Stablecoins and Kadena: Paving the Way for a Decentralized and Efficient Financial System

The transaction volume of the three top stablecoins, Tether, USDC, and DAI, surpassed payment provider powerhouse Visa's 2023 monthly average (The Block) in April 2024. The number of stablecoin holders has grown from 222,077 in July 2019 to 17.9M in July 2024 (Figure 1: RWA.XYZ).

Why have stablecoins taken over Wall Street and crypto exchanges worldwide? What regulations are moving stablecoins forward? Who is buying stablecoins, and what does the future of stablecoins look like? And what will make stablecoins on Kadena that much more special? We cover all that and more in this latest blog post.

Why Stablecoins?

Some of the largest asset managers in the world, like BlackRock, acknowledge the importance of stablecoins in bridging traditional finance with the world of decentralized finance. They're a newly emerging component for facilitating transactions faster and with more transparency than traditional financial rails that have prevailed since the dawn of modern finance.

On an episode of Beyond the Block, Kadena Chief Business Officer Annelise Osborne and Advisor Nitin Gaur discussed the need for stablecoins and what will make them mainstream:

Stablecoins emerged in the crypto space to address the dual needs of providing a stable exchange mechanism and facilitating the use of US dollars within the system for buying and selling crypto assets. The adoption of stablecoins will reach an inflection point when they become mainstream. This could be driven by implementing a stablecoin regulatory framework in the USA and the MiCA regulations in the EU.

Who Wants Stablecoins?

A wide range of institutional and retail traders are interested in purchasing stablecoins. These include crypto-asset exchanges and financial technology companies (Federal Reserve).

Benefits of Stablecoins

• Faster settlement
• Volatility Reduction
• Compatibility with DeFi
• Secure Reserves

Faster Settlement

Stablecoins offer a 24/7 market that operates 365 days a year. The instantaneous transaction time minimizes slippage and transaction delays. One reason that slippage occurs is when large gaps occur between when an order is submitted and when a trade is executed, such as over the weekend. Banks can also use stablecoins to increase the speed and automation of back-office record-keeping while lowering costs (Deloitte).

Volatility Reduction

Stablecoins also have the potential to reduce volatility, which is why they are chosen by investors who desire a more consistent, less chaotic investment vehicle. Stablecoin prices are pegged to an underlying asset or commodity, such as the US dollar. While stablecoins can experience volatility, they typically are less volatile than other digital assets and can potentially mitigate loss due to large price swings.

Compatibility with DeFi

Stablecoins are a backbone for DeFi platforms and applications and can interact with smart contracts and decentralized applications. Furthermore, stablecoins can leverage functionality across different platforms and unlock opportunities for financial interactions/ services.

Secure Reserves

Specifics for stablecoins vary by token and protocol. However, ideally, stablecoins are held under custody by well-reputed financial institutions and audited by secure auditing firms. This ensures the code is sound and is reviewed for vulnerabilities.

Stablecoin Regulation

Stablecoin regulation varies greatly by jurisdiction, with some regions more advanced in the path toward regulation than others, which have more red tape. Here is what the stablecoin environment looks like in a few different key jurisdictions where large volumes of crypto are traded:

Europe

Europe has established the first comprehensive stablecoin regulation in the world through the Markets in Crypto-Assets (MiCA) framework, which requires stablecoin issuers to obtain a MiCA license. Individual jurisdictions, such as the French entity known as the Autorité de Contrôle Prudentiel et de Résolution (ACPR), are responsible for approving these licenses for issuers like Circle. MiCA has been called the “One regulatory framework to rule them all” by Circle Senior Director, EU Strategy and Policy at Circle at a presentation at ETHCC.

The comprehensive regulation spans from stablecoin and other token issuers to crypto services providers (advisors, exchanges, custodians, brokers). It was adopted in 2023 and entered into force in 2024. It was born from European regulators believing that digital assets are not securities, so they needed a new framework (Circle).

USA

In the United States, the 118th Congress, which ends in January 2025, could produce stablecoin regulation via the The Lummis-Gillibrand Payment Stablecoin Act. The legislation seeks to protect consumers by requiring 1:1 reserves for stablecoins, providing more regulatory oversight for stablecoin issuance, and keeping the dual banking system intact.

Hong Kong

In Hong Kong, the Hong Kong Monetary Authority created the Stablecoin Issuer Sandbox, which aims to allow financial institutions to experiment with services and products for stablecoins and gather market feedback in a limited-scope environment.

Future of Stablecoins

While stablecoins are mostly used today to buy other digital assets, a broader range of use cases could emerge depending on how regulation plays out. For example, Deloitte forecasts that stablecoins can be used for retail payments in the future.

Stablecoins on Kadena

Stablecoin issuance on Kadena provides a reliable medium of exchange and store of value compared to the volatility of cryptocurrencies. Kadena’s next-to-zero gas fees facilitate cost-effective transactions and enhance liquidity management. At the same time, the security and decentralization of Kadena’s Proof-of-Work network provide optimal conditions for robust collateral-backed stablecoins.

Kadena has two stablecoins:

• Zelcore developed ZUSD, which can be used via Zelcore’s fusion stable bridge. The bridge converts to USDC-ETH to zUSD on Kadena.
• The upcoming CDP protocol, Kudos, includes a Kadena-native stablecoin (KUSD), which can be used for borrowing.

More information about stablecoins on Kadena will be posted here as they become available.

Infrastructure for the Digital World

There is still much uncertainty about stablecoins. Regulations can change anytime as the world embraces blockchain and digital assets. The exact role of stablecoins is still being determined worldwide.

Disclosure:

This blog post is for informational purposes only and does not constitute financial, investment, or legal advice. The views expressed here are those of the author and do not necessarily reflect those of Kadena or any associated entities. Readers should conduct their own research and consult a qualified financial advisor before making investment decisions. Kadena does not endorse or recommend any particular stablecoin, investment strategy, or financial product mentioned in this article. The information provided is based on current market conditions and regulatory frameworks, which are subject to change.