Driving DeFi With Stablecoins

Amy Luo, Senior Counsel, & Paul Grewal, Chief Legal Officer, Coinbase

Originally published in the GDF Annual Report 2020

Stablecoins are clearly meeting their moment. Since the beginning of 2019, total stablecoin volume has increased from $2.6B to over $27.6B. What is equally clear is that most of that growth can be directly attributed to the proliferation of Decentralized Finance.

DeFi is a broad term used to describe financial applications run on blockchain networks using smart contracts. These applications have not only replicated traditional financial activities such as borrowing, lending, investing, and savings, but also spawned innovative concepts such as yield farming and liquidity mining. Anyone with an internet connection can access these protocols, allowing the unbanked and underbanked to participate in financial markets, put their assets to work, and access high yields.

Most DeFi applications are run on Ethereum, the most actively used blockchain in the world, and rely on an ERC-20 token. Participants can deposit their tokens directly into the DeFi protocols or create liquidity markets on an automatic market maker to earn fees or yield on their deposits. Although most DeFi protocols allow participants to redeem their assets at any time, some have restrictions or limitations on withdrawals. In either case, while the tokens are “locked up,” they are subject to market volatility and can lose (or gain) value if the price of the underlying assets change.

For this reason, stablecoins such as USDC are an increasingly popular token of choice in DeFi, and form the foundation of the whole system. Given their inherent price stability and (often) deep liquidity, stablecoins allow participants to minimize market volatility risk (as compared to other ERC-20 tokens), and are a common base in AMMs like Uniswap pairs. In fact, stablecoins are the second, third, fourth, sixth, and seventh largest volumes on Uniswap.

Stablecoins have tremendous potential to disrupt traditional systems in a number of ways. DeFi is just one example. As additional use cases surface — and they undoubtedly will — expect to see stablecoins continue their rapid growth.

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