It would be easy to point to this year’s bear market as a primary reason for the existence of stablecoins. We all understand the desire for stability in prices for de-risking investment portfolios, after all, but do the reasons for stablecoins go beyond portfolio construction?
Enjoy part 1 of this series, a starter on stablecoins that focuses on some key use cases and real-world applications.
Why should I care?
Price instability and market speculation have contributed to extreme volatility in cryptocurrencies, creating an ecosystem that is not supportive of vital financial functions. For there to be a modern financial system on the blockchain, there needs to be a stable medium of exchange. There needs to be transparency and accountability, as well.
“The true key to unlocking the great potential of blockchain will come with the widespread adoption of stablecoins.” — Rune Christensen, Founder of MakerDAO
A stablecoin’s fixed price, a fundamentally new approach to the idea of digital money, enables a diverse set of financial activities. Global Currency and Decentralized Financial Services are the primary stablecoin use cases being explored right now.
Cryptocurrency volatility inhibits large-scale merchant and consumer adoption, there can be no denying. Stablecoins, designed to address the issue of volatility, act as a bridge between crypto and traditional currencies.
A stable digital and decentralized currency could become a global medium of exchange, an especially important application in emerging markets experiencing debilitating levels of inflation and economic chaos, such as Argentina and Venezuela.
While it’s true that stablecoins primarily see use from traders seeking to close risk-on positions, a compelling stablecoin offers near-instant settlements beyond cryptocurrency markets and makes global transactions cheaper. MakerDAO leads the way — Without a doubt, MakerDAO is the stablecoin project most focused on business partnerships, has a plan for adoption and understands its key demographic. More importantly, MakerDAO is executing on this plan.
South America is a natural and strong fit for Dai, where remittances play a large role in local economies across the region. Dai allows for the sending of money across borders without price volatility, censorship or delays. Not only that, but the interest rate for personal loans in Argentina is prohibitive, making Dai an excellent choice for lending.
Pairing Dai to Wyre’s trading engine and global fiat on-ramps and off-ramps enables nearly-instant movement of funds across borders. By decreasing the amount of time it takes to clear payments, businesses can increase the number of payment cycles and increase revenue.
Decentralized Financial Services
Currently, institutional arrangements constrain access to capital markets. Financial market transactions generate friction and transaction costs are scale-sensitive, with information costs considered to be the most important component of these costs.
The rationale for the existence of a banking system is that banks are able to function as ﬁnancial intermediaries between savers and borrowers because they possess a competitive advantage in information gathering and credit risk assessment. However, the relationship between ﬁnance and the economy is not neutral. Misallocations of funds can occur, and ﬁnancing and equity gaps may arise.
At particular disadvantage are small businesses, with capital markets tending to give priority to large and established ﬁrms. As a result, new and small businesses ﬁnd it difﬁcult to obtain start-up and early expansion equity.
MakerDAO seeks to support small businesses with the formation of new capital markets and applications for decentralized finance on the blockchain, such as fair lending and derivatives markets. Not only that, but decentralized stablecoins such as Dai reduce the costs of supply chain and international trade by eliminating the middlemen that charge fees for ensuring safe transactions, lending stable capital, and brokering cross-border initiatives.
The trade receivables market has very tight margins, which leaves no room for a volatile digital currency as instrument for settlement. The partnership between MakerDAO and Tradeshift establishes a supply chain liquidity marketplace for businesses, developers and investors.
Coming up next…
Thanks for reading! Stay tuned for Part 2 of this series, which will begin our dive into types of stablecoins.