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DeFi: DeFi and Impact Investing Must Work In Tandem to Build Sustainable Economies

While global crises are never welcomed, they do tend to kick people to find solutions to crucial challenges.

After the 2008 financial crisis, for instance, interest in impact investing grew. The COVID-19 crisis has further demonstrated the need for cooperation through investing strategies that are driven 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 out dedicated ESG teams, according to the head of J.P. Morgan’s Development Finance Institution. And institutional investors are launching more impact-focused investment funds to fulfill the UN Sustainable Development Goals.

More than $715B of 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 is a natural fit between impact investing and DeFi, which, of course, has not only upended the traditional order in finance. It’s also providing impact investors with a powerful tool to track performance.

The idea behind impact investing is straightforward – you invest your money to spur positive changes in the environment, human rights, labor practices, and equality. The expectation is that you generate financial returns 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 return and risk-adjusted financial return.

As a result, social enterprises often face greater scrutiny, with investors analyzing the performance down to the last dollar.

That’s where DeFi comes in. Fuelled by innovative leaders, decentralized finance projects are already taking the efficiencies of impact investing to a new level.

Last year, millions of people across the globe discovered how blockchain technology is lowering the barriers of access to wealth generation, helping people access finance in a way they never could in the past.

As NFTs became Collins Dictionary’s ‘word of the year’, amassing a total of $14.1B over the last year, up from $65 million the year before, artists across developing countries used NFTs to earn a full-time income. And play-to-earn games helped villagers break out of cycles of poverty. Meme coins turned teenagers into millionaires.

Beyond simply holding and trading, DeFi has enabled anyone with the internet and a digital wallet to earn a passive income – a wealth generation tool traditionally limited to those already with the privilege to own wealth, to earn yield, helping millions break free from financial bondage and access anti-inflationary assets.

This became a critical tool for survival in countries like Argentina or El Salvador suffering from a plummeting peso.

DeFi’s power of tokenomics and incentive economies introduced a new tool that is bringing in more people, and consequently more liquidity, into wealth-generation pools. By rewarding crypto holders for participating and staking within economic ecosystems, not only are people able to invest and see a company grow, they’re able to access additional yield for their participation in staking, with return rates not seen before in traditional finance.

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