Why Decentralized Stablecoins Matter (Part 1)

In Part 1 of this article, we'll cover some reasons why decentralized stablecoins matter by looking at the importance of stablecoins in DeFi and the importance of decentralization.

Decentralized finance is still in its infancy. We're somewhere near the beginning of DeFi's unwritten roadmap, but Hubble Protocol is approaching DeFi with a focus on the long horizon.

It's why we believe decentralized stablecoins, like USDH, offer a significant chance for DeFi to maintain its longevity, and it's why decentralized stablecoins matter.

In Part 1 of this article, we'll cover some reasons why decentralized stablecoins matter by looking at the importance of stablecoins in DeFi and the importance of decentralization.

In Part 2, we'll hash out some of the pitfalls DeFi could face by continuing to embrace fiat-backed stablecoins.  

Why Stablecoins Matter

DeFi is practically built on stablecoins. Of course, DeFi couldn't exist without blockchains and smart contracts, but if stablecoins were removed from the works, the whole system would fall apart.

Source: Cointelegraph (https://cointelegraph.com/news/decentralized-finance-the-best-ways-to-participate-and-operate)

As a case in point, the majority of DeFi's total value locked (TVL) is accounted for by decentralized exchanges (DEXs), and stablecoins are by far the most represented asset held within a DEX.

Source: DeFi Llama (https://defillama.com/protocols/Dexes)

Furthermore, the number one DEX, which also happens to have the highest TVL in all of DeFi, is a protocol whose main function is facilitating stablecoin swaps. The vast majority of tokens that make up Curve's $20 billion TVL are stablecoins.

For the rest of the DEXs in DeFi, nearly every crypto asset available is paired with an equal value of stablecoins in a liquidity pool. For example, $20 million of BTC would be added to a liquidity pool along with 20 million stablecoins, and this helps an automated market maker (AMM) price crypto assets to the dollar.

Source: https://www.bis.org/publ/qtrpdf/r_qt2112b.pdf

Additionally, the importance of stablecoins in the crypto ecosystem goes beyond DeFi. Looking at the right-most chart in the illustration below, it can be seen that stablecoins are also one of the most traded assets in all of crypto.

Source: BIS Quarterly Review (https://www.bis.org/publ/qtrpdf/r_qt2112b.pdf)

Why Decentralization Matters

In Chris Dixon’s 2018 article, “Why Decentralization Matters,” he expressed some strong opinions about the behaviors of centralized platforms. According to Dixon, the eventual hegemony of a centralized platform led to a less positive shift in that platform's relationship with users and developers.    

The changing relationship between centralized platforms, users, and developers.

Dixon asserted, “Over time, the best entrepreneurs, developers, and investors have become wary of building on top of centralized platforms." He went on to say, "We now have decades of evidence that doing so will end in disappointment.”

Taking Dixon's assertion a step further and applying it to DeFi's relationship with stablecoins, developing a DeFi protocol that relies on centralized stablecoins will likely increase the chances of future disappointments.

The decentralized stablecoin DAI holds up the Alchemix DeFi Lego stack.

Since stablecoins are such an integral part of DeFi, they are considered a layer (not necessarily a platform, but close) on which most DeFi protocols are built.

Developers that favor long-term sustainability should heed Dixon's words and favor decentralization, which means moving away from fiat-backed stablecoins toward decentralized stablecoins.

Stay tuned for Part 2 of "Why Decentralized Stablecoins Matter." We'll take a closer look at how fiat-backed stablecoins jeopardize the decentralization of DeFi.

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