A stable connection! How can stablecoins bring ‘stability’ to the DeFi market

Decentralised markets’ behaviour seems to suggest that stablecoins can shape the decentralised finance (DeFi) landscape. It is believed that stablecoins can help bridge the gap between traditional finance and lending and borrowing in cryptocurrency markets.

As stated in a Q1,2021 report by Messari, a cryptocurrency research firm, stablecoin’s monetary base achieved around $65 billion  and secured one trillion dollars in transaction volume. Further, USDC’s market share increased by 17%. “I believe financial stability is an important factor in DeFi. A stablecoin is pegged to a commodity, currency, or cryptocurrency asset. These stablecoins also help provide liquidity in DeFi applications including the lending protocols,” Punit Agarwal, founder, KoinX, a cryptocurrency taxation platform, told FE Blockchain. 

Market experts believe that dollar-pegged stablecoins, such as USDT, permit its utilisation as a unit of exchange to generate high returns. As reported by Circle, a global financial technology (fintech) company, dollar stablecoins’ utilisation would permit one to create yield in the DeFi market through avoidance of cryptocurrency market volatility-backed implications. 

“Stablecoins help alleviate the potential volatility in cryptocurrency market. For example, if an investor locks Ethereum on a DeFi platform, the price drop of Ethereum can negate the yield generated. However, if an investor uses a stablecoin for the same purpose, the yield generated will not be affected since the stablecoin is usually pegged to the dollar or any other price-stable commodity,” Raj Karkara, COO, ZebPay, a cryptocurrency exchange, highlighted.

Reportedly, companies such as Circle, Paxos, Binance, MakerDAO, among others, are known for issuance of cryptocurrencies which are pegged to the US Dollar (USD) value. Financial analysts believe that stablecoin-oriented DeFi can be beneficial for the financial sector in general, especially for sectors such as banking and finance, remittances and international payments, supply chain and logistics, among others. 

Moreover, from a futural DeFi perspective, stablecoins can shape itself as an alternative for conventional savings instruments, and also help retail investors in trade affairs. Insights from Julius Baer Group, a private banking corporation, showed that global regulators should create a balance between DeFi and traditional finance to develop adoption of stablecoins and other cryptocurrencies in the financial sector. The platform corroborated its insight with the relationship between stablecoins and sovereign-backed money, and that their issuance by private entities can lead to fraudulent practices.

“As demand around stablecoins for their less volatile nature increases, companies and individuals can start adopting them to store and transfer value. Additionally, as DeFi grows, the demand for stablecoins should increase for cross-border payments cost-effectively. I believe it’s unlikely that the value of US dollar would benefit from the issuance of stablecoins,” Edul Patel, co-founder and CEO, Mudrex, a cryptocurrency investing platform, mentioned. 

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