Self-Funding Cryptocurrencies Unfazed By Recession

Richard Red discusses how crypto projects have fared during the recession, compared to other businesses and startups.

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Q1 2020 hedge fund letters, conferences and more

 by Richard Red, Research and Strategy at Decred.org, a decentralized cryptocurrency project.

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The past few months have had some dire consequences for businesses. Startups raised 30% less in March compared to last year according to Crunchbase Pro and it may be increasingly challenging to secure VC money in the coming months. The ICO market has effectively collapsed and crypto startup funding has been ‘set back a year. On the contrary, self-funding cryptocurrencies have proved to be particularly resilient, in their ability to generate steady, continuous revenue, preserve their substantial funding reserves and remain inflation-proof.

Sustainable Self-Funding Cryptocurrencies Model

Several cryptocurrency projects such as Decred.org and Dash have built-in funding models to pay for developing and maintaining the open source infrastructure they need to succeed. In Decred’s case, 10% of every block reward goes to the treasury,  with voting stakeholders deciding what projects to green light to receive this funding. DCR (its currency) that is not needed to pay contractors is saved in the Treasury address, and years of frugality during the bull market has resulted in healthy reserves. In Dash's case, money is generated for approved proposals, by allocating 10% of block rewards from monthly superblocks.  Master Nodes on the Dash network vote to decide which proposals receive the DASH..

Funding Reserves

After just a few weeks of stay at home orders we saw substantial layoffs and some businesses closing down completely. According to LendingTree, 69% of small business owners do not have enough cash on hand to sustain their business for the next 90 days. We also heard about large corporations such as airlines spending 96% of their cash flow on stock buybacks.

In a stark contrast to this, self-funding cryptocurrencies have generated sizable funding reserves which would sustain their projects for several months and even years in some cases. Decred, for instance, could proceed as usual for more than five years before the reserves were depleted, despite seeing a significant reduction in the price of DCR in recent months.

Inflation-Resistant

In response to the economic effects of the pandemic, the Federal Reserve has been creating dollars from scratch at an unprecedented rate. By the end of the year it’s estimated that the Fed will have purchased $3.5 trillion in government securities with the newly created money, which has led to concerns about price inflation. This is yet another area where cryptocurrencies have proved resilient - due to their strict fixed issuance. No one is able to create more than the planned amount, irrespective of what happens in the global economy. Bitcoin for instance has a cap of 21 million BTC.

Due to this many are turning to digital assets as a hedge against inflation and a store of value. The pandemic has revealed several weaknesses in the ways traditional centralized businesses and legacy financial systems operate. As these become more apparent, decentralized, credible alternatives like cryptocurrencies may become increasingly apparent.