The role of stablecoins in a decentralized ecosystem

Avem
4 min readFeb 23, 2023

Digital money is under pressure at the moment, because of the downfall of Bitcoin in general and UST in particular. Skeptics had been waiting for months, or even years, for this moment. All to prove that stablecoins are not nearly as stable as you might think. According to the entire team at Avem, these USD-pegged coins are part of the financial system of the future, which is why today we present you with an article on the role of stablecoins in a decentralized ecosystem.

What’s a stablecoin

As we all know, cryptocurrencies are very volatile. The price fluctuates considerably, with deep troughs and high peaks being no exception. Bitcoin is by far the most well-known digital coin but by no means the only one. Thousands of cryptocurrencies already exist, while the real financial revolution has yet to begin.

Unlike all volatile cryptocurrencies, you have solid stablecoins. A stablecoin follows the value of a fiat currency, such as the US dollar. USD-pegged stables are supposed to be $1 at all times. These coins are essential in the future financial system because they allow you to determine the value. If you want to exchange tokens, you need a yardstick. In addition, it is impossible to liquidate all stablecoins against the most famous crypto coin, as Bitcoin’s supply is limited to 21 million BTC. In a previous article, we talked about the currencies that are up to the job, namely pairings with USDT, USDC, and USD.

Algorithmic stablecoins as Terra’s UST

Very recently, let’s say since the past 12 months, there is a new kid on the block: an algorithmic stablecoin. Due to this design, UST’s price moves in sync with the price of LUNA, Terra’s cryptocurrency. The crash of this coin almost single-handedly ended all progress so far. It’s for a reason that algorithmic can be replaced by undercollateralized at all times. UST doesn’t have the independent assets in reserves and that’s why they can’t back the value of their coins. But how do these stablecoins link with DeFi and is it all bad news?

Benefits of DeFi

DeFi, short for decentralized finance, emerged directly with the launch of Bitcoin. It’s all about peer-to-peer financial services on public blockchains, such as Ethereum. While minding your money business on the blockchain you can enjoy the benefits of DeFi:

  • All-inclusive
  • Permissionless
  • Real-time transactions
  • Smart contracts
  • Open-source & transparent

All those benefits are great in their own way, but the biggest game changer of all is working without the all-seeing eye of a centralized system. You can contract whatever you want with whomever you want and do it in an honest and transparent way. When you combine the best of blockchain technology with digital money like Bitcoin you can build a whole new financial world. A world where we don’t rely on the government and all the big financial offices. We change the narrative completely while you still can earn, lend, borrow, invest, and bet with your money.

Dispelling the fear of everything new

So, now you know a bit more about the basics of stablecoins and DeFi. But why are stablecoins so important for the future of our financial system? To begin with, price volatility is a burden for many people. Only 3.9% of people worldwide own one or more digital currencies. They are swamped in not knowing how to buy, how to sell, and how to do their financial transactions in this way. And then there’s the superlative fear of the unknown. By using stablecoins we could allay the fear, because if your digital coin is pegged to USD your worth is way more solid. When you eliminate the anxiety you can focus on what matters the most: notice the bridge between fiat currencies and digital coins.

What to expect in the upcoming years

Where currencies like Bitcoin are famous with skeptics for the quick wins and big losses, stable currencies are known for their comparison to investing with fiat currencies. The steady yield on the investments is key. Thereby the interest on your savings in your traditional bank account is close to zero or even in the range of negative yields. DeFi users are receiving yields up to 10% or even more.

Even though there’s a lot to do about crashing the system at the moment (LUNA & UST) the expected growth of DeFi is huge. According to DeFi Pulse the TVL in DeFi protocols is over $78 billion which is ten times the size of the value two years ago. Aside from that a centralized stablecoin might look interesting and trustworthy but is way more sensitive to regulatory changes, cyberattacks, and other challenges that centralized institutions bring.

Decentralized finance is the future and every new process, every innovation comes with its flaws. The current financial system isn’t compatible with our needs and dreams anymore and is somehow broken too. When institutions are beholding the transformation and trying to keep up, we will evolve in a way that allows us to benefit from the best of the past and everything that the future has to offer.

Sources:

https://cointelegraph.com/defi-101/defi-a-comprehensive-guide-to-decentralized-finance

https://consensys.net/blog/blockchain-explained/how-stablecoins-are-driving-decentralized-finance-on-ethereum/

https://economictimes.indiatimes.com/markets/cryptocurrency/why-defi-is-the-biggest-thing-in-the-history-of-finance/articleshow/89745980.cms

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