The Tangible Benefits of Bringing Non-USD Stablecoins and FX On-Chain

Tokenization of off-chain assets (OCAs) has been gaining momentum. The world’s Fiat currencies are an asset class ripe for tokenization, and USD stablecoins have already been among the most adopted and transacted tokenized OCAs so far. Even so, there is a much larger opportunity stemming from the tokenization of non-USD stablecoins and the creation of FX markets and currency derivatives markets on-chain. Let’s explore the many benefits and opportunities. 

Source: BIS Quarterly Review, December 2022

The United States dollar (USD) remains the world’s principal reserve currency and the most widely used for international trade.  The USD accounts for a 60% – albeit declining – share of foreign exchange reserves worldwide. It also accounts for around 40% of SWIFT payments and 85% of FX transaction volume. 

USD-denominated stablecoins are even more dominant on-chain. As of October 2023, the total market capitalization of USD stables sits at $125B, and the market capitalization of non-USD stables at $425M, or about 0.34%. This places on-chain USD dominance at 99.66%. This dominance extends to trading volume, with over $30-40B in daily volume for USD stablecoins versus around $5-10M for non-USD stablecoins, which places USD stablecoin dominance by trading volume at over 99.97%. In short, non-USD stablecoins are virtually nonexistent today. 

In crypto, USD is dominant. The blockchain industry strives to be global, accessible, and inclusive. These values, however, have not yet enabled greater accessibility through non-USD stablecoins and robust, efficient on-chain FX markets, which in turn would unlock atomic intra- and cross-border payments and remittances, macro directional trading, individual, corporate, and institutional hedging, etc.

Before trying to create new alternative currencies, the industry should focus on creating better markets and payment flows for existing currencies – that is, solving real world pain points and upgrading legacy infrastructure. 

If on-chain finance achieved a similar distribution to traditional finance, non-USD stablecoin market capitalization could easily grow to around $50B, and daily trading volumes could rise to around $20B. This would lay groundwork for the accessibility and inclusivity many industry actors are working toward. 

After all, this is why we Crypto.

The Role of Stablecoin Regulation

Regulations for stablecoins in the US remain opaque and contentious. Several other jurisdictions have been faster to provide regulatory clarity. 

In the UK, electronic money regulations and payment service regulations have been amended to include stablecoins, and the Financial Services and Markets Act 2023 recently passed into law. Another example is the Markets in Crypto Assets (MiCa) regulation in the EU, which sets out a clear path for stablecoin issuers to become regulated. Japan has also introduced its own stablecoin regulatory framework in 2022. Singapore recently did the same. Similar efforts to regulate stablecoins are in motion around the world. 

The US lag will likely catalyze the growth of non-USD stablecoins.

On-chain FX Trading

Perhaps the most obvious and foundational benefit of growing non-USD stablecoin issuance and liquidity on-chain would be the ability to create alternative foreign exchange (FX) markets with better uptime, smaller transaction fees, and atomic trade finality and settlement. Robust, on-chain FX markets can benefit a whole spectrum of use cases and end users while removing the reliance on antiquated infrastructure and various third party intermediaries (for more on this, see Circle and Uniswap’s report here). 

One clear use case is the ability for FX markets to facilitate macro directional trading, as well as hedging – whether for institutional, corporate, or retail users. Existing on-chain exchange protocols could enable FX trading, including:

  • Automated Market Makers (AMMs)
  • Concentrated Liquidity Market Makers (CLMMs)
  • On-Chain Central Limit Order Books (CLOBs)
Automated Market Makers (AMMs)

AMMs were the first generation of exchanges that could operate fully on-chain and handle price discovery based on market dynamics. They rely on liquidity pools in which liquidity providers (LPs) deposit an equal value of two tokens to facilitate trading for a specific pair. 

Price impact or slippage refers to the influence of a specific trade on the price of the tokens. It is proportionate with the size of the trade relative to the amount of liquidity available in the pool. There is a minimum price impact value typically ranging around 30bps on constant-product AMMs: this is the fee charged for each trade.

Unlike a traditional order book where liquidity is aggregated into specific amounts and at specific prices based on market maker activity, AMMs can offer blanket liquidity, where LP contributions cover all sizes and prices. This makes providing liquidity much more accessible by a variety of market participants, but it’s also a much less capital-efficient approach. Still, this allows for the creation of composable deposit tokens, or LP tokens, which represent these positions and their associated yield. LP tokens can be deployed across on-chain protocols (including as on-chain collateral). 

Optimization of AMMs for Stableswaps

Some AMMs are designed to facilitate swaps between assets that are highly correlated in price. These are often called “stableswaps.” 

Stableswap AMMs, such as Platypus or Curve, can be optimal for pairing stablecoins pegged to the same underlying currency. For example, they can offer the ability to swap two euro-pegged stablecoins. For stableswap end users, these AMMs can offer many functional on-chain benefits, including the ability to:

  • Easily convert holdings to a new or preferred stablecoin provider
  • Diversify exposure beyond a single provider
  • Quickly swap holdings for deployment into a particular DeFi opportunity
  • Convert holdings because of infrastructure integrations (e.g., if an on/off ramp provider accepts or prefers a particular stablecoin)   

Overall, stableswaps make it easier to hold and deploy stables on-chain, while providing LPs with an attractive, relatively lower risk opportunity than standard AMMs.

Concentrated Liquidity Market Makers (CLMMs)

CLMMs are hybrid constructs that combine properties of AMMs and order books, essentially creating efficient on-chain pseudo order-books. 

This model was pioneered by Uniswap with the introduction of Uniswap V3 but has since been widely adopted, with competitors like Trader Joe introducing changes. CLMMs abandon the lazy liquidity property associated with traditional AMMs in favor of better capital efficiency. As the name suggests, they concentrate liquidity in price ranges and require LPs to take a more active role when depositing and distributing liquidity. A good way to conceptualize CLMMs is to see them as order books with a very large tick size. 

Oracle-Based Concentrated Liquidity Exchanges

Some exchanges abandon the ability to achieve price discovery and instead rely on oracles to concentrate liquidity around an existing, off-chain market price. They can not safely be relied on as primary sources of liquidity but can provide very competitive secondary on-chain venues for FX trading by referencing off-chain pricing. A good example of this model is Xave

On-Chain Central Limit Order Books (CLOBs)

On-Chain CLOBs are, for the most part, self-explanatory. Their mechanism is identical to most centralized exchanges operating today with an order book that matches both buy and sell orders at a specific price. For a long time, they were impossible to host on-chain due to throughput and finality limitations of older blockchains. However, newer technologies, such as Avalanche Subnets, enable dedicated blockchains to host these transaction-intensive order books on-chain. A good example is Dexalot

These exchanges, if adopted by enough market makers to create liquid markets, could rival the capital efficiency of existing off-chain FX markets. They are, however, less composable and much less accessible for retail users when it comes to providing liquidity. 

Quantifying the Competitiveness of On-chain Exchanges

Particularly for retail end users and small businesses, those who typically are disadvantaged the most by wide FX spreads (see below for further details), on-chain exchanges should serve as a more competitive and compelling option than traditional solutions.

In the case of the EURC token on Avalanche, which trades on Xave and Trader Joe, the price can deviate from the official exchange rate by up to 1%:

Source: Flipside EURC dashboard

Deviations typically occur when given trade volume disproportionately surprasses available liquidity. For example, the EURC/USDC pool on Trader Joe currently has $1.5M of total liquidity but has seen up to $2.8M in daily volume. The same pool on Xave has $610k of liquidity but has seen $790k in daily volume. You’ll notice the deviation is quickly corrected (based on the chart above). This correction is effectuated by market arbitrageurs tracking the official off-chain exchange rate and rebalancing the AMM pool to make a profit. 

You can see this rebalancing in action in the chart below, which shows how the distribution of EURC and USDC within a Xave pool changes over time, regularly going in and out of balance:

Source: Flipside EURC dashboard

Even in the most extreme deviations, however, the spread remains substantially below that which a retail user or small business might have to pay for a comparable FX transaction off-chain and quickly compresses. 

Overall, on-chain innovations can upgrade legacy infrastructure and potentially eliminate the need for third-party intermediaries charging unnecessary fees for smaller transactions (see below for more details). Additionally, AMMs may create novel passive income for a wider set of participants through the LP pool model. 

Summary Advantages of On-Chain FX Trading 

  • 24/7
  • Less expensive especially for retail and small businesses
  • More widely accessible 
  • Composable 
  • Instant transactions finality and settlement
  • Less operationally intensive
Remittances and Cross-Border Payments

Creating alternative, liquid FX markets on-chain is the first step toward a much larger vision from a global utility and payments perspective. Remittances and cross-border payments have long been complex and expensive, in part due to limitations of legacy banking infrastructure and extractive intermediaries.

In 2022, countries received more than $831b of combined remittance inflows, with over 77% of these inflows received by low- and middle-income countries. India, Mexico, China, the Philippines, and France were the top five countries with the most remittance inflows. 

Western Union fees can be as high as 29% for smaller payments, and brokers are allowed to collect a margin of up to 6% on FX transactions for most countries (excluding the Eurozone). In comparison, swapping on FX exchanges on-chain would incur fees of around 0.01% to 0.3%, in addition to fixed transaction fees that would be a few cents per transaction. Even including on-ramping and off-ramping fees, which range between 1.5% and 4% in most cases, as well as price deviations, remittances on-chain remain competitive. 

A prime example: Lebanon, the world’s most remittance-dependent country, with remittances accounting for over 50% of the country’s GDP. Sending money in and out of the country is a real struggle. The lucky few rely on foreign bank accounts, but most people must use (dysfunctional) Lebanese banks or intermediaries, where they pay predatory, inaccurate exchange rates and eye-watering fees. 

There is a real opportunity here: the current on-chain infrastructure is already much more efficient, cheaper, and more transparent than traditional remittance payment rails in most developing economies. 

Derivatives

In addition to spot transactions, robust on-chain FX markets would also promote the creation of derivatives markets for macro directional trading and hedging purposes.  

Protocols such as Hubble and GMX can be used to create perpetual futures that track the price of underlying currencies and enable leveraged trading strategies. Protocol profits from trading and market making can be redistributed to liquidity providers, creating additional opportunities to earn yield on on-chain currency deposits (as mentioned earlier). 

On-chain options protocols can become powerful tools for hedging exposure to currencies. There are many different protocols that have the potential to enable this, ranging from fully on-chain models (Panoptic, Kibo) to hybrids relying on off-chain market makers and order books (Volare, Aevo). 

A large reason why on-chain options protocols (and, to an extent, perpetual futures exchanges) are still limited in liquidity is their focus on crypto assets. Introducing derivatives for various well-adopted, non-USD stablecoins could be instrumental in driving the growth of these protocols by attracting exponentially higher liquidity. 

In the shorter term, synthetic currency derivatives can let users trade and get price exposure to smaller local currencies. A good example: Baki, a protocol aiming to create synthetic FX markets for African currencies. 

There is still work to be done across these areas, but on-chain protocols have the potential to replace traditional currency derivatives markets. 

Creating Liquid Markets for Historically Illiquid Currencies

This last use case could be one of the most immediate opportunities for non-USD stablecoins. Think of Argentina, Lebanon, Syria or Ethiopia. They have one thing in common: reliance on black markets for trading and pricing local currencies. In some cases, this is exacerbated by capital controls imposed on banks and restrictions on currency outflows. 

This generally means that these local currencies are trading with very fragmented liquidity and without a unified price. Each broker will quote slightly different prices, with limited liquidity; there is no common trading venue. This means that spreads are generally extremely wide to account for uncertainty and high volatility. It also means that currency prices are easily manipulated. 

Locals generally rely on websites and apps attempting to track the parallel black market rates, relying on brokers and users declaring their recent trades:

This might be solved by tokenizing the local currency and listing it on an on-chain exchange. On-chain exchanges could provide more accurate, transparent alternative rates for these currencies, while also reducing liquidity fragmentation. Of course, this would require existing participants in these markets to adopt a given on-chain exchange as a primary source of truth. Each individual broker could act as an on-ramp and off-ramp for the stablecoin, where locals could deposit or withdraw their local currency. 

Such an initiative would require collaboration and oversight, but would allow locals to trade their local currency remotely, at better rates, and reduce their reliance on cash. They could receive USD-denominated stablecoins in return, which they can then either off-ramp through existing peer-to-peer networks or hold on-chain and transfer at extremely competitive fees. 

Key Takeaways
  • The crypto industry often assumes that there is no demand for non-USD stablecoins. But this is not true in traditional finance: demand exists.
  • The state of international stablecoin regulation makes this opportunity even clearer.
  • On-chain exchanges are already developed enough to provide competitive venues for FX trading, with instant settlement, lower fees, better pricing, and 24/7 markets. 
  • Improving the availability and liquidity of non-USD stablecoins on-chain is the first step in addressing real-world problems of remittances and cross-border payments. These markets are currently larger than the entire crypto space several times over. 
  • Institutional adoption can follow retail adoption: there are exchanges that perfectly mimic traditional exchanges, and various protocols that can provide markets for on-chain currency derivatives, which can be used for speculation or hedging.  
  • The opportunity is the clearest in emerging economies, which often lack necessary banking infrastructure and are subject to inefficient and predatory FX markets for cross-border payments, remittances, and trading of their local currencies. 

Provided for informational purposes only, without representation, warranty or guarantee of any kind. None of this is as an endorsement by Ava Labs, Inc., the Avalanche Foundation Limited or any of their respective subsidiaries or affiliates, nor is any of this investment or financial advice. Please review this Notice and conduct your own research to properly evaluate the risks and benefits of any project.

About Avalanche

Avalanche is a smart contracts platform that scales infinitely and regularly finalizes transactions in less than one second. Its novel consensus protocol, Subnet infrastructure, and HyperSDK toolkit enable Web3 developers to easily launch powerful, custom blockchain solutions. Build anything you want, any way you want, on the eco-friendly blockchain designed for Web3 devs.

Website | Whitepapers | Twitter | Discord | GitHub | Documentation | Telegram | Facebook | LinkedIn | Reddit | YouTube

SHARE //
NEXT UP//
Enterprise

stc Bahrain and Avalanche forge partnership to drive Web3 progress in the Middle East

Institutions

Homium Issues First Home Equity Loans on Avalanche

Enterprise

Feature.io Uses Avalanche-Powered API to Bring Web3 to Any Streaming Platform or Media File

Avalanche Watch: March 2024

Platform

The Avalanche Foundation Unveils the Icebreaker Program

Community

The Avalanche Foundation Launches Ambassador DAO to Usher in the Next Wave of Users

The Avalanche Foundation Announces a New Board

Community

The Avalanche Foundation Discloses Community Coin Holdings

DEFI

The Avalanche Foundation Announces Memecoin Rush

Platform

Avalanche Foundation Launches Community Grants Program with Gitcoin

Institutions

Clearpool Expands to Avalanche with Exclusive Launch of Credit Vaults

Enterprise

Coachella to Gamify the Festival Experience and Distribute New Rewards Using Avalanche

Developers

Startup Incubator Codebase Names First Cohort

Institutions

Diamond Standard Leverages Oasis Pro and Avalanche to Make Diamonds an Investable Asset Class

Institutions

Tokenization 101: The Tokenized Collateral Ecosystem

Enterprise

Avalanche Powers Web3-Enabled Voucher Program on Alipay+ D-store

Institutions

Avalanche and Chainlink Leveraged in Tokenized Asset Settlement Project

Developers

The Graph Expands Data Tools for Avalanche Developers

Community

Avalanche Foundation: Eligibility Criteria Framework for Community Coins

Platform

Avalanche Watch: February 2024

NFT

Best Dish Ever Launches NFTs on Avalanche, Pioneering the Future of Culinary Exploration

Gaming

Legendary MMORPG MapleStory Comes to Avalanche

Platform

Teleporter Makes Avalanche a Fully Interoperable L0 Network

Enterprise

Loyalty+ to Receive Multiverse Incentives to Spur AI-Enhanced Loyalty Programs

DEFI

SteakHut V2 Introduces New Liquidity Features on Avalanche

Enterprise

Avalanche to Power SI Tickets’ NFT Platform, Box Office

NFT

Looty and Inspect Launch Loyalty Platform with Loot Crate Rewards, Boosting Avalanche NFT Season

Platform

Durango: Avalanche Warp Messaging Comes to the EVM

Community

Avalanche DeFi Saga with Rep3

Institutions

Citi Tests Benefits of Private Markets Tokenization With Avalanche Evergreen Subnet ‘Spruce’

Enterprise

Avalanche Named Exclusive Sponsor of Collider on the Lot Startup Accelerator

Platform

Cortina: X-Chain Linearization

Avalanche Watch: January 2024

Gaming

Owned Blends SocialFi and Gaming on Avalanche with Battle Tech

Enterprise

The Empire State Building Launches NFT Loyalty Program on Avalanche Using Uptop

Institutions

Intain Launches Avalanche Subnet to Usher in New Era for Multi-Trillion Dollar Securitized Finance Market

Institutions

How Avalanche Uses Account Abstraction to Improve the Web3 Experience for Institutions

Institutions

Institutional Products, Pilots Signal Growing Interest in Tokenization

Enterprise

Edgevana to Provide Infrastructure to Avalanche Network, Expanding Validator Decentralization

Institutions

South Korean Digital Asset Custodian BDACS to Support Avalanche

DEFI

Struct Finance Joins Avalanche Rush with an Incentive Program of up to $1M

DEFI

Fonbnk Builds Avalanche On-Ramp for Cross-Border Payments in Emerging Markets

Platform

Avalanche Wallet Phase-Out Guide

Platform

Avalanche Watch: December Edition

Institutions

What is Asset Tokenization: Why & Why Now?

DEFI

Sub-Saharan Africa: A Land Of DeFi Opportunity

NFT

NFT-TiX Migrates to Avalanche and Announces Global Festival Partnerships

Enterprise

AR Platform Really to Upgrade Entertainment Using Avalanche

Gaming

Tiltyard Gives Web3 Games Tournaments and Fantasy Sports Features

DEFI

Hubble Exchange Launches Order Book DEX Built on a Custom Avalanche Subnet

Platform

Avalanche Watch: November Edition

Developers

NodeKit Raises a $1.2M Pre-Seed Round to Build a Shared Sequencer L1 with HyperSDK

Gaming

Mirai Labs Blends SocialFi and Web3 Gaming, Migrates to an Avalanche Subnet

Institutions

Republic Selects Avalanche for its Profit-Sharing Note, Gains Vista Support

Platform

Avalanche Watch: October Edition

Institutions

Avalanche Supports Citi FX Solution Under Project Guardian

Institutions

Onyx by J.P. Morgan Leverages Avalanche To Explore a New Paradigm for Portfolio Management

Platform

Avalanche Foundation Mission Statement and Reminder About System Unlocks

Developers

Web2 and Web3 Leaders Launch Codebase by Avalanche, an Accelerator Supporting Early-Stage Avalanche Projects

DEFI

Avalanche Expands Forex Market in Africa With Canza Finance’s Baki Launch

Platform

Avalanche Powers Metaverse Experience at Hong Kong FinTech Week

Gaming

5 Great Web3 Games Coming Soon

Institutions

Beneath the Surface: The Infrastructure Driving Tokenization Forward

Developers

Avalanche is Advancing Off-Chain Computation Services for Developers

Enterprise

Neal Stephenson’s LAMINA1 to Reimagine the Open Metaverse with New Layer 1 Built on Avalanche

Ava Labs Accelerates Push in India with Key Senior Hires

Platform

CCRI Finds Avalanche Emits 12x Less CO2 Than Ethereum, 300,000x Less CO2 Than Bitcoin

DEFI

The Tangible Benefits of Bringing Non-USD Stablecoins and FX On-Chain

Institutions

On-Chain Cash Management: Thematic Takeaways From Partner Discussions

Platform

7 Avalanche Use Cases

NFT

Builder Spotlight: Zeroone is Rethinking How NFT Enjoyers Create and Collect

Institutions

Navigating Tokenized Asset Investments for Institutional Buyers

NFT

Blockticity Mints $275M in Hemp and Other Product Certifications on Avalanche, Disrupting a $4.5T Industry

Developers

Introducing Firewood: A Next-Generation Database Built for High-Throughput Blockchains

Community

Builder Spotlight: Steven Gates Wants to Bring Subnets to the World

Community

Avalanche Foundation Launches Ted Yin Grant Program to Expand Open Source Technology Development

Enterprise

Korean Entertainment Giant Powers Ticketing Platform with Avalanche

Developers

Developer Spotlight: NodeKit’s Cofounder on Why Avalanche is “Unrivaled”

Platform

New Avalanche C-Chain Explorer Launches

Developers

Time to Finality (TTF): The Ultimate Metric for Blockchain Speed

Platform

Avalanche Watch: August Edition

Developers

Movement Labs Raises Pre-Seed Round, Launches Movement SDK To Reignite Web3’s Interoperable Future

Gaming

Builder Spotlight: Kam Punia’s Quest to Level Up Web3 RPGs

DEFI

Multiswap Launches with Plan to Unlock Swaps of 300+ Assets in a Single Transaction on Avalanche

Gaming

Korean Game Publisher Neowiz and Ava Labs Form Partnership

NFT

NFT Marketplace Hyperspace Makes EVM Debut on Avalanche

Enterprise

PlayThink and Loyalty Marketing Announce Plans for Web3 Ecosystem for 100M Japanese Users on Avalanche

NFT

Artist Spotlight: Three Creators Drawing the NFT Future

NFT

Artist Spotlight: Creators Expanding NFT Possibilities

DEFI

Dexalot Subnet Earns Avalanche Multiverse Incentives of up to $3 Million

Developers

Elastic Era: Considerations for Subnet Builders

Developers

Sigma Prime to Expand Security Tooling for Avalanche

Platform

Avalanche Watch: July Edition

Platform

Builder Spotlight: Blockpay Aims to Bring Blockchain Payments to the Masses

Platform

Avalanche Watch: April Edition

Core Mobile Now Supports iOS Devices

NFT

Momentum Accelerates in Avalanche NFTs

Platform

Ava Labs Announces AvaCloud: Empowering Businesses to Launch Custom, Fully Managed Blockchains in Minutes

Developers

Bware Labs’ Blast API uses Avalanche Network to Deploy Their Staking Protocol

Gaming

Avalanche Arcad3 Powers Up Web2 Gaming Studios, Arming Them to Thrive in Web3