Can DeFi Survive without Stablecoins?

As we have previously highlighted, the stablecoin market saw an astronomical rise in trading volume as well as its market cap in 2020. Almost universally across the board, every stablecoin saw its volumes and true value rise, and dozens of new projects were launched. While an argument could be made that this is due to the global pandemic, which has engrossed and encumbered us, a far more likely reason for this meteoric rise is the mirrored growth in DeFi. Since the global induction of cryptocurrency in the mainstream media, many in the industry have sought high and low to find a sticky enough application for the adoption of digital currencies, with many already believing that decentralized finance, or DeFi, as being the one use case that will transcend the industry. 

Finance, whether decentralized or not, always attracts sharks who are looking to capitalize on the margin and make the big bucks. As the old adage goes, the easiest way to make money is with money. But this begs the question, just exactly how much are stablecoins and DeFi entwined? And can DeFi not just survive, but possibly thrive without the recent barrage of stablecoins? 

The short answer, is yes. The DeFi can, and most likely will survive without stablecoins. An easy approach to this answer is to look at its history, and the overall intersection with Ethereum. 

The term DeFi was more or less coined in 2018. Back then, USDT had a market cap of tens of millions, not tens of billions as it does today. Therefore, it has already been proven that DeFi has once existed purely through ETH, and not stablecoins. Having said that, there are certain benefits stablecoins provide that ETH does not. For one, stablecoins are stable — not just in reality when pegged to fiat, but also in our minds pegged against relativity. The average person mentally knows how much a US dollar is, what they can buy with it (maybe a can of coke?), and therefore its worth. That same person will most likely not have a mental approximation of 1 ETH on a day to day (or month to month) basis. Secondly, the price of ETH fluctuates — making lending, borrowing, or insuring much more difficult and requires more complicated leveraging ratio mechanisms to ensure the contracts don’t accidentally auto liquidate. 

Imagine lending Bob $100 USDS at 2% interest, accrued monthly. At the end of the month, Bob pays you back $102 dollars, which is the principal plus interest. Now, because you lend him the principal in USDS, chances are the value of the $100 has not changed. But now, let’s say you lend Bob the same $100, but in ETH. At the time of writing (lending), that would be 0.26 ETH. At the end of the month, Bob wants to pay you back — but the ETH/USD price has changed. Is this a deal breaker? No, not really, but it does make things far more complicated. 

Which naturally brings us to our second question. Can DeFi thrive without stablecoins? Maybe one day, when ETH or BTC are used on a more common basis, and altcoins in general stabilize significantly more than they are now. That day however, seems like it is still far away — which means that until then, DeFi will have to leverage the comfort inducing quality of stablecoins in the minds of people to fully thrive.

As we can see, through the recent announcements from regulatory agencies and large financial institutions in 2020-2021, stablecoins are here to stay, and will certainly play a key role in the coming mainstream adoption of blockchain and DeFi technologies because of their simplicity and ease of understanding.

To learn more about how creating your own stablecoin can improve your business operations, reduce costs, and give you a competitive advantage in the rapidly changing fintech space, contact us.