Stablecoins — Terra Paves the Way for Multiple Fiat Currencies On-Chain

Author — Joseph Hurley , Defi Research at Kash

Why is USD used within the cryptocurrency space?

The sustained boom of the United States economy and its status as a global power, has meant that the US dollar is understandably one of the largest means of exchange across international markets. The USD alone plays a role in over 70% of international forex trading and over 60% of total global trade. This strength and stability has caused more volatile economies, such as that of Somalia and Ecuador, to go as far as to adopt the USD as their legal tender.

Thus, on the surface, it makes perfect sense that as blockchain technology has risen throughout the 2010s and into the 2020s, the USD would be the basis of a stable means of exchange through the issuance of Dollar pegged stablecoins. People know USD is stable and easily exchangeable, consequently they are happy to hold, send and receive USD pegged stables in return for assets on the blockchain, regardless of where they reside globally. This has resulted in asset prices generally being displayed in dollars even if you live in an advanced economy with a stable native currency. Due to the ease of onboarding onto blockchain technology worldwide, this also allows users with more volatile national currencies to retain their purchasing power via exchanging for a stronger and more stable asset.

Why hold/use stablecoins pegged to other currencies?

1. In order to truly onboard everyday people onto the blockchain, there must be currencies which everyday people can relate to. If I say to my 60 year old mother that she can earn yield, exchange and use USD rather than her native GBP then that just adds another layer of complexity onto an already tricky explanation.

2. If nations see that their currency is being swapped to USD pegged assets, it essentially devalues their native currency. The hostility shown by some nation states toward blockchain, has been seen on several occasions in the form of strict legislation and bans. If there was a functioning stablecoin that was usable on chain for their respective currency, perhaps they would be more in favour of exploring how this can benefit them both internally and on a global scale.

3. And the one you probably expected….the United States monetary policy.
Over the last 70 years the USD has had falling purchasing power. The seemingly reckless actions of the Federal reserve over just the past 2 years has led to one of the highest reported inflation figures in history at nearly 8%.
It is therefore understandable that people in developed economies such as Japan, the UK and the EU, even those within the US itself, would not want exposure to this loss in purchasing power, instead having other stablecoin options with which to deal in.

So…Why Are There No Mainstream Alternatives to USD Pegged Stables?

Put simply, the space is still new, and innovations leading to demand for dollar pegged stables has only really been seen over the past couple years. This has been achieved through the likes of stablecoin liquidity pools as well as lending and borrowing services. Keeping all liquidity on-chain within a singular denoted currency avoids the risk of fragmentation of these services. Now that these returns on USD stablecoins are a fixture in many decentralised finance ecosystems, and liquidity onboarding continues to be exponential, people have begun looking to other currencies they are more comfortable holding, also demanding a yield on these.
TLDR — The demand was not there in the past as people were happy with any sort of yield, going forward this seems to be changing.

How Terra Can Tap Into This Growing Demand

So we have gone through why USD pegged stables are used and why some people are demanding other options. So how can it be done?

For fiat backed stablecoin issuers such as Tether and Circle, a central entity receives dollars, storing them in reserves, and then mints the same amount of their respective stablecoin. Doing so for each national currency would take large amounts of infrastructure, incur legal trouble through centralised jurisdictions, as well as the normal trust that these backing assets are in fact legitimate.

The Terra blockchain is uniquely suited to being the first issuer of alternate stablecoins pegged to major national currencies like the Euro, Japanese Yen and Pound Sterling, along with many others.
This is due to the way in which terra stablecoins are minted.

$1 of Luna burned = $1 of UST minted and vice versa
This is the same for any currency currently supported by Terra. Right now there are 22 Terra stablecoins pegged to national currencies from the Euro (EUT) to the Indonesian Rupiah (IDT).

So for every £1 of Luna burnt you can mint £1 of GBT and vice versa, just as it works for UST.
In theory any currency can become a Terra stablecoin once it gets voted in through governance.
This avoids all of the problems centralised stablecoins would face in setting up a reserve of assets each time they want to add a new currency denomination; terra offers a completely decentralised system with no custodial risks associated.
For more information on Terra stablecoins, how they hold their peg, and the issues they fix with other types of stablecoins, see this post https://kash-defi.medium.com/why-ust-is-a-superior-stablecoin-aff7d9651ce7

What this means is that people can already switch to any of these currencies they wish if they are concerned about losing purchasing power through holding UST.
So the problem is solved right?
Wrong.

Whilst the ability to hold other stablecoins on terra is there, usecases for such stablecoins are not. Right now, with UST, you can trade synthetic stocks through Mirror protocol, swap on a decentralised exchange like Astroport and, most importantly, earn a 19.5% stable yield through Anchor protocol. Not to mention you will even be able to pay for goods in real life using debit cards from us here at Kash.

It doesn’t really matter if you feel the dollar will depreciate by X amount against your native currency, if you can hold UST in anchor earning 19.5–20% yield. Any concerns surrounding a loss in purchasing power are quickly put aside. If you’re unfamiliar with anchor protocol, check our piece on it here.

Whilst there are some payment applications suggesting that non-UST stables will be usable in their respective nations, this still does not address the problem of yield generation on said tokens.
So…what are the plans for non USD denominated stables on terra going forward?

Enter…Vertex protocol.

Thanks to Terra’s abundance of existing stablecoins, Vertex protocol is looking to create an onchain perpetual swaps and virtual automated foreign exchange market.
This will allow other Terra stablecoins to gain a yield in anchor through a perpetual swap with UST.

Here is how it will work!

A user deposits EUT for eg into an anchor frontend through Vertex.
Vertex will perform a perpetual swap in the background with UST. This exchange rate will be locked in for when you choose to withdraw. What this does is protect your deposit from a depreciation in UST which otherwise would eat into your return should you do this process yourself. *Note this works both ways, if UST appreciates in this time your return would be less than had you swapped and deposited yourself*.

This UST is then deposited into anchor and when the user decides to withdraw, the swap is reversed, any fees are deducted, and they have their EUT principle amount back in their wallet + yield.

All the user would see is them depositing, earning yield, and withdrawing their EUT.

The exact specifics on perpetual swaps and FX markets and their inner workings are beyond the scope of this article, for more in-depth research I’d suggest reading through Vertex’s litepaper here (https://medium.com/@vertexprotocol/vertex-protocol-litepaper-1-0-815483f40478)

What this means for non-USD users is, the terra version of their native currencies will be usable within Anchor without having to rebuild a separate source of borrowing demand.

This adds many avenues for other projects to provide usecases for some of the largest currencies in the world that are not currently represented on-chain.
Imagine Kujira allowing aAUT deposits to perform liquidations, or using aJPT as collateral on Mirror protocol to play around with synthetic stocks.
The possibilities here are endless and an influx of developers creating unique usecases will be seen.

Other currencies benefitting from Anchor’s earn rate would increase their demand 10 fold, causing more decentralised applications to be built around them; the cycle continues until there are dozens of major national currencies being represented across Terra.

For Defi to reach the masses, on-chain cross currency integration is paramount. Terra stablecoins are by far the easiest way forward in this regard.

With UST adoption and subsequent confidence soaring, it will be fascinating to see where non-UST stables go from here and the speed at which they are adopted.