Unpegged: The Next Wave Of Stablecoin Innovation
September 28 2023
by Oleksiy Novykov
Stablecoins have been under the spotlight for various reasons. The collapse of Terra Luna sent shockwaves through the market, and when USDC depegged in the aftermath of the SVB going under, it raised eyebrows across the industry. And with the SEC in the US still trying to find its standpoint on digital currencies combined with a murky global regulatory environment, the crypto landscape is in flux.
The Total Value Locked (TVL) in DeFi has seen a significant drop, plummeting from its peak of 160 billion to just over 39 billion—a 75% decrease. However, amidst this downturn, there's a silver lining: consumer demand and usage of stablecoins remains comparably strong.
While the overall stablecoin market cap has also faced a decline, moving from 180 billion to 125 billion, it's a more modest 34% drop. Notably, Tether USD (USDT) has managed to maintain its TVL from 2022.
Diving deeper into USDT's historical data, we observe an interesting trend: While its Ethereum-based TVL followed the general DeFi trajectory, its presence on the Tron network has seen growth from $30 to $42 billion market cap. What's driving this?
The key to understanding this lies in the image below. The map showcases the inflation rates of countries worldwide in 2023.
In essence, inflation signifies that today's money has less purchasing power than it did a year ago:
To safeguard their purchasing power, individuals from countries like Nigeria, Ukraine, Argentina, and Turkey among others, are inclined to store their savings in a currency that retains its value over time. The US Dollar has emerged as that preferred currency. However, the governments of these nations often implement restrictions to curb the outflow of capital, inadvertently driving their citizens towards alternatives like USDT.
The US Dollar stands as the world's primary reserve currency, accounting for 59% of foreign exchange reserves and underpinning a majority of international trade. Money has a magnetic quality: it attracts more of its kind. This creates a consistent global demand for the US Dollar and its digital counterparts.
But why the emphasis on USDT in this article? I'm not endorsing USDT, Tether, or Tron, in any way. My point is that USDT addresses a genuine need for many users worldwide, leading to its sustained demand.
When considering the introduction of a new stablecoin or any product in general, it is important to make sure that there is a solid use case for this product. It might sound like stating the obvious, but the tech industry tends to invest tremendous resources on creating solutions in search of a problem instead.
There are other stablecoins pegged to currencies like the Euro, Canadian Dollar, Singaporean Dollar, and Australian Dollar. Yet, their adoption is limited. The reason? In their respective countries, the traditional banking system already provides efficient services at reasonable costs, often with a user experience superior to what most crypto platforms offer. The map below illustrates this: the black number indicates the percentage of unbanked individuals, while the blue number highlights those with mobile internet access.
For a stablecoin to gain traction, it should target regions with high mobile connectivity and limited banking infrastructure. Based on this graphic, Latin America, Africa and the Middle East will be such regions. To illustrate this point with an example, I will share stories of two projects from the Celo Ecosystem who can leverage Mento Platform to launch successful stablecoins and bootstrap their businesses.
First up is impactMarket. They utilize Web3 technologies to distribute unconditional basic income (UBI) to some of the world's most underserved communities. Beyond this, they've ventured into undercollateralized microloans, empowering individuals without prior financial access to start small businesses and earn a livelihood. For these initiatives, they use the Celo Dollar (cUSD) on the Mento Platform. While cUSD works well for UBI due to its relative strength against local currencies, it poses challenges for microloans. As recipients earn in local currencies that often depreciate against the US Dollar, repaying loans becomes more challenging. Recognizing this, impactMarket could initiate the launch of local stablecoins in their operational regions, aiming to make microcredit products more accessible to a wider audience.
Second example is Dunia, a financial player in Francophone Africa. They facilitate payments for a vast network of 25,000 merchants across 12 countries. Their services include regional cross-border payments in the West Africa Franc (XOF) and an on-ramp to USDT, which businesses use for overseas supplier payments.
Dunia is gearing up to introduce eXOF on the Mento Platform on Celo. Their vision with eXOF is to streamline regional transactions, making them more cost-effective and swift. As more businesses embrace eXOF for B2B transactions, it's anticipated that consumer adoption will follow. The user-friendly Valora wallet, known for its simplicity and widespread use in Africa, further supports this vision, aiming to bring more individuals into the digital economy.
While the US Dollar accounts for 59% of the real-world economy, its share is 99.5% in the on-chain economy. This disparity suggests potential for other reserve currency stablecoins, especially if they're introduced with clarity and a well-defined use case.
A well-integrated network of efficient stablecoins can revolutionize on-chain foreign exchange markets. The traditional FX market boasts a staggering daily trading volume of $7.5 trillion. Transitioning this market to an on-chain platform offers several clear advantages:
- Cost Efficiency: By eliminating intermediaries, such as banks and brokers, transaction costs could be reduced by up to 95%.
- Availability and Speed: Unlike the traditional FX market, which often sees next-day settlements, its on-chain counterpart could provide round-the-clock service with near-instantaneous settlements.
- Accessibility: The removal of intermediaries broadens access, making it available to a wider user base.
The article “The Seven Defining Opportunities in On-Chain FX” by Stablecorp provides an extended overview of this topic.
Another promising avenue is the development of cross-border settlement currencies.
To illustrate, consider the Special Drawing Rights (SDR) – a financial instrument devised by the IMF. The SDR is an international reserve asset, its value is based on a basket of five currencies — the US Dollar, the Euro, the Chinese Renminbi, the Japanese Yen, and the British Pound Sterling. While the IMF explicitly states its unavailability for the private sector, let's entertain a hypothetical thought experiment:
What if an asset akin to the SDR was accessible to businesses? Such an asset could offer businesses a robust mechanism to hedge against currency fluctuations. Moreover, it doesn’t have to be an exact SDR replica. The flexibility of blockchain allows for the creation of myriad asset variations, backed by a basket of currencies with adjustable weightings. This would enable businesses to choose the asset type that best mitigates their foreign exchange risks.
However, merely introducing these stablecoins isn't the endgame. For them to be effective:
- Efficiency is Key: There should be ample trading pairs or routes between them, ensuring deep liquidity.
- Improved Account Management: The global business community needs superior account management and reporting tools. Relying on platforms like Gnosis Safe and Ledger isn't feasible for managing global financial operations.
- Seamless Integration: Smooth and affordable on- and off-ramps are essential to ensure these systems integrate effortlessly with existing financial infrastructures.
In our discussions with payment providers worldwide, a recurring theme emerges: the complexity of converting fiat money into Mento stablecoins. Imagine this: you want to convert your fiat money to stablecoins on Celo. First, you fund your Binance account. Next, you purchase USDC. Then, you transfer USDC to a blockchain, likely BSC. Following this, you use a bridge (SquidRouter, for example) to transfer USDC to Celo. Finally, you issue Mento assets using USDC as collateral. This cumbersome process deters our partners. To address this, we're developing MATE, an SDK that simplifies the process, enabling a direct fiat-to-Mento asset conversion. This open-source SDK, not exclusive to Mento or any specific CEX, integrates seamlessly into existing workflows. Stay updated on its release by following our Discord or social media channels.
Revisiting the inflation topic, it's evident that many purchase USDT to maintain their purchasing power, aiming to preserve value over time. However, with global currencies experiencing notable inflation, is fiat truly the ideal preservation tool? The answer is nuanced. Inflation isn't a currency flaw; it's intentional.
Enter the concept of a stablecoin that tracks a country's consumer price index rather than its local currency, commonly termed 'flatcoin.' While this is an exhilarating development, it presents challenges. Reliable on-chain CPI data feeds, especially in critical regions, can be elusive. Relying solely on official data might not capture the complete picture. While projects like Truflation are addressing this, their current focus is limited to the US and UK. Additionally, finding appropriate collateral is essential. Given the inflationary nature of all currencies, the US Dollar, which continually depreciates against its backing asset, isn't ideal. The solution? Tokenizing tangible real-world assets.
Innovation often unfolds gradually, not in monumental leaps. The industry needs diverse operators launching fiat-pegged stablecoins or low-volatility assets with clear use cases. Through persistent experimentation, novel products will emerge. Enhancing tooling and user experience is pivotal for financial inclusion, and tokenizing real-world assets heralds vast potential.
At Mento Labs, we're committed to this evolution. We provide foundational tech tools, from oracles' infrastructure and issuance mechanisms, to governance frameworks and auxiliary tools. This allows operators to concentrate on economic design and user adoption without the intricacies of smart contract logic or blockchain deployment.
The evolution of money is a collective journey, and your insights are invaluable. Dive deeper into these discussions and brainstorm with us by joining our Discord server. For real-time updates and insights, don't forget to follow us on Twitter (aka X). Together, let's shape the future of finance.
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