Stablecoins are the gateway for financial freedom.
A brief history of stablecoins.
The title of the Bitcoin white paper is “A Peer-to-Peer Electronic Cash System”. Since the birth of Bitcoin in 2009, there have been many initiatives and attempts to use the cryptocurrencies for international remittances, global micropayments and more. However, cryptocurrencies have extreme volatility of up to tens of percent. Such volatility has made it difficult to utilize cryptocurrecies for remittances or payments in our lives.
That’s where stablecoins come in. It was around 2019 which stablecoins began to grow their presence in the crypto markets. The growth of stablecoins owed to gradual maturity of tokenization technology. Each stablecoin played a role as a token pegged to U.S dollars at a 1:1 ratio and the token holders were entitled to claim U.S dollars back. For instance, Tether Limited issued Tether stablecoins collateralized with U.S dollars deposited in banks. Tether holders could claim U.S dollars back from the issuer.
With the rise of stablecoin usecases, the market size began to grow. Most stablecoins were the medium of trading in the crypto exchanges. Exchanges which previously used to provide trading services only in the legal tender or bitcoins began to list stablecoins on their trading platform. The price of stablecoins, unlike bitcoin, was more stable to be convenient to use for trading other crypto assets. That’s where stablecoins proved themselves to be better as trade pairs than bitcoins.
Stablecoins served as a useful hedging tool when the crypto market was in a state of upheaval. Instead ofredeeming their crypto assets, investors stored them in stablecoins. Tens of trillions of won of Chinese capital moved into stablecoins instead of yuan when the Chinese government forbade the use of any crypto assets. In the following four years, the stablecoin market increased to almost 200 trillion won.
Companies like Circle and Paxos started to enter the stablecoin market as it grew. Stablecoins, in particular, were expected to be used for payments and remittances rather than just as trading pairs or hedging. This was something Circle in particular predicted. He predicted that a true Internet economy could emerge if the stablecoin market expands beyond 200 trillion won and if people can conduct economic activities within the stablecoin ecosystem.
From Offline to Online
The corporate mission of Stripe is to “Let’s grow the GDP of the Internet”. Stripe began to provide remittance/payment services as the rate of them online started to hike up faster than offline. Besides Stripe, many internet based finance startups entered the market. Companies like Toss, venmo, CashApp, and Alipay were valued at tens of trillions of won.
It is true that these fintech startups occupied their own domains with user-friendly UI/UX functionalities. However, they still rely on the current financial systems to serve their users. As a result, they stopped short of providing international financial services. For instance, Toss or CashApp were only available within their jurisdiction. These limitations came from the dependency of current financial system.
The drawback of the existing financial system
Information freely circulates via the internet but money cannot move like information. Money is restricted to be circulated within the local network of central banks, clearing houses, banks, and financial institutions. That’s why most of local fintech services are available in their countries.
The fintech companies offer financial services via direct communication with Bank API or open banking infrastructure connect to the banking networks. Little troubles take place as long as these financial services are offered locally in national jurisdiction. It’s challenging to expand the services to a global open banking infrastructure, though. Global financial services are still only possible through the expensive and sluggish correspondent banks and SWIFT networks.
From Off-Chain to On-Chain
Stablecoins potentially resolve current problems because they move like information flowing on the internet. People can send and receive stablecoins without relying on current financial systems. It means that money moves from off-chain(outside the blockchain) to on-chain(inside the blockchain). So, stablecoins enable people to make financial transactions over the globe without third party permissions.
Now, we see that everyone can build and launch global financial products. We know that even two or three programmers developed DEX where hundreds of millions of dollars are traded and a developer created a lending platform using open source codes. These stories remind us that blockchain could dismantle financial barriers, just as the internet did for informational hurdles. The transition from off-chain to on-chain has just begun, just as the industry landscape shifts from offline to online over the past 20 years. We need Web 3 version of Stripes that could grow on-chain GDP.
To be continued
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