The Role of Stablecoins in Cardano’s DeFi Ecosystem

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

Background

Stablecoins have become an essential element of cryptocurrencies. Unlike traditional cryptocurrencies, stablecoins are designed to maintain a stable value against another specific asset or basket of assets, such as the US dollar or a commodity like gold. This stability makes them an ideal tool for use in decentralized finance (DeFi) applications. As DeFi on Cardano continues to expand its capabilities, the importance of Cardano-native stablecoins is only likely to increase.

What’s DeFi?

DeFi refers to a new financial system built on top of open and decentralized blockchain networks that operate without centralized intermediaries such as banks, governments, or other financial institutions.

In DeFi, anyone can access financial services such as lending, borrowing, trading, and investing without having to go through traditional financial intermediaries.

Since DeFi applications are built on decentralized blockchains, they operate on a trustless, open, and transparent system. User transactions are executed through blockchain-based smart contracts and recorded on the public blockchain, providing users with greater control and autonomy over their financial activities.

This emerging financial system has gained popularity due to its potential to disrupt traditional finance, increase financial inclusion, and create new opportunities for innovation and growth, especially in markets where users have greater difficulty accessing traditional financial services.

In this blog, we explain a bit more about Cardano’s DeFi ecosystem, DEXs on Cardano, and their features to create passive income streams, as well as take a closer look at the role of stablecoins like USDA in the Cardano DeFi ecosystem.

Overview of Cardano’s DeFi ecosystem

Cardano is one of the largest decentralized blockchain networks with a huge global user community. From the beginning, it has been designed and built to be an open-source blockchain that delivers accessible economic services to all by providing a platform to host decentralized applications (dApps) for finance, identity, property, and more. Cardano is the first blockchain to be built according to scientific peer-review methods and is provably secure.

Cardano’s DeFi ecosystem has significantly developed and now comprises a wide range of DeFi protocols, decentralized exchanges (DEX), crypto wallets, and more.

One of the most popular DeFi protocols on Cardano is the Cardano Native Token (CNT) standard, which allows users to create and manage custom tokens on the Cardano blockchain. Other notable protocols include the Marlowe smart contract language, which enables users to create complex financial contracts, and the Plutus programming language, which allows developers to build decentralized applications on the Cardano blockchain.

Recent data indicates that the Cardano DeFi ecosystem has increased by an estimated 170% since March 2021. As of early 2023, there were approximately 4 million active wallets as opposed to 500,00 active wallets in March 2021. Data has shown that the value being stored by users on Cardano DeFi applications, commonly referred to as Total Value Locked (TVL), has been at all-time highs in 2023.

Overall, the Cardano DeFi ecosystem is quickly becoming a major player in the DeFi space, and its growth shows no signs of slowing down.

What’s a DEX?

DEXs on Cardano are also an important part of Cardano DeFi because they provide ADA users with a secure and trustless trading environment that is uniquely peer-to-peer.

Unlike centralized exchanges, where users need to trust the exchange with their funds, DEXs allow users to retain full control of their assets at all times. This is achieved through the use of blockchain smart contracts, which automate the process of trading and ensure that transactions are executed securely and transparently.

A DEX, short for decentralized exchange, aims to provide an on-chain infrastructure that is accessible without permission and third-party intermediaries. They also strive for decentralized ownership of application protocols, distributed across a community of stakeholders. To achieve this, a decentralized autonomous organization (DAO) usually governs the administrative rights of the protocol. The DAO is made up of a community of stakeholders who vote on critical protocol decisions.

Common DEX user features

As explained above, a DEX offers a permissionless option for traders who would like to trade in cryptocurrencies. A well-structured DEX often has the following features:

- AMM: Automated Market Makers (AMM) are protocols used in liquidity pools that help in automatically pricing assets. This enables crypto trading without the need for traditional market makers or order books. Instead, it relies on a mathematical formula to determine the price of an asset based on the supply and demand of that asset within the DEX.

- Yield Farming: Yield farming is conducted using AMMs. Yield farming is a DeFi practice where investors earn a return on their cryptocurrency by lending or staking it in a liquidity pool. It involves providing crypto liquidity to DEXs or DeFi protocols in exchange for rewards. Yield farming can generate high yields but also involves higher risks due to cryptocurrency volatility and smart contract vulnerabilities.

- Liquidity Pools: Liquidity pools are an essential part of every DeFi ecosystem. In simple terms, to form a market, users known as liquidity providers (LPs) combine two tokens of equal value into a pool. They receive trading fees from the trades that take place in their pool in proportion to their share of the total liquidity in return for contributing their cash.

- Liquidity Mining: Liquidity mining also known as Yield mining is when you earn rewards for allowing a decentralized trading service to use your tokens for a locked period. Yield farming, on the other hand, is the process of earning rewards by lending, borrowing, or providing liquidity to a DeFi platform.

Top DEXs on Cardano

Thanks to its large community and technical scalability and interoperability features, Cardano has quickly become a popular option for building DeFi applications.

Here are some of the top DEXs built on the Cardano platform. These DEXs offer features such as AMMs, Liquidity Pools, Yield Farming, and Liquidity Mining options to users helping them create a steady passive income stream.

1. Minswap: At the time of writing, Minswap had a TVL of $55 million. Minswap currently ranks as the #1 DEX on Cardano. It offers AMM and liquidity pools through which users can provide liquidity to Minswap’s liquidity pools by depositing two different cryptocurrencies, and in exchange, they receive a liquidity token representing their share of the pool.

1. SundaeSwap: TVL of $7.5 million. SundaeSwap is an AMM that incentivizes users to provide liquidity to its liquidity pools through yield farming and liquidity mining programs. Users can stake their liquidity tokens to earn rewards in the form of the platform’s native token.

1. MuesliSwap: TVL of $9 million. MuesliSwap was the very first decentralized exchange to be built on the Cardano protocol and has reached one of the top positions as one of the most used Cardano DeFi dApps. It offers features such as order-book trading, liquidity pools, DEX aggregator, and staking. MuseliSwap offers liquidity pools as part of its Hybrid DEX. According to a recent report, the Cardano algorithmic stablecoin Djed, will list on MuesliSwap and Minswap offering better liquidity mining options.

1. Indigo: TVL of $29 million. Indigo is a decentralized non-custodial synthetic assets protocol built for Cardano. It’s worthwhile to note that it is possible to use Indigo’s Collateralized Debt Position (CDP) Liquid Staking which enables a wallet to collect ADA staking benefits while the delegated ADA is also being used elsewhere only on Cardano.

1. WingRiders: TVL of $16 million. WingRiders is a native and fast AMM decentralized exchange platform on Cardano that offers token swaps between Cardano and ERC20 tokens, staking of ADA within liquidity pools, yield farming, community governance, and more.

Quick note: Other DeFi dApps such as Genius Yield, Axo Trade, TeddySwap, and Astarter will also be launching soon and will be available on Yoroi Swap with a Yoroi DEX aggregator coming in the future.

The role of Cardano-native stablecoins like USDA in DeFi

Stablecoins play a key role in expanding the reach of DeFi and improving interoperability between DeFi and traditional markets. Stablecoins allow businesses and consumers to explore and participate in DeFi while keeping their funds dollar-denominated and not investing in a particular cryptocurrency. They also allow merchants to accept decentralized currency without tying their fate to a particular token or dealing with overly complex treasury management. Stablecoins provide important on-ramps for new DeFi users – both businesses and individuals – by allowing them to join decentralized protocols without making an investment or fretting over whether it is an opportune time to enter the market. And finally, stablecoins can also be used as a trading pair for other cryptocurrencies, enabling traders to move in and out of positions quickly without having to convert to fiat currency.

EMURGO announced the launch of USDA, a fully backed, regulatory-compliant stablecoin in the Cardano ecosystem. USDA is the first product from EMURGO Fintech’s Anzens product suite and will allow users to tokenize their USD into USDA through credit & debit cards, wire transfers, and also conversions into ADA.

USDA aims at offering Cardano users better security, stable gas fees, and faster global transactions. Read more about USDA here. Read more about Cardano Native Token assets here.