Yesterday, we discussed the nature of stablecoins. Today let’s discuss what stablecoins could actually be used for.
The flaw of assuming a customer or a business can use cryptocurrencies for its’ day-to-day basis is that, currently, one of the defining characteristics of crypto is it’s volatility. Businesses need a stable medium of exchange in order to make decisions around pricing, capital investment, market development and an almost innumerable set of other business decisions. For example, after the crypto-boom of 2017 — several well-funded projects went bankrupt because they didn’t diversify their assets out of the underlying crypto and were caught ill-prepared for a turn in the market.
The first, and most obvious, use case for a stablecoin is as a digital currency. There is an entire industry devoted to payments and blockchain-based technologies have been disrupting it since their inception. However, the volatility of cryptocurrencies have held business back from accepting them as a form of payment because it was impossible to forecast both expenses and income in a reliable fashion. Mass adoption by consumers was also hindered because there was no purchasing price parity map for them to rely on.
With stablecoins — the cost of using USDT at a point-of-sale is as predicable as using US Dollars. As a result, merchants and consumers alike can profit from the advantages of blockchain technology without being exposed to the swings in value of the currency.
Where a true “digital currency” use-case really shows its value is when the payment mechanisms are more complicated. Cross-border transactions have oft been referenced as an ideal use case for cryptocurrency and rightfully so. The network of clearing houses, transaction fees, and banking services needed to pass through and pay for has added anywhere from 8% to 20% to the value of the transaction. For a particular cross-border transaction — remittances (where a foreign-born worker is sending money back to their home country) — losses due to transaction fees can swallow a materially significant portion of the remittance and, for this socio-economic class, can represent a drastic change to their livelihood.
The benefits are not only for low-value, high-volume transactions like remittances. Larger, international corporations that rely on supply chains and vendors criss-crossing the globe will find that the operational expenses using a blockchain-based stablecoin are substantially lower than traditional financial instruments.
Physical / Digital Divide:
Stablecoins enable use-cases where digital currencies need to be interchangeable with paper money. Adoption of smart contracts and blockchain technology into payroll services or real estate leasing and rental requires that the currency transferred from wallet to wallet is of a consistent value with what is listed in a contract signed months or years in advance. While it is possible that employment contracts or leasing agreements may be drafted in such as way as to accept payment in other cryptocurrencies — such events are extreme outliers representing a negligible pool of potential users. A stablecoin representing a 1:1 valuation match with an existing currency can bring the benefits of programmable money to an industry built on repeat and sometime remote payments.
Beyond 1-Off Payments:
Software-as-a-Service has become the predominate business model for tech firms over the last few years. This subscription model requires predictability in expenses. Businesses see a spike of “unsubscribe” each time their subscription fee increases. Prior to stablecoins, businesses were unable to gain traction using cryptocurrencies to pay for subscriptions because the underlying asset was too volatile. With a stablecoin-infused ecosystem — a game developer, for example, could offer a subscription package where each day, week, or month a “loot box” of items were provided to the paid subscribers.
But games are not the only applicable market for subscriptions. Regular donations to nonprofits can also benefit — and perhaps more so — from a blockchain-based charitable donation. By creating a platform for charitable donations — powered by a stablecoin asset — non-profits, philanthropists and external observers all benefit from the auditability, immutability and traceability functions that blockchain technology provide.
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But these are just the beginning. The various use-cases envisioned above are simply applications of new technology to EXISTING structures. What we don’t know yet are all of the new applications that can be built using this technology once we put it in the hands of smart people. There is a universe of financial engineering where a stablecoin can be a vital cog to decrease volatility and risk in an otherwise unwieldy financial instrument. It is an exciting time to be at the center of innovation and creation where new technologies are being used to create things that we had never envisioned before.