November 11, 2022

5 Examples of How Stablecoins Could Be Used by the Cardano Community

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Keep in mind that these topics only provide educational information and are in no way financial advice.

Fully-backed stablecoins

It’s well known that cryptocurrency prices including NFTs are relatively volatile – in part – due to their nascent status. 

Due to volatile prices in the cryptocurrency market, stablecoins have emerged as a popular hedging solution. 

Stablecoins are a type of blockchain-based crypto asset that pegs its value to a major fiat currency, commodity, or computer algorithm.

The most commonly used stablecoins are pegged and backed 1:1 with a major fiat currency such as the US dollar, euro, Japanese yen, and others. 

For every issued fully backed stablecoin, there is an equal amount of physical cash in reserve held by its issuer, which can be redeemed by the stablecoin user.

In this article, we’ll discuss the top five use cases for stablecoins with a focus on fiat-backed stablecoins and their reasons.

Stablecoin use cases

1. Better Cardano portfolio management with quick settlement

Cryptocurrencies have managed to grow quickly through their fast adoption by global investors and traders.

Cryptocurrency exchanges were one of the first viable products in the crypto and blockchain industry, and now regularly attract hundreds of thousands of users. 

In most cases, users use a centralized cryptocurrency exchange operated by a private entity and deposit fiat currencies on the exchange to buy & sell crypto, and ultimately withdraw back into their bank account. 

For decentralized exchanges (DEX), peer-to-peer cryptocurrency exchanges without a central entity, this was largely impossible in the beginning as there was no regulated way for a DEX to be connected to fiat currencies. 

This is where stablecoins grew in popularity as an alternative solution, as they allowed traders to reap the benefits of DEXs while using stablecoins pegged to a fixed value.

Thus, stablecoins work as an efficient exit strategy for traders. 

Traders can avoid the problems of taking their cryptocurrencies back to a centralized exchange, handing over personal data and full control over their cryptocurrencies, and then selling them for fiat to withdraw back into a bank account. This whole process could take anywhere from a few minutes to several business days depending on the centralized exchange and the users’ bank policies.

2. Better store of value for Cardano communities in developing nations

Stablecoins are also used as a new method of personal savings in certain developing nations.

In most developing nations, banking and financial services are concentrated in urban centers catering to the affluent. 

These countries sometimes experience high levels of inflation that are much higher and more frequent than wealthy nations due to the weakness of their local currencies and inconsistent government policies. 

In these countries, governments also typically introduce capital controls to prevent the local populace from buying dollars or euros to protect their purchasing power.

As a decentralized and open-source blockchain platform that provides decentralized finance applications and a native cryptocurrency, Cardano aims to offer equitable access to financial services for all those who are in need simply by way of having a smartphone with Internet access. 

As more people around the world have gained awareness of cryptocurrencies and their benefits, residents in underdeveloped and developing countries have started to increase their adoption of stablecoins to hedge against inflation and increase their savings.

3. Stable payroll system for companies building on and accepting payment in Cardano ADA

Payments have always been an elusive, yet clear use case for the crypto industry. 

It has been elusive due to the volatility of cryptocurrencies which makes them unattractive to most traditional business owners and people as it can be difficult to predict value if what you receive as payment can go up or down rather quickly and significantly. 

For that reason, few goods and services are paid directly with crypto. Yet, there are an increasing number of services that accept payment in crypto like Cardano ADA such as Travala.com, the leading blockchain-based travel booking platform with more than 3 million travel products in 230 countries and territories around the world.

However, now stablecoins fill the digital payments use case perfectly, as they sidestep all the problems associated with price volatility. 

Once a person receives crypto for a good or service, they can immediately exchange the crypto received for a stablecoin to redeem later for fiat; or a person can first exchange their crypto for a stablecoin and use that to pay for goods and services.

Since each stablecoin received represents and is redeemable for a fixed fiat value, people can trust the usage of stablecoins.

Also, stablecoins bring the benefits of lower transaction costs if using a blockchain like Cardano along with greater transparency and security.

4. Cross-border remittances

Similar to the above example, cross-border remittances should be a natural use case for crypto and blockchain, but few people want to receive a volatile asset. 

This is especially true because a significant portion of cross-border remittances is from family members working in wealthy nations sending money back home to help their family and friends. 

Again, stablecoins provide a much-needed solution utilizing blockchain technology. 

They can act as a more convenient system of international transfers that can move money faster, with reduced fees, and greater transparency, leaving more money in the hands of the recipients of cross-border transactions.

5. Escrow

Stablecoins utilize a decentralized blockchain network and are integrated with smart contracts. They can automate escrow functions according to specific contractual conditions programmed into a smart contract between multiple parties without the need for a centralized third party. This can reduce overall commission fees for the parties involved in a large transaction as well as provide transparency to audit the smart contract as they wish.

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