Decentralizing Money Markets: The Opportunity and the Approach

Published On: Dec 4, 2023By
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Introduction

Decentralizing the Forex markets is one of the single largest addressable market opportunities for blockchain builders today. Daily FX trading volumes are in the trillions of dollars, and there are numerous areas where blockchain-based stablecoins have advantages over traditional fiat.

Foreign exchange trading, also known as ‘Forex’ or ‘FX’ trading, is the marketplace for trading between national currencies. FX is a large, popular, continuous trading ecosystem that is utilized for speculation, hedging, and diversification.

Stablecoins are a form of cryptocurrency designed to offer price stability. They are typically pegged to a stable asset, fiat currencies, like the US dollar, or commodities, like gold. Digitizing these assets boosts their utility and opens them up to be used within blockchain-based decentralized applications.

One of the most popular forms of the stablecoin model is the tokenized version of a national currency. Digitized versions of the US Dollar, Euro, Japanese Yen, Australian dollar, and British pounds. While digital US Dollars are popular and accessible across centralized crypto exchanges, non-USD stablecoins have not yet achieved momentum with the wider crypto public.

Stabull Finance is a Web3 capital-efficient Automated Market Maker-based swap facility for Stablecoins — Fiat and other tokenized assets. It is designed to facilitate the democratization and decentralization of the multi-trillion dollar FX and commodities markets on-chain.

“Right now, there’s an opportunity for a decentralized exchange focused on FX stable pairs, with a UX purpose-built to the expectations of traditional forex traders.”  – Tama Churchouse, Cumberland Labs COO

Why tokenize national currencies?

There are numerous areas where stablecoins are more efficient than traditional versions of national currencies.

  • Stablecoins, due to their purely digital nature, enable cheaper and faster cross-border transactions. Blockchain-based stablecoin transactions, which are secured by a network of aligned nodes, do not need to go through multiple intermediaries like banks and clearing houses — two peers can simply connect with each other and transfer. There are technology fees specific to the blockchain like gas and interoperability, but even with these costs factored in, cross-border transactions are still cheaper and faster than traditional ones. The trading day can now also become 24 hours and trading can happen on weekends.
  • Accessibility and inclusion. Stablecoins are permissionless. They can offer yield and can be used as a viable medium of exchange for goods and services. These characteristics can be incredibly useful in regions where banking is limited or unavailable.
  • Blockchain technology offers any financial asset network enhanced security, transparency, and immutability. Transactions cannot be altered retroactively and there is no need to trust a 3rd party like a bank for a transaction.
  • The inherently digital nature of stablecoins makes them ready-made to be integrated into digital payment, remittance, e-commerce, and online service systems.

DeFi and FX markets work well for each other

The Automated Market Maker (AMM) model that is used by a number of popular decentralized exchanges, including Stabull, has a number of advantages that work well for a Forex-styled exchange.

With an AMM, instead of pairing up buyers and sellers, tokens are bought and sold at a rate determined by an automated demand and supply-based pricing curve. With this mechanism, as tokens are purchased, the price goes up. As tokens are sold, the price goes down. In both cases, the exchange rate is determined by a supply curve instead of a market of orders placed by buyers and sellers. This permissionless, automated trading system is ideal for 24/7, continuously shifting FX markets.

There are fewer barriers to entry for new tokens to register for trading. Popularity is purely market-driven, with all supply and demand being transparent and sourced by the community.

Anyone can become a liquidity provider on an AMM and earn yield through transaction fees for their service. AMMs offer users tangible avenues to earn passive incomes, which may become oversized if factors like the platform’s native token rising in value play out.

Additionally, Stablecoin swaps are ideally suited for AMMs because they reduce the impact of, one of their biggest flaws — MEV impermanent loss.

Being a liquidity provider on an AMM can be risky because of impermanent loss. With a number of AMMs, half or both sides of the liquidity pool have to include some volatile asset. Impermanent loss occurs when for example an LP deposits ETH and some other asset into a liquidity pool and the price of ETH changes.

When they withdraw they earn less than they would if they had simply held ETH and the other asset. This is because of the way the ownership of pools is structured. LPs essentially absorb the hit of the price of a volatile change on other platforms. The impact of IL is far reduced with stable assets.

The Stabull solution

Stabull has been built to target specific market gaps —

  • The most efficient bonding curve model for swapping between non-USD stables, USD-stablecoin assets, and other stable assets.
  • To create a platform for the Stablecoin and stable asset industry to grow and prosper. Bolstering a mission of uniting non-USD issuers and being a collaborative industry-driven initiative.

While there are numerous AMM models already in existence, they are constantly being optimized and iterated upon.Curve, for example, succeeded because it allowed for more capital-efficient swapping between similarly priced assets despite Uniswap already existing and offering swaps between the same assets as Curve (and on the same chain). Uniswap is also iterative, and new versions of DeFi’s most popular and used AMM have been released.

Stabull adds to this list of built-for-purpose AMM’s.

Stabull’s price curve and exchange rate mechanism have specifically been designed to optimize swapping between USD and non-USD stablecoins (Stablecoin FX swapping). The team has worked on the math and testing to ensure this is a further iteration and improvement from previous generation AMMs such as DFX and Stableswap.

Strategies used by the Stabull team to optimize for price efficiency include:

  • Dynamic Fee Structures ensure that fees are set at levels that compensate liquidity providers for the risks they undertake
  • Improved exogenous Price Oracles — So prices for Stabull assets are as close to external market price as possible
  • An algorithmic Hybrid Bonding Curve that can adjust for a variety of factors

The stablecoin industry is dominated by US Dollar stablecoins such as USDT and USDC. USDT is the 3rd largest asset in crypto and has a market cap of ~US$244 Billion, while USDC is the 7th largest asset in crypto with a market cap of ~US$24 Billion. This is likely because of the ease of accessing US dollars and because assets in crypto are priced in US Dollars.

Crypto, like many other globally accessible classes like commodities, has a tendency to be priced in USD. The reach of US Dollar has spread throughout the world in the 20th Century. The US Dollar has replaced goal as the Hegemonic asset of the Global Economy. This is thanks to Politics and the USA flexing its might as the largest economy in the world, working with entities like the IMF to proliferate dollar-denominated loans. Additionally, the Federal Reserve, the USA’s central bank is able to issue new dollars and absorb a high level of debt with reckless abandon and buffers the dollar’s position as the global monetary hegemon as explained by the Dollar milkshake theory.

Some of the most popular trading pairs are BTC/USDT and ETH/USDT. Traders like them because USDT is a stable asset to trade in and out of. When a user is in between trades or locking in a profitable trade, USDT is a useful asset for traders to lock a win because it is not volatile and there is less of a chance that it may lose value quickly compared to an asset like BTC.

Source: Dune, User: 21co

Source: Dune, User: 21co

The two tables above evidence, how collateralized stablecoins dominate the Real-World Asset (RWA) and the majority of stablecoins are US Dollar-based. 9 out of the 10 largest stablecoins are USD-based.

This means that crypto users outside of the US, dealing with crypto trading in USD stablecoin terms, create extra costs. Global crypto traders that are earning and managing in currencies that aren’t the US dollar, like JPY and NZD, then have to deal with foreign exchange loss and additional onboarding costs acquiring USD stablecoins. There is also regulatory risk and the potential that users outside of the US may be blocked from using digital US Dollars, or that stablecoin issuers may be blocked from facilitating them.

Having to switch from a local national currency to a USD stablecoin has become a necessary annoyance for trading crypto or interacting with DeFi, but things don’t have to be this way.

Non-USD stablecoins set to be listed on Stabull include — NZDS (New Zealand Dollar Stablecoin), XSGD (Singapore Dollar), TRYB (Turkish Lira), and the GYEN (Japanese Yen).

A variety of non-USD stablecoins have been built and have been steadily growing communities. None, however, have achieved the broad appeal and adoption of USD stablecoins but this may be because of accessibility and a Chicken & Egg issue.

Stabull exists as a platform to develop the non-USD stablecoin ecosystem. On Stabull, non-USD stablecoins can be given a spotlight to access liquidity and connect with traders who have been craving a fully digitized FX platform. Part of the reason Non-USD Stablecoins have not grown is a lack of a clear trading venue to access the specific FX stablecoin trading opportunity.

The Stabull team has considered regulatory hurdles, deploying on relevant chains to access as many non-USD stables as possible, and building out an incentive program to make Stabull as enticing and competitive as possible.

Conclusion

The decentralization of Forex markets through blockchain technology and the strategic use of stablecoins represents a potential transformative shift in global financial systems. Platforms like Stabull Finance are at the forefront of this revolution, leveraging the unique advantages of blockchain — which includes enhanced security, transparency, and efficiency — to streamline and optimize Forex trading.

The focus on stablecoins, especially non-USD varieties, addresses a critical gap in the market, providing a much-needed solution for users outside the US and reducing the complexities associated with traditional fiat currencies. This approach is set to broaden the scope of financial inclusion. Discussing the opportunity for Non-USD stablecoin Paul Kremsky of Cumberland said “Infrastructure has been built, but so far, no one has come.”

As this technology continues to evolve and overcome regulatory and operational challenges, it holds the potential to redefine the very foundations of currency exchange and international trade. The future of Forex trading, underpinned by blockchain and stablecoins, is set to be more equitable, efficient, and globally integrated.

To learn more about Stabull check out our Gitbook and Whitepaper

Overview — Stabull Gitbook

Stabull Whitepaper (Draft Rev. 2.1)

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