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DeFi sector risks corrections due to the central bank's actions

DeFi sector risks corrections due to the central bank's actions

Global central banks tighten policies to cope with inflation, depriving DeFi and cryptocurrencies of traditional competitive advantages.

According to Bloomberg Economics, central banks plan to reduce their balance sheets by $410 billion cumulatively and raise interest rates by the end of 2022. For example, the U.S. Federal Reserve already initiated a policy tightening cycle last month. Other regulators are likely to follow suit.

The Bank of England (BoE) also cuts assets on its balance sheet and is likely to raise rates this month. The Bank of Canada and the European Central Bank have released a timeline for the start of quantitative tightening in financial markets.

Under such conditions, the traditional advantages of the DeFi sector tend to level out, while the risks remain the same. This could lead to an outflow of investors who would prefer to invest in more reliable financial tools. 

Recall that in 2021 the central banks of the G7 states injected $2.8 trillion into the market in order to stimulate economic recovery after the COVID-19 pandemic. However, the U.S. consumer price index (CPI) rose 7.9% in March, marking the fastest inflation ramp-up in 40 years.

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