Blockchain Rails Plus Stablecoin Advance DeFi Reality

Blockchain Rails Plus Stablecoin Advance DeFi Reality

May 25, 2021 at 09:03AM

Decentralized finance remains both cutting-edge, and perhaps a bit of a mystery. But in recent years, the realities – and opportunities – of DeFi (as it’s known for short) are becoming clearer.

As Denelle Dixon, CEO and executive director of the Stellar Development Foundation, told Karen Webster, the promise of blockchain is in fact a present-day reality fashioning the start of the Internet of Money.

“You want to make sure that money makes it from point A to point B very quickly – you don’t want to have hiccups along the way,” she said. But within the traditional financial infrastructure, consumers and businesses – especially when transacting across borders – may not know where their money is, or who is holding it along the value chain.

Enter blockchain, where the visibility and security of transactions is a key tailwind not only to the adoption of tokens, but also to new applications that bring sustainable value to a broad range of financial services.

The conversation came against the backdrop of the Stellar Development Foundation and Circle’s announcement earlier this year that the USDC stablecoin would go live on the Stellar decentralized exchange.

Dixon told Webster that bringing USDC to Stellar represents a key way to foster sustainable use cases – including P2P payments and B2B payments across currencies and borders. And, she said, as central banks choose to issue central bank digital currencies (CBDCs), “it’s going to be a huge benefit to leveraging Stellar’s decentralized exchange. Central banks issue these CBDCs, leveraging the private sector in the same way they do with correspondent banking, and where the exchange could support stablecoins and CBDCs in a way that makes them interchangeable.”

For now, at a high level, said Dixon, to expand the network and encourage positive trading volumes, “you need to be able to have these strong stablecoins that can be leveraged on either side of the transaction.”

But more importantly, the expanding ecosystem – aided by transparency, speed and decentralization – will encourage developers to build new applications on top of the Stellar network. At least over the near term, as volume swells, USDC holders in, say, Argentina can embrace USDC as an asset to offset inflationary pressures, while also using the stablecoins to transact around the world.

“The remittance corridors are opening up” for businesses and consumers, noted Dixon, “and that’s always going to be a strong use case because of the speed of the blockchain. “ There’s also the benefit  of reduced costs and having compliance mechanisms that span KYC and AML mandates.”

She elaborated that speed is of particular value in cross-border transactions, where getting money from one side to the other, so to speak, has traditionally been a time-consuming, costly and opaque process.

Anchors Are The Key

Anchor financial institutions (FIs) – roughly two dozen of them – have been opening up corridors for Stellar all over the globe. Said Dixon, “we call them anchors if they’re actually holding and issuing an asset on the network, but you can be an anchor without actually issuing an asset – by taking remittances or payments and being able to put those into different bank accounts for consumers or businesses.”

Anchors offer a number of services, such as issuing fiat tokens. They also can connect the Stellar network to the anchor country’s banking system and handle KYC/AML activities – building scale in the process. Scale, of course, builds network effects – and the key advantage of blockchain technology like the Stellar network is “that everybody comes to the party at the same time, and knows what they are supposed to bring,” noted Dixon.

Finance services powered by a decentralized network, of course, have their share of nuances. On one hand, there’s the ability to run several different applications across rails; on the other hand, there’s the option to build special-purpose rails with their own tokens for specific use cases.

“All networks have value – and I don’t believe in a ‘winner take all’ model,” she said. Stellar focuses on an open, interoperable, decentralized network, allowing developers (and their applications) in different parts of the world to build solutions that address real needs in their specific verticals, countries and geographic regions.

The particular value of the Stellar network, Dixon said, lies in fostering the ability for these far-flung stakeholders to speak the same language and build interoperability between traditional and next-generation financial infrastructure. The network acts as translator and builds brand value, explained Dixon – an important attribute even in the age where DeFi is built on the premise that it’s “trustless.” Because transaction records are instant and immutable and interactions are direct, so that one need not rely on trust to get things done.

But, said Dixon, as an increasing number of anchors join the network, they will create opportunities for more people (end users, specifically) to become more comfortable using the blockchain. A parallel exists with the evolution of the web, where once it was all about the technology and we were hesitant to conduct commerce over those “pipes” – but now, Dixon noted, we make card-not-present (CNP) payments, log onto Zoom calls and send texts with hardly a second thought. We’ll be headed in that direction before too long with blockchain, she predicted.

As Dixon told Webster, “It’s important that eventually, we get to the place where the end user, whether that’s a bank or a business or a consumer, doesn’t really have to know that they’re leveraging blockchain technology.”