Introduction The Decentralized Finance (DeFi) Revolution is taking over traditional finance (TradFi) and centralized exchanges (CEX), with billions in...
In the beginning, there was Ethereum. While Bitcoin had the first-mover advantage in providing store-of-value, Ethereum established itself as the first-mover in providing programmable money via smart contracts. This eventually evolved into a movement called DeFi as more use-cases emerged, and users figured out how to remove banking intermediaries from certain areas.
By developing novel financial applications as well as decentralized versions of traditional financial products and services, DeFi supporters have been building an open system that rivals the status quo system that many are unsatisfied with.
The success of Ethereum and DeFi has naturally led to competition. For almost as long as Ethereum has existed, there has been speculation of the next “Ethereum killers” speculating about how to build a better smart contract platform, which would solve issues such as gas fees. Some compete directly with Ethereum, while others focus on optimizing for specific applications.
Every community has its share of maximalists who believe activity will eventually be consolidated into only a handful of these blockchain ecosystems. At Stably, we believe there will be an expansion of blockchain ecosystems rather than a contraction. While there are certain dominant players at the moment, there are 150+ emerging blockchains that are likely to grow in size and popularity over the coming years. Similar to different countries, each blockchain will have its own community of supporters, and its own novel approaches to address various problems.
Stablecoins are often seen as the building blocks of these blockchains and they play a fundamental role in their development. They also provide a safe haven during volatile times, and interestingly enough the ratio of stablecoin market cap to overall crypto market cap has reached an all-time high of 17%, right when the overall market has been experiencing significant distress.
In this article, we will begin by explaining why we believe that multiple blockchain ecosystems will grow, before explaining the role of stablecoins in this growth.
DeFi: A free-market response to TradFi
Think about DeFi as the free-market response to the traditional financial system. Different communities have different needs. If the needs of a given community aren’t being met and there’s an effective and profitable alternative, the chances are high that someone will come along and at least try to fulfill them. The open-source nature of such projects helps incentivize this.
It’s in fact this open-source nature of blockchain and smart contracts that encourages different communities to adapt these technologies for their particular needs. Many focus on high transaction speed, but many also optimize on novel functionality or specific use-cases like NFTs or remittances.
For every financial product or service in the traditional world of finance, there’s now an incentive for there to be a decentralized counterpart. And that’s not to consider the novel applications now available thanks to the programmability of smart contracts.
Given the prolific rise of so many during the recent bull market, it’s likely that many projects will fail during the current bear market, and many others may become consolidated. At the same time, with so many different ways to adapt blockchains for specific applications, we expect the “ecosystem of ecosystems” to ultimately significantly more, especially as the market eventually rebounds. This is especially true because of the novel advancements that we cannot even consider at the moment, comparable to how many Internet inventions came significantly after their initial development.
Each blockchain comes with its own tokens and applications and competes for its share of the overall market. By being siloed and hard to integrate with the greater blockchain ecosystem, projects are damaging their growth potential. Stablecoins are in turn critical for now only onboarding new users into the ecosystem and solving current problems, but for providing interoperability throughout all of the blockchains.
In a recent article of ours, we covered the two different approaches to interoperability: cross-chain and multichain.
Essentially, a cross-chain approach involves creating one or more bridges between the networks we want to connect and “wrapping” a token. For example, wrapped Bitcoin on Ethereum is created through a smart contract that tracks Bitcoin’s true price, and creates a token that represents the underlying asset of Bitcoin. In contrast, a multichain approach involves deploying infrastructure for a token or application natively onto each of the networks that we want to connect. For example, Stably’s stablecoin $USDS natively exists on 10+ blockchains, rather than being a wrapped version.
Vitalik has predicted a multichain approach will ultimately prevail due to the inherent security risks involved in cross-chain solutions. While we appreciate the benefits of a multichain approach over the long-term, we believe both of these approaches will find their place as each can have trade-offs depending on the maturity of the ecosystems involved.
For ecosystems embracing the idea that a multichain approach will be superior in the long run, facilitating the development of foundational dApps and tokens will be critical to avoid lagging behind competitors. While many blockchains come with their own on/off ramps, decentralized exchanges, and basic DeFi protocols, many emerging blockchains do not have this infrastructure themselves yet but must do so to embrace their benefits.
Stablecoins are critical in attracting liquidity.
As more businesses begin to use blockchain, and more blockchain businesses come into existence, routine operations such as salary payments will increasingly rely on stablecoins. Consider alone the payment processing costs or time delays that merchants endure, which could each be significantly reduced through accepting stablecoins. While these immediate use-cases exist now and are growing, stablecoins also offer an introduction to blockchain-based services that will help increase mainstream user appetite at a macro level.
More specifically, stablecoins also provide easy entrance into the world of blockchain, as they remove the issue of volatility. If one were to “on-ramp” from fiat to crypto directly from USD to BTC for example, they would subject themselves to any fluctuations should they wait even a single day before using their funds. A price 1% price difference might not be a huge deal for some consumers, but it greatly hinders institutional operations. In comparison, going from fiat to a stablecoin means that one has crypto at their disposal, without having to worry about value fluctuations.
Additionally, there’s the importance of liquidity. Centralized exchanges have vast financial networks to provide liquidity, whereas decentralized networks must figure out innovative ways to maintain it. While having a wide variety of altcoins attracts one to a given DeFi application, having a wide variety of stablecoins in turn can attract users to a blockchain. This is because it makes it much easier for users to switch between blockchains if they are able to do so using a multichain stablecoin such as Stably’s $USDS. Stablecoins enable interoperability throughout the blockchain ecosystem, on top of immediate use-cases and lack of volatility.
Build a more competitive blockchain ecosystem
Having a wide range of stablecoins that connect with other blockchains is critical for blockchain networks that would like to attract new users and interoperate with others in the overall blockchain network. Having both multichain and cross-chain stablecoins makes this much easier, and not only presents current use-cases that will help in general crypto adoption, but they provide a stable manner for users to onboard, off-board, and navigate the crypto world.
From ERC20 and other Ethereum-compatible tokens to other blockchain ecosystems, Stably has the insights needed to effectively bring stablecoins to a network.
Stably Prime makes it easy to access a variety of different stablecoins. Please visit https://prime.stably.io/ to get started or head to https://www.stably.io/ for more information about Stably’s borderless accounts, Stably USD (USDS), and Asset-Tokenization-as-a-Service.
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