The Role of Stablecoins in Decentralized Finance (DeFi)
The launch of Bitcoin spurred dozens of digital money projects creating a new financial world with many investment opportunities. With cryptocurrencies gaining traction and DeFi riding the crests of the financial market, digital money is a heated discussion among crypto enthusiasts, big mainstream companies, and large investment funds.
Stablecoins emerged as the lifeblood of DeFi. They are doing what Bitcoin was supposed to do — becoming a universal means of payment. Whether you are a hedge fund, a business, or a consumer that wants to make payments, stablecoins are right up your alley. They are better than writing a paper check, using a credit card, or wiring money. Stablecoins are faster, better, cheaper, and accessible worldwide.
From DAI to sEURO and everything in between, learn more about the role of stablecoins in DeFi.
What are stablecoins?
Stablecoins are cryptocurrencies whose value is tied to another currency, financial instrument, or commodity. Stablecoins aim to solve the problem of high volatility, which makes crypto assets unsuitable for transactions.
The first stablecoins saw the world in 2017. Since their launch, over 200 new stablecoin projects have been announced. Today, most stablecoins are issued on Ethereum as ERC-20 tokens and have the same properties as regular Ethereum tokens, including:
- Global reach that makes it easy to make payments throughout the world
- Easy to produce and manage
- Interoperability within the Ethereum network
- Transparency
Stablecoins were introduced to represent a familiar unit (fiat money), decrease the volatility of crypto markets, and facilitate crypto trading since it’s easier to exchange crypto coins for stablecoins and vice versa than moving fiat money in and out of your bank account. They serve as a bridge between traditional finance and DeFi.
Thanks to so-called value stability, stablecoins facilitated a range of DeFi services like borrowing and lending.
How do stablecoins work?
To put it bluntly, stablecoins resemble more fiat money than crypto coins and tokens. But unlike fiat money, stablecoins can bring solid returns when used for staking or yield farming thanks to relatively high stablecoin interest rates. Let’s take, for example, sEURO. It’s an over-collateralized stablecoin pegged to EURO that can generate passive income within The Standard protocol, even under looming recession, thanks to high stablecoin yields.
Access our website to learn more about TheStandard.io euro stablecoin (sEURO).
The role of stablecoins within the DeFi ecosystem
The role of stablecoins within DeFi has grown in recent years. Initially, they were just used as a bridge to trade crypto coins and as a relatively safe means of value in the highly volatile market. But with the swift expansion of decentralized finance, stablecoins have gained new applications.
Liquidity providers
Stablecoins play a central role in enabling trading, lending, and borrowing activities. They provide liquidity for most DeFi applications, especially lending protocols and decentralized exchanges. Stablecoins help eliminate impermanent loss and ensure seamless transactions across various DeFi platforms in one-click swaps.
For example, stablecoins are often one of the assets in a pair of digital assets in automated money maker (AMM) arrangements. For example, stablecoins are used as collateral or often locked in DeFi arrangements to generate passive income.
Crypto-asset trading
Stablecoins act as a bridge between crypto and fiat money. It’s much easier to swap stablecoins to crypto coins and vice versa than getting money in and out of your bank account and paying high transactional fees.
No or minimal fees are involved when converting Euro or U.S. dollars to stablecoins. So active trading involves tons of buying and selling movements, and stablecoins are much cheaper and faster alternatives in the highly volatile crypto market.
Means of payment
Going cashless isn’t a new trend on the market. In most countries, digital payment tools like chip and pin, credit cards, and contactless payments have already replaced the cash economy. But, a new cashless payment method is finding its way — stablecoins.
Think of stablecoins as digital money that is fast, secure, and affordable while having the usability of traditional money. Unlike crypto coins, stablecoins can act as a medium of exchange due to their price stability. Fiat-pegged stablecoins have a value equal to one Euro or one U.S. dollar.
Today’s financial system involves a middleman that charges relatively high transaction fees. Using stablecoins allow for omitting any third parties between merchants and consumers, reducing the transaction costs for both parties.
Get ready for the next great thing with The Standard!
Stablecoins are disrupting the DeFi ecosystem and the traditional banking system. Sooner or later, they will change the way people use cashless payments.
