Stablecoin Use Case in Web 3.0
Stablecoins have now become the most influential cogs in the digital currency sector. A quick $180 billion market cap is proof that they are the crypto assets to watch, and stablecoin enthusiasts now describe them as the future of payments.
However, some New York Fed analysts are skeptical about these tokens’ role in the future of payments. Instead, they support tokenized bank deposits as an efficient digital currency than blockchain-based stablecoins.
These analysts say that asset-backed stablecoins tie up liquidity, diverting it off the banking system. To this end, they propose that mainstream stablecoins should undergo regulation.
Then as per the New York Fed analysts, legacy financial institutions already have payment infrastructures that provide a more “desirable and realistic starting point” for the expanding digital payments use case.
“Central bank actions over the last century have resulted in a well-functioning banking and payment system. Why not take advantage of that, and issue tokenized deposits? While a number of practical details would need to be worked out, the principle behind tokenized deposits is straightforward. Bank depositors would be able to convert their deposits into and out of digital assets — the tokenized deposits — that can circulate on a DLT platform”, the analysts write.
According to the analysts, some benefits of tokenizing bank deposits include heightened user deposit security and well-laid out payment infrastructure. There is also the benefit of “singleness of the currency,” arising from the ease of converting money between banks and central banks.
Tokenized bank currency accounts would also enjoy the security of deposit insurance. Nevertheless, the New York Fed analysts agree that a “key innovation of cryptocurrencies is that they operate on distributed ledger technology (DLT) platforms, a new type of exchange mechanism.”
They also state that DLT crypto assets could enhance the payments ecosystems via tools such as smart contracts.
Why are Stablecoins the future of payments?
Both Gary Gensler, the US SEC Chair, and Jerome Powell of the Fed have all issued strong statements about regulating stablecoins. The Federal Reserve is also researching the feasibility of a CBDC or central bank digital currency to counter the growing influence of DLT based stable assets.
The regulators would not pay so much attention to a harmless technology. Instead, they recognize that stablecoins are systemically evolving to a crucial segment of the financial network and could change global finance in the future.
It is also possible that they could become the backbone of the payments and financial services sector in the Web 3.0 era. First, they are low-cost, competitive, and real-time payments systems. They lower the costs of transactions and make them rapidly available to businesses and merchants.
Second, stable coins could easily connect the underbanked and unbanked people to the financial system. While banks and the proposed tokenized bank deposits can support a safer payments system, they are weak competition to the blockchain sector.
This is because banks pay little care for innovation and lower services costs. To illustrate this point, most Americans incur higher costs of payment services than Europeans. They, for instance, spend an annual $74 billion on hidden charges such as overdraft, late, bad credit, and fraud charges.
The average adult spends about $577 on extra charges for a bank account. The average low credit score consumer will pay much more to access essential financial services. In addition, they will pay higher interest rates, especially for credit card use.
Consequently, while most regulators believe that the system is not broken, the people who live paycheck to paycheck would beg to differ. The current financial system is so fractured that 70% of people that use payday lenders and check-cashing services have bank accounts.
They, however, avoid bank account use due to extreme system-wide friction. Stablecoins, in contrast, offers the advantages of speed, efficiency, and inclusion.
Stablecoins and Web 3.0
The digital world is now embracing a revolution that will shake all the foundations that build the Classic web or Web 1.0 and the highly centralized Web 2.0. Web 3.0, the third iteration of the World Wide Web. It will process big data intelligently through artificial intelligence (AI), machine learning (ML), and decentralized ledger technology.
It is the autonomous, semantic web as envisioned by Tim Berners-Lee, but it will be open and decentralized. All parties will interact with data via decentralized protocols such as smart contracts and interoperable P2P data storage systems.
A human-centered Web 3.0 will give its users control and ownership of their data. They will no longer rely on large organizations that exploit user data for marketing and advertising revenue. Web 3 applications will ease encrypted and decentralized data on permissionless blockchains.
In the absence of a single point of failure, there will be fewer cases of denial of distributed services instances and data redundancy. In addition, multiple decentralized backup facilities will keep data censorship-resistant.
The digital world has already made its initial steps to a Web 3.0 economy. For example, the global pandemic played a key role in shifting payments to contactless and digital alternatives to fiat such as cryptocurrencies and stablecoins.
As per Eswar Shanker Prasad, a Brookings Institution senior fellow and economist, this change is long-term. “For many consumers and businesses that made the switch to digital payments, there is probably no going back, even if the pandemic-related concerns about the tactile nature of cash were to recede,” he says in his book, The Future of Money.
Prasad says that we are at the dusk of the age of cash and the dawn of digital payment systems that will bring about the end of physical money. “Cryptocurrencies by themselves won’t. Stablecoins have a better shot but might have limited reach,” he says.
Due to this shortcoming, the former head of the IMF China division also supports CBDCs over stablecoins saying that they could be easily and more widely accessible than stablecoins.
That said, the stablecoin market is growing to meet the demands of digital payments networks and could cross the $1 trillion market cap by 2025. Pundits attribute this tenfold growth to the rising use of stablecoins in decentralized finance (DeFi) applications and the growing metaverse and NFT sectors.
People that hold stablecoins can easily participate in decentralized finance, NFT, and Web 3.0 economy’s payment networks. In addition, most cryptocurrency investors use stablecoins when purchasing and selling volatile digital currencies.
By February 2021, close to 57% of all BTC trades were fulfilled in USDT format. Stablecoins are a major source of liquidity for the crypto sector.
Stablecoin’s smart contracts benefits for Web 3.0
More so, since stablecoins are non-volatile and smart contract ready, they could support low-cost e-commerce. Moreover, unlike mainstream debit and credit card systems that are inefficient and high cost, stablecoins and smart contracts could help the vulnerable unbanked and under-banked save cash in digital payments.
Likewise, they will ensure that brands and retailers make more profit. Most merchants pay a minimum 2.5% fee per transaction to payment processors. On the other hand, banks make a massive $100 billion from e-commerce transactions.
Distributed ledger technology will connect merchants and shoppers, eliminating profiteering third-party actors such as payments processors. As a result, this infrastructure can enhance merchants’ gross margins by 2% to 3%. Just picture an e-commerce system devoid of card processing fees or e-commerce networks surcharges?
In addition, as more consumers embrace e-commerce, many businesses are now building digital platforms. Fraudsters are therefore finding more opportunities as digital transactions become more prevalent.
Consequently, as per Statista data, online payment fraud cost all stakeholders $20 billion in 2021. To this end, businesses will spend an annual $9.6 billion on fraud detection by 2023. In addition, over 54% of consumers have encountered suspicious or fraudulent actions on the internet.
Unfortunately, most payment card issuers and merchant services always pass on the cost of fraud and chargebacks to the brands and retailers. More so, since low-value fraud cases occasion these large losses, their legal costs often exceed the value of the fraud. So, fraud cases often go unaddressed. Merchants rarely take individual fraud cases to court.
Payment processing services such as PayPal have dispute-resolution systems that are more efficient at mitigating fraud and resolving disputes. Stablecoins could significantly lower scams since the blockchain fund verification process is fast, real-time, and more accurate.
Stablecoin payment parties enjoy smart contract protection. Smart contracts only execute agreements between parties when all preset conditions of the agreement are met. The traditional payments system relies on the threat of central authority enforcement. Smart contracts are an alternative to this form of coercive power.
Parties will first initiate a contract and pre-commit to its terms, including the irreversibility of transactions. Then, smart contract terms are immutable and cannot be overruled by a single node or malicious actor.
Reliable and accurate smart contracts will disincentivize fraud, enhancing the integrity, trust, and security of payments in Web 3.0.
Web 3.0 and decentralized PAR will create new opportunities
The war for Web 3.0 dominance between CBDCs and stablecoins is heating up, but countries such as the US remain hesitant about their development. Most CBDCs are in their formative stages, but stablecoins are already achieving mass adoption amongst users.
Consequently, most regulators are moving to limit stablecoin issuance to banks. That said, countries that support stablecoins in digital payments will have certain upsides, such as greater digital sovereignty. In addition, Stablecoins and Web 3.0 could revive economies and provide more economic opportunities to regions sidelined in the Web 2.0 boom.
An alternative value-based internet architecture coupled with decentralized payments solutions via stablecoin such as PAR will free markets from the USD hegemony over the legacy financial system. PAR is an algorithmic stablecoin that tracks the value of the Euro.
It is an Ethereum based, crypto-backed stablecoin with transparent, open censorship-resistant, and decentralized protocols that can massively scale to support a large payment network. PAR’s adoption cycle is linked to crypto adoption.
The MIMO token also has cross-chain characteristics. It is minted on the Ethereum blockchain in order to safeguard its token integrity, and then bridged to other chains to maximize its DeFi potential.
Its market capitalization will grow alongside cryptocurrency use. In addition, PAR and the Mimo Protocol will give these users access to investment and passive income generation projects. Consequently, PAR does not tie up liquidity but enhances financial inclusion, cryptocurrency adoption, and fraud-free digital payments.
Then, Web 3.0 and decentralized stablecoins such as PAR are vital in building an equitable technological era. To this end, they will give other regions a higher chance at reaping more benefits from the decentralized web.
To quote Patrick Hansen’s Stanford Law School article, “If the EU wants the EURO to play a major role in the future of global payments, stifling EURO-backed stablecoins is the opposite of what should be done. The current stablecoin market is already heavily dominated by USD-stablecoins (over 99%). This brings not only FX-risks for European consumers (e.g., using DeFi), but more importantly, leads once again to significant political influence from the US government, and similarly significant amounts of economic value creation being denominated in USD.”