There has been a lot of news about stablecoins and the role they play in making DEFI possible. In this article, we’ll be taking a journey into the world of stablecoins and why they are such a powerful innovation.
What are Stablecoins?
Stablecoins are digital tokens that are pegged to fiat currencies. A single unit of a stablecoin is worth as much as a single unit of the currency they are pegged to. 1 USDC for instance is worth 1 US dollar, and 1 TerraKRW is worth 1 Korean Won.
Different companies today provide this service, including Tether (USDT), Circle (USDC), Binance (BUSD), Terra, Gemini, DAI, among others. They also provide it for different currencies. According to Investopedia, Terra provides stablecoins pegged to the Korean Won (KWT) and the International Monetary Fund’s Special Drawing Rights (SDT) alongside the US Dollar.
A stablecoin can be backed by fiat money sitting in the bank, bonds, and other physical assets, or it can be backed by some other mechanism we will look at later on.
Why Are They Relevant?
Stablecoins are important to the crypto trader and investor because stablecoins provide a calm oasis in the volatile cryptocurrency market.
Stablecoins are important to the businessman because they allow funds to be moved at the same amazing speeds that other coins are transacted at. When compared to the terribly slow banks and payment bottlenecks in fintech that sometimes take weeks to move money, stablecoins are a gift.
They also play a huge role in eCommerce, where paying for clothes in USDC at a boutique takes a minute if the network is busy.
It also costs the same to send 1 million USDC as it costs to send 10 USDC in a single transaction. Banks and Fintech services like Payoneer charge their transaction fees as a percentage of what you are sending. Say they charge a 1% transaction fee, you would pay 10 cents for sending 10 dollars, and $1,000 for sending a million dollars!
Having your money in the form of a stablecoin rather than as fiat also means you are safe from having bank personnel tell you what transactions can be made complete or telling you’re too young to be moving such amounts of money through your account. With stablecoins, there is no more keeping your money sitting in their bank for two weeks as it happened to Cuy Sheffield when he wanted to send funds to his father. Now imagine that the money was needed for emergency surgery or for any of the other multitude of emergencies that old people face every day.
Transacting in stablecoins gives you the stability of fiat but also returns your freedom to do with your money what you actually want to do with it, as quickly as you want to do it.
Stablecoins have made token swapping much faster and safer, so much that we have all but forgotten that there was a time when buying any coin meant you had to buy bitcoin with your fiat first, and then exchange the bitcoin for that token, which had its risks posed by volatility of bitcoin between the time you buy it and the time your transaction to exchange it for the other token is successful.
Well, what is it like to purchase tokens using stablecoins and move stablecoins between blockchains?
Moving Stablecoins Between Blockchains
It is important to remember that stablecoins are assets like bitcoin or ether, which means they are launched on particular blockchains. They can also integrate with other blockchains different from the ones they launched on.
USDC for instance is available on Ethereum and Binance blockchains but is also integrated with Algorand, Solana, Stellar, TRON, Hedera, and Avalanche blockchains with plans to expand to many more.
When you use your fiat to buy USDC, you are either buying the USDC that is compatible with Ethereum blockchain (ERC-20 USDC), or the USDC compatible with Binance chain (BEP-2 USDC) or the one for Binance Smartchain (BEP-20 USDC) and so on. This distinction is overlooked by a lot of newbies or they simply are not aware of it, and they shortchange themselves because when you mistakenly buy ERC-20 USDC when you intended to buy BEP-20 USDC, you will have to swap it to BEP-20 USDC and that will cost you gas fees, which can be particularly high on Ethereum.
However, this costs nothing if you are doing it within a centralised exchange such as Binance. That is to say, if you use a Binance wallet to buy the ERC-20 USDC, you can swap it for free within the same wallet. Transactions within Binance and most other centralised exchanges are without gas fees because the money is only moving around within the system. You are charged when sending to a wallet outside Binance.
Imagine DeFi without Stablecoins…
DeFi is only a fraction of the cryptocurrency market.
The crypto market is outrageously volatile. Price drops of 15% and price rallies up to 20% are the norms in crypto. Now imagine lending and borrowing in a currency that does that kind of movement. It would be nothing but a gamble. Say for instance you lend out $500 worth of ETH, and the day before the smart contract returns the money from the debtor with interest, ETH dumps 15%. The $500 you lent out has just become $425, and you have to hope and pray that the interest you earned on it can make it up to the value you lent out. or imagine that you are the borrower, and you have just taken out a 1 bitcoin loan to finance your housing project. The time comes to pay and the charts show you that Bitcoin has hit $70,000 from the $38,000 where you borrowed it. Effectively you have to pay back double what you borrowed. Plus interest!
Stablecoins change the game. They bring you the assurance that 1 USDC will be 1 dollar, both when you are borrowing and when you are paying back; when you are lending and when you are being paid back.
There are people willing to take the risk of using non-stablecoins to run not just lending and borrowing, but staking, yield farming and other business transactions in DeFi. The overwhelming majority, however, would rather not get high blood pressure from the volatility of those coins. The majority would rather have a calm oasis that assures them that their money is still there, and that is why stablecoins have been the door into crypto for so many people. And as they got into the space and began to use USDC and USDT in these yield farms and asset-trading DeFi platforms, DeFi exploded.
It just makes sense.