Celo And Stablecoins Are Used In A Wide Variety Of Ways
Celo and other stable coins can help with the problems that arise from central/country banks and inflation. Being able to tie a digital coin to the value of currency has many uses, and is able to help the users keep their money and not see it eroded away.
Original article written by Slobodan Sudaric
Stablecoins first emerged on the cryptocurrency scene in 2014. By tracking the value of an underlying asset, they aimed to protect users from the volatility of cryptocurrencies like Bitcoin. This stability allowed stablecoins to function as a medium of exchange and store of value. However, a lack of transparency, long transaction times, high costs and limited access meant adoption was initially slow.
To overcome these difficulties, the Celo network launched its first stablecoin, the Celo Dollar (cUSD), in June 2020. cUSD tracks the US dollar, and it has been designed to enable users to near-instantly send and receive money from a mobile phone- without a bank account- for a negligible fee.
To maintain its stability, cUSD is backed by the Celo reserve consisting of a basket of crypto assets, including CELO, the network’s native asset. The Celo reserve algorithmically adjusts the supply of stablecoins to user demand. If the value of cUSD rises above $1, then the network increases the cUSD supply by allowing users to purchase newly created cUSD from the Celo reserve in exchange for $1 worth of CELO. The opposite happens when the price falls below $1.
A second stable asset, the Celo Euro (cEUR), was launched earlier this year and further stablecoins can be added in future to meet the needs of the community. These could track other fiat currencies such as the Brazilian Real, the Philippine Peso, the Japanese Yen or a basket of assets which functions as a community currency or local unit of account.
Following the launch of cEUR, now seems like a good time to discuss some of the use cases for stablecoins. They fall into two categories- transactions and decentralized finance (DeFi).
Celo’s architecture is one of the main reasons that cUSD and cEUR make mobile payments so easy. Celo is a mobile-first blockchain, designed for fast and light transactions (about 5 seconds) with block headers optimized for mobile phone synchronization. With non-custodial wallets like Valora, users can send payments to phone numbers, which makes transactions on the Celo blockchain as easy as sending a text message to a phone contact. Transaction fees on the Celo blockchain are negligible and payable in stable assets, which means that users sending cUSD to friends or family are able to pay fees out of their cUSD balance, and do not need to hold a separate balance of CELO in order to make transactions.
For the record, the architecture is also climate-friendly. The Celo blockchain relies on a consensus mechanism known as Proof-of-Stake, which consumes much less energy than Bitcoin’s Proof-of-Work mechanism without compromising security. The network offsets its remaining emissions through various programs like its partnership with Project Wren.
Celo’s stablecoins offer merchants a cheaper and faster alternative to other payment solutions. Transactions on the Celo blockchain cost a fraction of a dollar cent regardless of the value and get processed rapidly, whereas payment providers using legacy payment infrastructure typically charge a flat fee plus an additional 1.5% to 3%.
Another advantage of using blockchain technology is it reduces counterparty risk by eliminating the intermediary. The sender and receiver transact directly with each other rather than through a third-party payment provider, removing a potential point of failure.
Singapore’s MugglePay was one of the earliest adopters of stablecoins, while Deutsche Telekom, web browser Opera, and PayU, which serves 450,000 merchants in Latin America, Africa, and Southeast Asia, recently joined Celo’s Alliance for Prosperity and announced support of Celo’s stable assets.
Stablecoins also offer users an affordable way to directly send money across borders without an intermediary. To put this in context, sending $200 in cUSD or cEUR costs less than a cent, compared with a global average charge of $12 according to the World Bank, rising to more than $30 in some countries.
Thanks to projects such as Kotani Pay, users can send and receive money and apply for loans from the most basic mobile devices owned by roughly 60% of the African market.
Celo stablecoins allow for targeted, fast and cost-efficient distribution of humanitarian and environmental aid. In June 2020, the nonprofit Grameen Foundation launched a project to send emergency cash relief to female entrepreneurs in the Philippines. Delivering physical goods was a challenge given the measures to combat the covid pandemic, so the foundation used the Celo platform to send nearly $160,000 in cUSD to more than 730 beneficiaries. The recipients spent the money through a custom microsite selling groceries and daily necessities. The United Nations World Food Programme, Mercy Corps and CARE also have announced projects on Celo
The world is gradually shifting towards a gig economy, especially in developing countries which generally have large, informal labor markets. Meanwhile, improved connectivity has created microwork opportunities, giving people a chance to either earn a full time living or top up their salary. However, microwork payments are typically small, so they’re best suited for low fee solutions that use stablecoins. And as pointed out earlier, Celo’s technology is compatible with basic mobile phones.
Decentralized finance (DeFi)
Stablecoins give users access to a new generation of alternative financial products, traditionally only available through a bank, from their mobile phone. The DeFi ecosystem may become important in countries with limited financial infrastructure where it’s difficult to open an account or apply for credit or lending facilities.
By converting local currency into cUSD and cEUR, users can protect their income and savings from some of the risk of hyperinflation which can rapidly erode the value of certain fiat currencies. And hyperinflation remains a real concern for millions of people with inflation rates in 2020 exceeding hundreds and thousands of percentage points in some countries. Take Zimbabwe for example. Prices are rising by an estimated 100% this year, although that’s an improvement on 550% in 2020. Elsewhere, Argentina is facing more than a decade of double-digit inflation with current inflation rates between 40% and 50%.
Even in countries with low inflation, such as the EU and the US, stablecoins can help to avoid erosion of savings. The European Central Bank’s deposit rates are negative at present, and commercial banks pass these costs to retail customers, either as negative rates or increased fees. However, Euros held as cEUR aren’t exposed to these rates, or, for that matter, the foreign exchange risk of converting Euros into other fiat currencies. Interest rates in the US are near zero, while the Celo community set aside funds to provide users of Valora rewards of 5% on cUSD holdings.
Some community members have launched their own stablecoins on the Celo network to meet the demand of local communities. DuniaPay’s cXOF stablecoin tracks the value of the West African CFA franc — a currency used by residents in more than fourteen countries in West Africa — and allows holders to earn 8% on their cXOF holdings.
On platforms like Moola Market, users can lend stablecoins and earn on or borrow stablecoins against collateral if they don’t want to liquidate holdings. Earnings depend on demand for an asset: they rise when demand grows and fall when it shrinks.
In traditional markets, assets are traded via order books on centralized exchanges that determine clearing prices according to supply and demand. Decentralized exchanges (DEXs) such as Ubeswap remove the need for an intermediary. Instead, users trade directly against liquidity pools, a collection of coins held in a smart contract on the blockchain. DEXs employ an algorithm to adjust the price of an asset based on the flows into and out of the pools.
DEXs can only execute trades if the pool has sufficient liquidity, so they offer an incentive by paying liquidity providers. There are risks of loss, though, especially when the coins are volatile.
Watch out for further articles which will explore these use cases in greater depth.
Original article found here: //medium.com/celoorg/the-many-and-varied-uses-of-stablecoins-af0b6dbf16b5