Finvault Follow Mar 22
· 3 min read
The Decentralised Finance (DeFi) space has grown exponentially over the past few years.This paradigm shift, brought about by blockchain technology, has taken the finance world by storm in terms of security and decentralisation.New protocols and products are being built from the bottom up so that everyone can reap the benefits of DeFi.
Stablecoins enable these protocols in the finance world to be carried out.
What is a stablecoin?
For most of history, until the Bretton-Woods agreement, any form of currency was “pegged” to a valuable asset (mostly gold).This meant that any currency note was exactly what the name suggests — just a note.However, each currency note had the equivalent of its denomination in gold, stored in a secure place such as a bank reserve.
After the Bretton-Woods agreement, the United States Dollar (USD) and all other currencies became what are known as ‘fiat’ currencies.These have floating values that are not linked to any particular asset.
Where does crypto fit into all this?
Enter crypto-currencies.Crypto currencies started out as blockchain native tokens used as a medium of exchange and a store of value.But just like fiat currencies, they have no “asset” backing them, and their value varies wildly based on public sentiment.
This makes it unsuitable as a good means of exchange.The benefits of using a crypto-currency, such as offering cheap, trustless, and international transfers and cryptographic security were very quickly outweighed by the fluctuations in its value.
Stablecoins offer the best of both worlds.They are crypto-currencies, so come with all of the benefits but they are backed by an asset such as the USD.This causes the coin’s value to fluctuate much less therefore it can be used as a secure, easy, and very powerful means of exchange.
The complexities of the DeFi space
With all the security, functionality, and decentralisation that blockchain technology provides to the finance world, it also massively increases the complexity of the whole ecosystem.From multiple blockchains, different protocols, a completely new technology stack, new computer languages, complex cryptography, wallets, keys, signatures, standards, and much more.
The intricacies of blockchains and the Decentralised Apps (dApps) and smart contracts that run on them are often too hard to understand for even the most tech savvy people.
For something made to benefit the masses, there are a lot of barriers to onboarding.
The barriers to entry
To understand DeFi in its current form, there are many areas users are expected to have knowledge in or conditions they would need to meet in order to understand it, such as:
– Having a general computer science understanding
– Having blockchain specific knowledge
– Understanding cryptography and security, and how it works
– Knowing what private/public keys are, and their safety
– Knowledge of what a wallet is, how to get a wallet, and how to operate a wallet.
– An understanding of gas fees (not the kind of fees you face when filling your car with fuel!), transaction structures, how to send/view transactions and signatures
– An understanding of the myriad of coins and tokens in the DeFi space
As you can see, all this is quite overwhelming for new adopters, whether they are tech-savvy or not, which is hindering the mass adoption of DeFi.
How can stablecoins accelerate mass DeFi adoption?
As stablecoins are a form of crypto-currency, they bring all the benefits you would expect from crypto, such as cheap international transfers and security.However unlike other crypto-currencies, they are also backed by an asset (e.g.
the USD).This causes the coin’s value to fluctuate much less therefore it can be used as a secure, easy, and very powerful means of exchange.
At Finvault, we stake using stablecoins, so unlike other fiat X crypto fintechs, we eliminate the volatility and risks associated with crypto investments, enabling you to reap the benefits of blockchain technology.
Check out our website at www.finvault.com.