September 29, 2022
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Insights

Why Fintechs Are Using Stablecoins To Power Their Apps

Following the downturn in the crypto industry in spring 2022, activity across the ecosystem has changed. The appetite for speculation, rehypothecated loans, and other risky opportunities has plummeted, leaving many altcoins, NFTs and protocols untouched.

This isn’t necessarily a bad thing. In the long run, the health of the industry depends on crypto being used to solve real-world problems, not get-rich-quick schemes.

In fact, the fintechs that are working to solve real problems are continuing to build, despite a “crypto winter”. In many cases, they are marching forward through the bear market, ignoring the downturn by using stablecoins to power their products.

What are stablecoins?

Stablecoins are a type of cryptocurrency pegged to a specific value – usually the value of a fiat currency, such as USD or Euro.

While they hold the same value as the fiat currency they are pegged to, stablecoins offer the dual benefit of the mobility and utility of blockchain-based cryptocurrency. This combination is very powerful, enabling stablecoins to be a bridge between traditional finance systems and DeFi.

But how do they work?

There are multiple ways a stablecoin may maintain its “peg” to a value.

Asset-backed stablecoins

Stablecoins like USDC and EUROC are fully asset-backed stablecoins. This means that for every USDC or EUROC minted, there is an equivalent value being held in the real world – in the case of USDC, for instance, the stablecoin issuer Circle holds cash and short-dated U.S. treasuries.

Not all stablecoins are pegged to fiat. Some, like Tether Gold, are pegged to the value of a commodity (gold, in this case). Like fiat-backed stablecoins, these tokens are intended to be backed by a physical reserve of the commodity and can be exchanged 1:1.

Software-based “algocoins”

Some tokens hold value algorithmically, through software, rather than keeping real world assets to maintain their peg.

The most prominent example of these (and perhaps the most successful) is DAI. DAI is pegged to USD, and maintains its peg through a system of over-collateralized borrowing and subsequent burning of the token. This allows MakerDAO, the token's issuer, to keep control of the supply.

Generally, these types of stablecoins are seen as riskier and less “stable”. This view has been compounded by high-profile depegging events, such as the crash of UST, which triggered a wider spread crypto crash.

Cryptocurrency-backed stablecoins

A less common – but still important – type of stablecoin is the crypto-backed token, which maintains its peg to another cryptocurrency.

Typically, this type of stablecoin is used to exchange value 1:1 for two tokens that aren't on the same blockchain. For example, Wrapped Bitcoin is an ERC-20 token that is pegged to Bitcoin, allowing Bitcoin holders to exchange their tokens 1:1 to gain access to protocols and activities on Ethereum that wouldn't normally be available to them.

Who uses stablecoins?

Due to their stability, asset-backed stablecoins like USDC can be used to facilitate financial transactions between traditional financial systems and blockchain. One of the earliest use cases for stablecoins was using them as a “middle” currency to facilitate buying other crypto assets on exchanges without on or off ramps for fiat.

This idea has expanded and evolved over time, but the underlying solution is the same – making them very useful to users and builders alike.

Stablecoins in emerging markets

The benefits of stablecoins are particularly attractive to users in emerging markets, such as Latin America and Africa.

Stablecoins offer a fast, cheap, always-accessible alternative to foreign currency exchange for activities like remittances – which are expected to reach $630 billion in 2022, a 14% increase since 2020.

As well, USD-backed stablecoins represent a hedge on inflation in markets with unstable economies, such as Argentina and Colombia. This is why many US-based companies with remote teams are choosing to pay international employees in using USDC.

Powering neobanks with stablecoins

Stablecoins can also be used as a tool for app-based neobanks to expand their product offerings to compete with traditional banks, with features like interest or borrowing.

Yield Accounts, for instance, leverage lending and market making on DeFi protocols to earn interest on stablecoins – often far exceeding traditional savings accounts.

Due to their stability, stablecoins also represent an important medium for payments. Neobanks can allow users to hold value in more volatile coins – Bitcoin for example – and exchange them for stablecoins to accommodate payment transactions. This allows the user to remain in the crypto ecosystem, without fear of volatility having an effect on the transaction.

Building stablecoin-powered products with Conduit

The Conduit development platform makes it easy for fintechs to provide stablecoin-powered financial products to their users. The API provides a single source of access for wallets, onramps and transactions, shortening development time by weeks.

Developers can use the platform to build DeFi into their existing product offering, allowing for features like faster remittances, yield accounts, USD payroll and more.

Learn more about the Conduit Platform at conduit.fi and start building today.