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“Money is unfair, so learn its rules in order to use them to your advantage.” — Anonymous
First introduced in the crypto space in 2014, a stable cryptocurrency (stablecoin) is a cryptocurrency that remains stable in value against a reference asset or traditional currency. The main purpose of a Stablecoin is to eradicate the speculative nature of most cryptocurrencies by helping create a more consistent and reliable market, and with this, expand the use cases of the crypto asset class. From a payments and store of value point of view, stable cryptocurrencies include the best features of cryptocurrencies while minimizing or eradicating their less desirable aspects, unleashing a powerful tool for the digital age.
Stable cryptocurrencies minimize the price volatility by keeping their value fixed against traditional-world assets, i.e., a single fiat currency. The majority of the most prominent stable cryptocurrencies are pegged against the U.D. Dollar on a 1:1 ratio.
The market capitalization of stable cryptocurrencies has been steadily increasing, currently surpassing 20 Billion USD. There are many explanations for this; an important factor is that stable cryptocurrencies allow crypto traders and investors to enter and exit the crypto-asset market without converting back to fiat.
With the crypto-asset market growing in value, the number of assets available, and investors, stablecoin demand is at an all-time high. During the past months, stable coin demand has been growing at about 100 million per day. This most recent spike in adoption can be attributed to the emergence of decentralized finance(DeFi).
DeFi and Yield Farming
“As revolutionary as it sounds, Blockchain truly is a mechanism to bring everyone to the highest degree of accountability. No more missed transactions, human or machine errors, or even an exchange that was not done with the consent of the parties involved” — — Ian Khan, TEDx Speaker | Author | Technology Futurist
As partly covered in the last essay, the most recent trend at the forefront of innovation in the crypto space is decentralized finance(DeFi). DeFi applications allow access to financial services to anyone with an internet connection and crypto wallet, typically not requiring trust in custodians or middlemen; in this sense, they are permissionless & trustless.
Traditional finance relies on trusted authorities and institutions to provide custody & arbitration to investors in a very costly and inefficient manner. DeFi applications use code to resolve any possible dispute while empowering users with complete control and access to their funds at all times. This reduces the costs associated with providing and using financial services dramatically, enabling a new breed of financial assets for any kind of investor.
DeFi apps have democratized access to financial services typically offered only by large financial institutions towards institutional and accredited investors. Today there is more than 14 Billion USD locked in DeFi applications.
Most DeFi apps typically require that their investors or “Yield farmers” deposit or “lock” stablecoins and other crypto assets such as BTC and ETH into their “liquidity pools” or smart contracts. Yield farming, also referred to as “liquidity mining,” is a concept that has emerged with DeFi and a relatively new way of investing. Yield farming allows investors to earn passive income on their crypto asset holdings.
Yield farmers typically lend their crypto assets to “liquidity pools” that offer an interest on the assets deposited into them. DeFi applications develop these liquidity pools that provide liquidity to a diverse number of trading pairs in the crypto market for an exchange fee, generating income distributed to the pool participants. (There are other use cases in DeFi, most of which will be covered later in the series.)
Stablecoins beyond crypto
“The blockchain keeps everyone honest, and a whole layer of banking bureaucracy is removed, lowering costs.”― Paul Vigna, The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order
As mentioned in our first essay, the fractional reserve banking system and its interconnected international institution hegemony effectively act as rent extracting agents that erode populations’ wealth. Irresponsible economic policies generate a cascade of negative effects on billions of people’s lives, and currency devaluation and inflation are the main culprits.
In addition to this, Banks act as custodians of wealth and, on average, not only do not offer attractive returns to their account holders but charge a series of fees on the account holders’ own money for services that rely on a dying infrastructure. As an example, current fiat solutions like SWIFT take days to clear and require costly infrastructure and intermediaries that prey on the wealth generated by the average world citizen.
Stable cryptocurrencies enhance all of the aforementioned processes by several orders of magnitude. They empower the individual providing an opportunity to opt-out of their respective financial system, and are legitimate stores of value and medium of exchange that directly outcompete their respective fiat currencies and the traditional services built around them.
Stablecoins can act as an enforcement mechanism on behalf of the individual, providing accountability to bad governments. As the populace becomes aware of fiat currencies’ fallibility, stable cryptocurrencies are a powerful alternative that has regulators and government officials on edge.
Facebook’s Libra
“People think innovation is just having a good idea but a lot of it is just moving quickly and trying a lot of things.”-Mark Zuckerberg, founder of Facebook
In May of 2019, Facebook announced its long-awaited cryptocurrency called Libra. In Libra’s whitepaper, the project states that it has the objective of bringing financial inclusion to the world. After the announcement, several governments worldwide began a diverse number of actions oriented to block or respond to Libra, as they collectively see the threat it poses to national sovereignty. From regulation to public consultations on currency, governments’ response has been fierce towards stablecoins in general and Libra in particular.
The next essay will cover a detailed discussion on how governments and central banks are reacting to the emergence of stable cryptocurrencies. Stay tuned for more information and follow us on social media.
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