Why Stablecoins Are Important for DeFi
We don’t sugarcoat things on this blog, and as such, you probably know that we don’t recommend investing in stablecoins. While that is a topic covered in numerous other articles, we want to make it clear that stablecoins do have a purpose in DeFi, and an important one at that.
Stablecoins are important for DeFi because they serve as a foundation for accounts, a way to provide liquidity, and can be used for utility purposes on the blockchain. Read on to learn more about why stablecoins are important for DeFi.
1. Stablecoins Serve as a Foundation for Accounts
When a new blockchain platform launches, they all suffer from the same issue—how to get users to its platform without having to rely on CeFi payment methods. Stablecoins serve as an essential bridge, allowing individuals to convert whatever they may hold on another platform into a payment method that can be transferred to a new one without leaving crypto.
Not only that, but stablecoins hold steady during the transaction process, giving users instant and essential peace of mind. While this may not always be the case depending on the DeFi platform, it is always good for users to start with a stablecoin and then choose their risk tolerance from there.
2. Stablecoins Provide Liquidity
One of the major issues DeFi platforms face is liquidity. While they would love to allow all users to withdraw their funds at any given time, depending on the protocol, this is not always possible. Integrating a stablecoin into their protocol can make it easier for them to extend at least some liquidity to users. Of course, there are still limits, but even some liquidity goes a long way for a new platform.
Not only that, but having pools of liquidity can allow the blockchain to expand its offerings, allowing everything from lending to borrowing, and even yield farming. They can allow users to develop their own dapps as well, using stablecoins as a stable payment process when trying to predict the approximate cost. No matter how you look at it, stablecoins enhance and expand offerings, allowing for a blockchain to be realized for its true potential.
3. Easier Cross Border/Cross Platform Transfers
We know we already touched on how stablecoins make it easier for users to make that initial investment, but it’s also important to recognize that stablecoins make all transactions on and off that blockchain easier, forever.
Stablecoins hold their value, that is the reason they don’t make good investment vehicles. But where they fail is also their strength—they hold value while in transit, even if that transit takes a long time.
While stablecoins do need to be pegged to something specific, it is generally somewhat easy for platforms to implement a stablecoin on top of whatever else they have going on. It will cost an initial investment, but the benefits will far outweigh whatever it takes up front to implement—for users and creators alike.
4. Payment Integration
In the perfect world, DeFi platforms are all crypto and nothing else. However, the industry is a tough one, especially as adoption lags. Many platforms, for as much as they want to only accept decentralized payments, have to adopt more traditional payment methods—something that is nearly impossible without stablecoins.
As we mentioned above, stablecoins are basically a bridge, and as such, they make it easier to connect blockchains and traditional fiat payment methods. In fact, many payment processors that use crypto have some sort of stablecoin liquidity backing transactions. This is necessary because otherwise the value of the purchase could be lost in regular fluctuations before the transaction could be processed.
5. Stablecoins Elevate Platforms
Again, we never recommend investing in stablecoins, but it is difficult to deny that they are one of the key factors that take new blockchain projects to the next level. While Bitcoin doesn’t need a stablecoin to succeed, most new blockchain projects are not on the same level as Bitcoin, and they should take any boost they can.
It’s possible to have a successful platform without stablecoins, but in our opinion, it will be very difficult to have a successful platform without easy transfers, liquidity, and easy programming—all things that stablecoins provide.
6. Stablecoins Allow Instant Settlement
Stablecoins offer something cryptocurrency can’t, and that’s instant settlements. While every cryptocurrency is different, it always takes time for proof of work or proof of stake (or whatever other consensus mechanism you have in mind) to occur. Stablecoins function differently. Typically, a stablecoin acts more like a smart contract, locking away an equivalent value and minting you the stablecoin to use for your transaction. While this can sometimes take some time, in general, it is faster than cryptocurrency blockchains, allowing users to complete their transactions sooner.
Now, we do want to be clear that this benefit may depend on the platform, but in general, most stablecoins allow for quicker transactions.
7. Low Barrier to Entry
Cryptocurrency is generally considered to have a lower barrier for entry than traditional financial systems. That being said, cryptocurrency and consensus mechanisms still have a learning curve—more so than stablecoins.
There is still something to be explained to newcomers, but once they understand that stablecoins are like a bank holding your money and giving you a check for an easy transfer, they tend to get the picture. In fact, most people understand the basic concept of stablecoins faster than they do Bitcoin.
This doesn’t mean you can publish a blockchain platform without education for users—because, as we’ve explained before, there isn’t a lot of money to be made in stablecoins. We are merely suggesting that you use them as a stepping stone in user education, just as cryptocurrency has done as a whole.
Overall, while we won’t be buying stablecoins anytime soon, they play an important part in the DeFi world and its development. So if you are building a blockchain, make sure you know how incorporating stablecoins might be able to help you.
