Cryptocurrencies have still a long journey to their mass adoption. DeFi usage is already quite big in the crypto sphere, but in comparison with traditional finances, it still has big potential and room to grow. One of the main problems of today's cryptos is called volatility. The prices can rise for a few percent per day and drop by tens of percent the next one. This is big trouble for its users and especially merchants, who have the fixed cost for their business and the volatility can play strongly against them.
Stablecoins are a solution for volatile crypto
Stablecoins have very low volatility so they are a solution for this ache. Their value is tightened to the specific fiat currency, such as USD, EUR or GBP. Stablecoin can even be stored on hardware wallets, which gave them one extra quality compared to their fiat cousins.
The need for stablecoins wanted to turn to their side Facebook with their Libra, which supposed to be based on the package of fiat currencies and commodities. But legislative obstructions stopped the project just in the beginning.
Types of stablecoins
It’s important to mention, that there are two different types of stablecoins:
IOUs
Centralized IOUs, which are a simple transition between the world of crypto and the real world, because they are backed 1:1 by a fiat currency or some commodity like gold or silver.
IOUs need some level of trust to the issuer, that he got really 1:1 of those assets and, at best, is well audited by some prestigious audit company.
One more problem of IOU stablecoins is that they can be struck by regulators at some point in the future as a protentional threat or rival to fiat currencies.
Crypto-collateralized stablecoins
The second type has a more decentralized approach because their circulation is driven by smart contracts or multi-sig wallets and the number of locked collaterals. Their stable value is based on transparently held assets within smart contracts or on multi-sig wallets. The most famous crypto-collateralized stablecoin is DAI, which is issued by the blockchain organization MakerDAO.
The principle of crypto-collateralized stablecoins is that they are backed by specific crypto collateral, but not in 1:1 ratio as IOUs stablecoins, but higher, such as 1,5:1. This is due to the risk of a sudden drop in the price of the collateral.
Stablecoins importance for DeFi ecosystem
Stablecoins play a big role in DeFi. Not just they are kind of a bridge between fiat currencies and the crypto world, but they are used in some other ways where investors benefit from them.
Lending and borrowing are so simple in the crypto industry and offer significant benefits compared to traditional finances.
By lending stablecoins in DeFi (completely decentralized finances), CeFi (centralized finances), or even CeDeFi (a portmanteau of centralized and decentralized finances), you can get a steady yield on your investment in the range of 10%-12%. Those rates are absolutely unimaginable in traditional finances, where you can nowadays get a yearly interest of 0%-1%, or „even 2% “ if you lock your funds for several years! What a difference! Sure, you need to count on the possible risks, but those are in traditional finances as well as in the stock markets.
Another way to enjoy passive income from stablecoins is to join some of the liquidity pools. You can use it in some decentralized exchange or even the centralized such as Binance. In a simple explanation, you provide your stablecoins to the pool for some specific token pair, for example, USDT/DAI or USDT/USDC. Traders can then use the advantage of this bond so you receive a payoff for your deposit to the liquidity pool. By providing liquidity to some of the liquidity pools, the need for market makers is eliminated or reduced and in the same manner, the token pairs can get better liquidity which results in a higher profit for a trader.
Why Algorand suits DeFi well?
Algorand is a third-generation blockchain for smart contracts, which solves the so-called blockchain trilemma. Algorand is using its own Pure Proof of Stake BFT algorithm to achieve consensus. By application of cryptographic lottery when selecting a node to propose a new block to the blockchain by using Verifiable Random Functions, Algorand is very well secured and at the same time provides a great level of scalability and decentralization.
Algorand has also low computational needs, high transactions throughput over 1000 TPS, fast block finality (4-5 seconds), and low transaction fees. Those are additional qualities necessary for a blockchain to be used in Decentralized finances (DeFi).
But there are some more benefits for Algorand to be used in DeFi in many ways. The significant one is the presence of stablecoins on the Algorand blockchain. The biggest stablecoins!
In February this year, Algorand added on the blockchain USDT Tether, the biggest stablecoin on the market. While USDT already runs on the Ethereum network as an ERC20 token, it also runs on EOS, Tron, and Omni and Liquid Network protocols.
Then in June, Algorand announced cooperation with Circle, and the second-biggest stablecoin on the crypto market, USDC, was added to the Algorand blockchain as well.
Keep in mind, that before Ethereum will move to Proof of Stake, and this will take time, Algorand is much faster with better scaling and throughput of transactions than Ethereum. Increasing of DeFi product might annoy the services for some of the projects, so they might use some faster and well-secured blockchains such as Algorand instead.
Conclusion
Stablecoins will play a big role in the future of the DeFi application, because of their low volatility. By having two biggest stablecoins both USDT and USDC on its own blockchain, Algorand brought the large advantage for DeFi usage on its blockchain. Algorand can be successful in the DeFi race by increasing its adoption level.
The transaction throughput (over 1000 TPS), finality (5 seconds), and low transaction fees makes Algorand a strong competitor in the DeFi space.
By improving interoperability using Moonbeam bridge to connect with Polkadot blockchain in the near future, Algorand has still some aces in the sleeve for 2021.
