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Is it possible for existing stablecoins to function as CBDC or carry the entire weight of a country’s remittances system?
Stablecoins — cryptocurrencies that attempt to peg their market value to an external asset, usually the U.S. dollar — have become the prominent solutions around problems that society have been trying to figure out. They offer a variety of benefits when compared to their underlying asset including: global transfer of value, security and privacy offered by the cryptocurrency system and fast connection of investing in the rising crypto markets. As central bank digital currencies (CBDCs) are starting to become a reality, these advantages make stablecoins a potential solution to improve the current system, particularly in regards to remittances.
From a grand point of view, CBDC and Stablecoins stand to serve with a similar purpose and have similar functionality; the main difference is who controls them and how do authorities regulate them. While CBDC are issued and monitored in a centralized manner from a government authority, stablecoins are not regulated and are either decentralized or privately managed. Some countries such as Bahamas and Nigeria are pioneers in this field having already launched their CBDC. Others still decide on the way they plan to proceed.
Currently in the United States a Senator introduced a bill intending to prohibit the Fed from issuing a central bank digital currency directly to individuals. The bill claims that having the Fed issue a CBDC in a centralized way would essentially put people’s right of privacy at stake and ultimately end up hurting the U.S. economy and pushing innovation away.
Furthermore, stablecoins have also been seen involved around the old remittance systems. Several third world countries heavily dependent on remittances have started exploring options of implementing blockchain technology. Back in June El Salvador announced that Bitcoin will serve as legal tender. Among its main reasons besides fomenting innovation was the positive impact that this will have for people receiving remittances. After this several Latin American countries started to explore the possibilities as well. More recently the country of Tonga announced that it also has plans of turning Bitcoin into Legal Tender by the end of the year. It’s important to keep into account that about 200 million migrants work to send money (remittances) back home to support around 800 million people. As a group they represent more than 10% of the global population.
This begs the question: is it possible for existing stablecoins to function as CBDC or carry the entire weight of a country’s remittances system? In this article we analyze several factors that show some interesting analytics on the current state of stablecoin developments in line with this question.
In order to process a whole nation’s remittances, it is paramount for a stablecoin to be capable of processing thousands of transactions frequently. The Average Time Between transactions indicator measures the average duration between one transaction block and the next. Basically measures the average time between transactions, in this case we are analyzing USDT on Ethereum
As of Jan. 18 via IntoTheBlock’s Tether Analytics
The indicator shows that the USDT network has an average time between transactions of 14 seconds. In comparison to traditional methods like domestic wire transfers that can take up to 3 days stands as a very important difference. In the case of remittances which classify as international transactions that can take up to weeks and involve costly fees this would give the perfect alternative.
Another, intriguing indicator to analyze is the percentage that stablecoin transactions take of all the ETH chain transactions. In this case we are classifying the addition of USDT, USDC and DAI transactions as the stablecoins percentage, which are three of the major stablecoins in the crypto market.
Via IntoTheBlock’s: Tether, USD Coin and DAI Analytics
The graph above tracks the share that the stablecoins USDT, USDC and DAI make out of the total amount of transactions on Ethereum. The indicator clearly shows how these three stablecoins take a great percentage of the transactions being processed on the blockchain, in some cases going all the way up to 30% like during the end of 2020. Each of these transactions cost money, through gas fees which stands as the cost of using the network. The higher the demand to use the network the higher the gas fee goes. It is estimated that the ETH chain can process around 18 transactions per second, since the demand for the space far exceeds the capacity, the net result ends up being unpayable gas fees to use the network. This problem has created an avenue for new blockchain technology to rise with capabilities of higher processing power usually at the cost of centralization.
Decentralization comes at a high price. The current processing power that the ETH chain contains wouldn’t be enough for it to be able to process a CBDC or carry the weight of an entire country’s remittances system. Even if capacity isn’t reached, gas fees would become unfeasible for the daily user. Just to put it into perspective the Federal Reserve processes 64.6 million transactions daily, that makes it around 747 transactions per second. On the good side, while the CBDC scenario is still not possible, leaving the “gas fee” problem aside, a remittances system could work since Western Union CEO claimed that they process about 30 transactions per second.
Lastly, one last indicator to also keep in mind is the active addresses. Every day, IntoTheBlock reports the number of addresses that made any transaction. This provides a view of both user engagement and growth.
Via IntoTheBlock’s: Tether, USD Coin and DAI Analytics
This indicator depicts the number of active addresses, meaning addresses that have made a transaction during the day recorded. It is showing the active addresses for USDT, USDC and DAI protocols. Besides the clear growth of the past two years it can also be seen how by mid 2020 the USDT protocol managed around 200k active addresses. While 200k active addresses stand as a significant number in crypto standards, having it compared to traditional systems where millions of people make transactions daily is still not achievable. Relating to the past indicator the network would not be able to handle and process all the transactions accordingly, without having to sacrifice decentralization.
Currently stablecoins form a very important part of the crypto currencies ecosystem. They serve as one of the main forms of stable protection for when trading, in addition to its current functionalities it has great potential to become a crucial part of the futures economy. There are still some innovations that need to be made and new alternatives to explore in order to adopt a crypto standard.
Stablecoins’ Role in a World of CBDCs & Digitized Remittances was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
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