Could digital assets challenge global wealth inequality?
- Wealth inequality is one of the major challenges the world is facing today
- The current financial system favors those who have already accumulated wealth
- Historically, great redistributions of wealth have followed major paradigm shifts such as the Industrial Revolution
- Digital assets could represent the beginning of the next paradigm shift and help challenge global wealth inequality
- However, we are currently seeing the majority of digital wealth accumulated in the hands of a small number of people
- Yield App believes passive income on digital assets should be available to everyone, everywhere, irrespective of their level of knowledge and experience
Global inequality is one of the major challenges we face today, as wealth continues to be concentrated in the hands of a small number of individuals and organizations. To date, all political attempts to address this problem have failed. History shows that only major paradigm shifts, such as the Industrial Revolution, have led to a sustainable redistribution of wealth. Could the emergence of digital assets be the beginning of such a paradigm shift and could they challenge global wealth inequality?
Digital assets are the newest and most exciting development to emerge since the advent of the internet itself. As such, they could have the power to challenge the status quo. However, in reality, we are seeing a similar problem in digital assets today as in other asset classes, with the majority of wealth concentrated in the hands of the few. Let’s take a look at the role digital assets could play in the coming years.
The widening wealth gap
The reasons for inequality are manifold and depend on one's origin and the social class into which one was born. Beyond that, it is the nature of the existing financial system to favor those who have already accumulated or inherited wealth.
Since those who already have wealth and liquidity are naturally more creditworthy, the newly created money tends to flow to these individuals and organizations. They then have the opportunity to reinvest this new liquidity, causing price rises in investment assets, such as stocks and real estate, and goods. Those who don’t have the means to invest are then left to ration their income on rising rents and other basic costs of living.
In addition, high net worth individuals are likely to benefit from the compounding effect, whereby their investments generate income from both the initial capital and the accumulated earnings from previous periods. The result is exponential growth for some and an inflation-driven erosion of capital for others.
Digital assets – A paradigm shift?
Digital assets could have the potential to challenge this dynamic. Historically, great redistributions of wealth have occurred when societies underwent a major paradigm shift. One such shift was the Industrial Revolution, when capital flowed from farmland to factories. At that time, wealth distribution was reorganized in favor of the owners and investors in new technologies and factories.
Fast-forward to 2022, digital assets represent an entirely new asset class that offers a frictionless investment opportunity, as anyone with access to the internet now has access to the latter. As such, it provides an alternative to other investment options, such as the stock market and even real estate. Their ease of access, instant liquidity and the potential for higher returns make digital assets attractive to investors with different portfolio sizes and backgrounds.
However, while digital assets could take the pressure off an overheated real estate market and provide an accessible investment opportunity for the majority of people, the lion’s share of potential returns could once again fall into the hands of a minority, as digital assets already show massive wealth concentration. For example, of the 19 million BTC currently in circulation, over 58% is held by a tiny fraction of Bitcoin wallets (0.01%). Like any type of investment, digital assets could therefore continue to favor the wealthy and perpetuate the inequality problem we are facing today.
Cutting out the middle men
A more recent driver of inequality has been the internet itself, as Web 2.0 networks and databases, such as Google, Facebook, and Uber, monetize their users' data. These centralized platforms have quickly become the largest organizations on the planet, often perceived as detrimental to their users who do not share in this wealth creation.
Blockchain technologies and Web 3.0 have the potential to solve this problem. One of the great promises of Web 3.0 is to connect users directly, without the need for an intermediary that charges high fees for its services or collects its users' data. These peer-to-peer interactions are enabled by decentralized databases, aka blockchains and smart contracts. The permissionless nature of decentralized applications (dApps) allows all users to interact directly with each other.
This is already happening in the field of art. Non-Fungible Tokens (NFTs) are shaping the artistic landscape, as they allow artists to sell their art directly to their followers on the global market. To support this development, Yield App recently partnered with Africa Blockchain University to educate African artists about NFTs and empower them to take ownership of their art and assets.
Future use cases could include the ability for drivers or home owners and users of services such as Uber and Airbnb to connect directly. Today, these services charge their users between 15-35% depending on location. It would be feasible to use a smart contract, a micro insurance policy, and a GPS algorithm to enable peer-to-peer interactions for a similar service, saving the user up to 35% as a result.
There are many ways in which digital assets, blockchain technology and Web 3.0 could change the way we live and interact with each other, giving more people access to wealth creating opportunities and putting them in charge of their own assets and data. However, the fact that the majority of digital assets remain concentrated in the hands of a small minority of individuals and organizations evokes similar concerns to the traditional investment market, where few have managed to accumulate meaningful wealth.
Only time will tell how this landscape will develop. At Yield App, we believe that everyone, everywhere should have access to the earning opportunities created by digital assets and we will continue to work on making these available to the world.