How On-Chain Forex Markets Supported by Chainlink are Unlocking the Full Potential of Stablecoins and DeFi
The $129B stablecoin market is bubbling, housing hundreds of different stablecoins with unique features and functions. However, the stablecoin market is currently dominated by the top 5 projects that make up 94% of the total market capitalization and represent 99% of stablecoin trading volume — most of which are USD-backed stablecoins.
Yet, non-USD stablecoins have an important role in onboarding billions of users to the blockchain ecosystem and, more precisely, DeFi. As of now, the majority of the stablecoin market revolves around the US Dollar, creating frictions and adding currency exchange risks for users living outside of the US. But, regardless of their design, non-USD stablecoins struggle to attain the network effect needed to make them usable by everyone. The main issue non-USD stablecoins face is liquidity, since it is incredibly costly to build liquid markets for them, meaning they are hard to launch and scale. A surprising and fairly simple way of solving these issues is to port the Forex market to blockchains.
This is what Jarvis Network has been working on with the launch of our first protocol, Synthereum, which allows for the issuance and exchange of synthetic stablecoins called jFIATs through an innovative on-chain Forex design. Synthereum uses the industry-leading Chainlink Price Feeds on both Ethereum and Polygon for real-time exchange rates on fiat, which users reference to buy, sell, or exchange jFIAT stablecoins without unnecessary slippage. jFIATS can help solve the liquidity problem for non-USD stablecoins, fostering worldwide inclusion of other global currencies and further increasing DeFi adoption.
Blockchain-based Forex: an on-ramp to access liquidity!
Forex is the largest traditional financial market by far, with as much as $6.6 trillion exchanged every day. Most of this trading volume comes from non-speculative use cases, with one of these being particularly compelling — Forex happens to be used for buying or selling currencies with the sole purpose of investing in foreign markets. In fact, in traditional financial markets, assets are quoted against a fiat currency: Apple stocks are priced in US Dollars, Mitsubishi in Japanese Yen, and Total in Euros. To buy a Japanese stock with Euros, one would first need to exchange them for JPY on the Forex market, the latter being a liquidity on-ramp.
In order book-based centralized or decentralized crypto exchanges, crypto assets can be quoted against any fiat currency (or any other crypto asset, like ETH, BTC, or BNB). Still, the most liquid markets are quoted against USD. For example, on Kraken, the ETH/USD market is more liquid than ETH/EUR, which is more liquid than the ETH/AUD. There is nothing abnormal with liquidity being centralized in USD, however; because there is less volume in non-USD markets, there are fewer market makers in these markets, creating a vicious circle of liquidity constraints.
For someone holding AUD, at times it could be more efficient to first exchange them for USD on the Forex market and then buy ETH/USD rather than use the ETH/AUD market. This could actually be healthier for overall liquidity, since market makers could funnel their resources into the ETH/USD market rather than spreading them around on multiple markets. In fact, many fiat on-ramp services do this when possible to provide their users with the best price when using non-USD fiat currency. In this scenario, the Forex market is an on-ramp to access the most liquid markets in crypto.
An on-chain Forex market could play the same role for non-USD stablecoins, granting them access to the preserved liquidity of USD-backed stablecoins…
Exploring an on-chain Forex market
In AMM-like exchanges, USDC, USDT, DAI, and BUSD are the stablecoin pairings that represent the vast majority of the liquidity within various markets. But since anyone can pair non-USD stablecoins with their USD alternative, AMMs enable the creation of inner on-chain Forex markets that can connect any stablecoin to the rest of their liquidity through order routing.
However, a few issues have prevented the emergence of large-scale, on-chain Forex markets on AMMs. First, it is very expensive to build liquidity within these Forex pools, especially for crypto-collateralized stablecoins. Therefore, despite recent innovations like concentrated liquidity, this model can only scale at the expense of spending vast capital on liquidity and incentives, thus creating an opportunity cost and wasting resources. Secondly, Forex pools on an AMM can only work if arbitrage can be performed. Therefore, there is an evident need to have either another market that guarantees that trades happen at the real market price, or another mechanism in place for facilitating arbitrage.
Solving these issues requires a low-slippage and capital-efficient on-chain Forex market that guarantees the execution of trades at the real market price. This is exactly what Jarvis Network has launched with the Synthereum protocol! Deployed on Ethereum and Polygon, Synthereum allows for the issuance and exchange of synthetic stablecoins (aka jFIATs).
Rather than using an AMM with traditional double-sided liquidity pools or an optimized bonding curve, the protocol’s liquidity pool utilizes a burn and mint mechanism where Chainlink Price Feeds provide the real-time market price of assets to facilitate trades. Users buy from and sell to the pool, which only holds USDC for now, since it is the only approved collateral. Whenever someone buys, the pool uses the buyer’s USDC and adds x% to it to meet the required collateral ratio (CR). Then the pool mints jFIATs, which it then sells to the buyer. Whenever someone sells, the pool burns the seller’s jFIATs to redeem their initial collateral, partly using it to pay the seller.
This design is extremely capital efficient: with a CR of 125%, 1 USDC of liquidity allows the purchase of $4 worth of jFIAT — and no liquidity is required in order to sell. The CR could be changed, varying from 110% to 200% to adapt to market dynamics and the increase or decrease of available liquidity.
This issuance mechanism allows users to swap jFIATs for USDC in order to leverage its liquidity and network effect on multiple chains.
USDC: The ultimate liquidity router
On Jarvis Exchange, users can perform Forex swaps without slippage on Ethereum and Polygon; they can exchange jEUR for USDC or jCHF for jGBP.
Jarvis Exchange uses this feature to burn jFIATs for redeeming USDC without price impact by referencing the current market price from Chainlink oracles, swapping the latter for any other token on an AMM in the same transaction. This feature, called the On-Chain Liquidity Router (OCLR), uses USDC to help jFIAT access the most liquid pools on Ethereum or Polygon. Since there is no slippage when exchanging jFIAT and USDC, an exchange between a jFIAT and another token has the same price impact as if the latter was exchanged with USDC.
For example, for buying ETH with jEUR, the jEUR would first be converted to USDC on the Synthereum protocol, and then the USDC would be swapped for ETH on an AMM. The price impact between jEUR and ETH is the same as between USDC and ETH.
Thanks to this built-in on-chain Forex, jFIATs are connected to the entire crypto market liquidity idling on decentralized exchanges on any chain. These Forex markets also guarantee jFIAT’s redeemability for USDC, which helps maintain their peg on their primary and secondary markets thanks to constant arbitrage opportunities.
This elegant solution solves the liquidity and peg issues met by other stablecoins. jFIATs derive a lot of value from this feature, as it makes them usable from the day they are launched.
Launching new stablecoins with ease
Eventually, Synthereum also solves issues with scaling: any jFIAT, even the most exotic pair, inherits the aforementioned features from the block from which they are launched. Because of the high capital efficiency, jFIATs do not require a lot of liquidity to function, they only require price oracles from Chainlink. This allows for the launching of an incredible amount of liquid stablecoins and CRYPTO/FIAT trading pairs that bring DeFi to everyone. Since USDC is present on most L1 and L2 scaling solutions, with deep liquidity and working bridges already in place, jFIATs could also be launched on pretty much any blockchain or scaling solution.
This would provide a lot of value to niche markets and regions where users pay a big premium when buying cryptocurrencies with their local currencies or are obliged to face currency exchange risks by settling their trades in USD and holding USD-pegged stablecoins.
With this in mind, Jarvis has recently launched a synthetic Franc CFA (jXAF and jXOF) and is planning on deploying synthetic Naira, Rand, or Philippine Pesos. In that regard, the Synthereum protocol positioned itself as a backend underpinning Revolut-like wallets all over the globe: developers can integrate the protocol to provide their users with any supported stablecoins and CRYPTO/FIAT pair to target a specific geo-localized audience. Combined with local fiat gateways for jFIATS and low-cost L1 or Ethereum scaling solutions, this new development can significantly drive user adoption.
Competition or synergies with other stablecoins?
Despite the challenges, the stablecoin market is bubbling, and while many are fighting for market share, synergy can bring a lot more value to the ecosystem and end-users.
Using similar asset pools ala Curve, jFIATs could be swapped for other stablecoins and vice-versa with very limited slippage. These pools create a symbiotic relationship between all the stablecoins within them: it grants each one of them the features of the others.
A first example of a powerful synergy is a pool of jFIATs paired with their tokenized version, since the later offers a fiat on and off-ramp and jFIATs provide access to liquidity. A jCAD-CADC or a jSGD-XSGD pool would help both CADC and XSGD to access deeper liquidity, while providing a fiat on/off-ramp to jCAD and jSGD.
Another symbiotic relationship would be jFIATs pooled with a similar synthetic fiat currency to help the latter maintain its peg. A jEUR-PAR pool would reinforce PAR’s peg on its main secondary market by facilitating arbitrages, since jEUR can be exchanged for USDC at the oracle price. Of course, the PAR would also benefit from accessing deeper liquidity, and its ecosystem would be open to jEUR holders.
A happy consequence of such pools would be the generation of sustainable yield through trading fees. Together with money markets and a Liquity-like liquidation model, they fashion multiple yield-bearing stablecoins. This enables the creation of savings accounts in any supported stablecoins, which enhances the value proposition of a Revolut-like backend for wallets and further accelerates adoption.
Bringing DeFi to everyone!
Synthereum’s role is to speed up mass user-adoption and we are committed to facilitating a user’s journey in the blockchain industry. However, wallets with fiat gateways supporting jFIATs can ease user onboarding and help bring DeFi to millions more users. Take for example the Bridge wallet from Mt Pelerin, which could provide their users with a 1:1 fiat on/off-ramp for jFIATs on both Ethereum and Polygon. To foster more wallet integrations, the protocol’s fees could be distributed through a revenue-sharing program.
Complemented by crypto-card, wallets, and Synthereum, Jarvis Network can enable a Revolut-like experience within DeFi — users could deposit their fiat to blockchains through a fiat on-ramp, exchange them for other stablecoins, send, receive, or spend them, access liquidity and yield opportunities, as well as explore DeFi services such as lending or leverage trading as soon as jFIATs are more integrated within other protocols.
Of course, Synthereum has numerous other use cases to explore like the obvious one related to its Forex feature, such as remittance, or building derivative markets atop of it for hedging currency risks. But in the meantime, creating a network effect with liquidity yield and various integrations is the primary focus.
We also want to thank Chainlink for its support in creating new Forex markets through the provisioning of highly secure, reliable, and precise price oracles. For more information on the great features of Chainlink Price Feeds, refer to our previous announcement.
Pascal (pscltllrd on Twitter).
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