Disaster-Prone Communities With Blockchain 'cash',” Reuters, November 26, 2019


Charlie Taylor, “AID: Tech partners with Irish Red Cross for blockchain-powered app,” The Irish Times, December 19, 2018


Renee Cho, “Bitcoin’s Impacts on Climate and the Environment,” Columbia Climate School’s State of the Planet, September 20, 2021


Sinead Barry, “Scrolling doesn’t just waste your energy. It wastes the planet’s, too,” EuroNews, May 24, 2021


Shirah Dedman is a Legal Fellow at Elizabeth L. Carter, Esq., LLC. Her focus is on blockchain, NFT, and cryptocurrency matters.

127 views0 comments