While crypto newcomers may overlook the importance of stablecoins, they play a central role in all things DeFi.
Stablecoins are cryptocurrencies whose value is pegged to stable assets such as USD or other fiat currencies. Per their namesake, stablecoins provide price stability and access to DeFi without exposing users to inherent volatility so often found in cryptocurrencies like Bitcoin or Ethereum.
They are foundational to both retail and institutional DeFi participation because:
- Stablecoins provide liquidity
- Stablecoins play a key role in lending and borrowing
- Stablecoins help reduce volatility
Stablecoins currently available on Flare include USDC and USDT, which can be bridged to Flare via Stargate to unlock greater yields. Also available is USDX, the native stablecoin of Flare, which expands utility by offering Treasury Bill yields and serves as the backbone of the FAssets system.
What role do stablecoins play in providing liquidity?
Stablecoin pairs are the most liquid trading pairs in the entire crypto space. This is due to the fact that stablecoin pairs do not incur impermanent loss, which is when the value of one token in a liquidity pool fluctuates relative to the other. This removes risk for institutions by allowing them to earn yields without worrying about price volatility. In fact, stablecoin yields often exceed U.S. Treasury Bill yields, which offer around 5%. In contrast to Treasury Bills and similar traditional options, stablecoin liquidity pools can offer significantly higher returns. An example is Clearpool’s T-Pool, which can be accessed here. Staking USDX on Clearpool returns cUSDX, which can be used as collateral in the FAsset system.
On Flare, cross-chain liquidity is enhanced through integrations with Stargate and LayerZero, which allow stablecoins like USDX (Flare’s native stablecoin), USDC, and USDT to move seamlessly from multiple ecosystems to Flare. This interoperability not only reduces friction and unlocks greater liquidity for users – it’s also the first step in participating in the Flare DeFi Emission Program.
How do stablecoins help crypto adoption?
Stablecoins can hedge against volatility, allowing users to maintain crypto exposure but hold assets that will retain their value relative to fiat currencies. Price stability in the midst of volatile price movement is key for managing loans effectively in DeFi lending and borrowing. This ensures that borrowers do not face unexpected collateral depreciation.
Additionally, in underbanked regions such as Argentina and Nigeria, stablecoins like Tether (USDT) provide people access to the U.S. Dollar. Stablecoins pegged to USD can help the underbanked protect their funds from local currency devaluation, and mitigate the impact of volatility while simultaneously providing more financial access.
Flare’s recent partnership with Red Date Technology further improves the accessibility of stablecoins for Mainland Chinese users by pioneering a decentralized KYC solution. This demonstrates that KYC solutions can remain anonymous while being compliant in regulated markets, paving the way for widespread adoption by financial institutions.
How do stablecoins align with the FAssets system?
USDX will play a key role in the upcoming FAssets system on Flare, as it will be included in the collateral mix bridged from other chains that support FAssets.
To add the USDX collateral option, a price feed for USDX is required on the Flare Time Series Oracle (FTSO) to serve as a stable collateral option. With Bitmart’s recent listing of USDX, the USDX/USD price feed is now available on Songbird via API. A significant amount of USDX has been minted to ensure adequate support for FAsset issuance and to facilitate efficient liquidations, allowing FAssets to function seamlessly and securely.
Join us on our upcoming, USDX: Powering Flare’s DeFi Ecosystem X Space on December 3 at 11am UTC to learn more about USDX’s role in FAssets.
Tune in here: https://x.com/FlareNetworks/status/1862164434803712276