Here’s Why Stablecoins are the Crucial Bridge to Crypto Adoption
Although currently an expensive bridge to cross thanks to Ethereum’s overhaul, there is no shortage of use cases in which stablecoins wouldn’t be a superior solution to traditional money transfers. Here’s how stablecoins are poised to serve as the bridge connecting the traditional world to that of digital assets.
Needless Friction in the Financial System
Technically speaking, there is no reason for banks to take so long to transfer money, or take hefty fees. With the combination of blockchain, internet and Bitcoin, the road ahead has been clear for over a decade. In light of this, let’s say that the government orders the entire financial system within its domain to make it as frictionless as possible, just like it ordered a trip to the moon in the 1960s. How would such a decree be implemented?
Simply put, the banks would tokenize fiat currency, turning cash into digital fiat tokens, running on a blockchain. This would make money as easy to transfer as sending an email from one address to another. In turn, we would lose:
- Merchant fees
- Overdraft fees
- Money transfer wait time
- Wire transfer fees
- Monthly account maintenance fees
Of course, the government hasn’t issued such a decree, and blockchain infrastructure—and understanding by the general public—remains in an early state of development. We have to deal with multiple layers of friction for money to get from one account into another.
While Visa and PayPal have made transactions faster, they too require fees for their services. For instance, if you were to send someone $1,000 internationally, PayPal would automatically take $44 (a 4.4% fee). Then, the recipient would have to pay an additional fee to withdraw the funds into their bank account. Such services are also known to mask fees through currency conversion rates.
Smart Contracts + Internet = Stablecoins
The reason we pay all these fees and wait for our money is three-fold:
- A global banking network like SWIFT has running costs in terms of personnel, servers, and upkeep.
- It charges all parties involved in money transfer for its service.
- Banks lack the incentives to forgo their fees.
However, with cryptocurrencies as digital tokens, there is little-to-no benefit in any other network existing except for the internet enveloping different blockchains. Furthermore, blockchain-powered smart contracts remove the need for personnel, as all legal contracts are executed automatically. Therefore, stablecoins represent the penultimate step towards such a frictionless system, with the abrasive layer remaining fiat currency itself.
Stablecoins tokenize fiat currency, backed by a 1:1 ratio. While stablecoins can also be backed by crypto assets and commodities, the most dominant of them all are fiat-backed, such as:
- Tether (USDT) – $39.7 billion market cap.
- USD Coin (USDC) – $11.3 billion market cap.
- Binance USD (BUSD) – $5.4 billion market cap.
- Multi-Collateral Dai (DAI) – $3.3 billion market cap.
- TerraUSD (UST) – $1.8 billion market cap.
Just the top 3 represent 93% of the stablecoin market. All of them are ERC20 tokens, which means they run on the Ethereum blockchain. Unfortunately, due to the ongoing ETH 2.0 upgrade, transaction fees are still enormous, even with the Berlin hard fork online.
In fact, the Berlin hard fork seems to have exacerbated the problem and caused numerous disruptions on the Ethereum network. While it’s safe to say this is temporary, you could still transfer stablecoins with minimum friction if you use Ethereum-interoperable networks as shown here via Binance:
Regardless of these hiccups, stablecoins are being increasingly recognized as the future of finance. After all, they combine the best from both worlds – fiat price stability with cryptocurrency agility. This makes them perfectly suited as a bridging token, from Bitcoin to USDC or USDT, and then to the thriving world of NFT marketplaces and DeFi platforms.
Institutional Adoption of Stablecoins
It is yet unclear if Central Bank Digital Currencies (CBDCs) are set to upturn the world of crypto, including stablecoins. In the meantime, based on the OCC’s decision in January, banks are allowed to interface with public blockchains. In turn, financial institutions can use stablecoins for all forms of payments and settlements. This is as close to fiat tokens as one gets at this point.
Since the federal authorities greenlighted stablecoins, Visa payment network had announced on March 29th that it will implement USDC stablecoins for payments in cooperation with Crypto.com, the first of many Visa partners.
Here’s how it would work: If you have a Crypto.com account/wallet with USDC stablecoins, you will be able to make a Visa card transaction with those very same stablecoins, without converting them into USD. Visa uses Anchorage digital asset bank to clear the transaction. At the end of that chain, the recipient receives money in their own currency.
Does it Matter which Stablecoin You Use?
For the end-user, all that matters is that the sum of money sent is as close to the sum of money received. In that difference lies the financial friction. However, different stablecoins do strive to make more partnerships in order to outpace both competing stablecoins and mainstream payment processors like PayPal.
PayPal is somewhat ahead of the game by expanding its crypto support to ETH, LTC and BCH. PayPal has also previously announced that its crypto strategy will involve support for CBDCs. Any mention of stablecoins, has yet to be heard.
How long until PayPal incorporates stablecoins? How will that impact the world of crypto? Let us know in the comments below.