Is investing in classic stocks always safer than defi? Not exactly

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In 2011, a magnitude 9.1 earthquake struck the seafloor off Japan, causing a devastating tsunami. In the days that followed, Japan’s Nikkei stock market fell 6.2%, reflecting the market’s response to the unprecedented disaster.

Thirteen years later, the increasingly popular cryptocurrency is facing criticism for its extreme short-term swings, which are often perceived as more volatile than traditional stocks. While this volatility may appeal to some risk-tolerant investors looking for high rewards, it is a red flag for more conservative investors who are more averse to losses.

However, as noted above, the situation in the Nikkei highlights a changing narrative. Rising economic uncertainties and market disruptions have led to high price volatility in equity markets, sometimes rivaling cryptocurrencies.

For example, since early August, the Japanese stock market has suffered its biggest single-day decline since 1987, and in the US, the Dow Jones Industrial Average has also fallen by more than 1,000 points. These significant declines highlight the increasing unpredictability in mainstream markets, reflecting broader economic uncertainties and market disruptions.

Now investors are asking: Are the volatility risks associated with Defi really worse than those associated with traditional investing?

Historically, classic investment options, such as buying real estate or stocks and bonds, have been seen as the cornerstone of a stable financial plan and are generally considered less volatile than cryptocurrencies because they are backed by tangible assets and earnings from the companies they represent. However, recent trends in global markets suggest that this stability is being questioned.

The upcoming 2024 presidential elections in the United States are expected to introduce an additional layer of uncertainty. Political developments can significantly impact financial markets, affecting investor sentiment and contributing to market instability. The increased volatility of equity markets is compounded by a variety of factors contributing to market turbulence, including trade conflicts, interest rate changes and inflation concerns, leading to rapid and often unexpected fluctuations.

Given the increasing uncertainty in traditional markets, some investors are reassessing whether the risks associated with defi are worth taking. This is especially true as new developments in the sector gain popularity.

For example, re-staking is a concept that increases capital efficiency by allowing assets like Ethereum (ETH) to be used more effectively across networks. Pioneered by EigenLayer, a protocol built on Ethereum, the concept involves allowing users to take ETH staked within Ethereum and then “re-stake” it beyond the primary blockchain, unlocking additional utility and earning potential while preserving its security and value.

While some critics have raised concerns about the financial stability and technical risks associated with restaking, it is important to approach these developments with an open mind. Recently, web3-focused VC firm DFG published a report highlighting the significant potential of restaking and liquid restaking, an exponentially growing branch of the industry. The report emphasizes that despite the criticisms, the industry’s innovations are reshaping financial models and presenting new opportunities for staking to contribute meaningfully to the growing defi space.

Embracing these developments with a balanced perspective, while keeping the inherent risks in mind, can provide a path forward for investors seeking new opportunities in an evolving financial environment. Developments emerging from the defi space have the potential to unlock new avenues and attract a new wave of investors eager to explore the benefits of a dynamic and adaptable investment environment.