Photo by Alan Sailer
“The DeFi world is almost as technologically advanced as the dollar, and when it is, there will be no one who will want to accept politically manipulable currencies like dollars anymore.” ~Tim Draper, billionaire bitcoin bull.
We’d like to challenge Draper’s assumption.
People are not turning to DeFi to replace the dollar. Instead, they are using DeFi to avoid censorship; own their assets; and build financial service without permission.
The proof? At the heart of DeFi are dollar-pegged stablecoins, some of which are very centralized and censorable but still growing in adoption at accelerating speeds. Others that are more decentralized, face important scalability issues that, as they stand, would prevent them from ever replacing a national currency.
So what are stablecoins used for? And do different stablecoins have different use cases?
Below we take a look at the on-chain activity of two very different stablecoins, DAI and USDC, to understand their distinct appeals and levels of activity in the DeFi space.
DAI’s Censorship Resistance Attracts the Most DeFi Activity
The animation above follows the flow of DAI tokens between different actors in the ecosystem: users, exchanges, and supply management. Each bubble represents a specific amount of tokens that have changed hands on-chain within the last 30 days, which we call “active supply”.
DAI is completely decentralized and can't be monitored. It is pegged to the US dollar, but instead of being backed by USD held in reserves, it is backed by crypto.
Users are mostly exchanging their DAI tokens on decentralized platforms. Notice the constant back and forth between users and decentralized exchanges & DeFi apps (DEX), i.e. between purple and red.
The only centralized exchange with meaningful DAI volume is Coinbase, which added the token last year in response to user demand for a DAI/USDC trading pair.
Anyone can create or burn DAI. This is evidenced by the fact that newly created, or “minted” DAI tokens (in dark grey) are going straight to users. In the same way, we can see a flow from users (red bubbles) to the burned pile.
Coinbase Lets Anyone with USD Create More USDC
The animation above follows the flow of USDC tokens between its network’s key user groups, in the last 30 days.
USDC is fiat-collateralized, meaning that the tokens are backed by USD held in reserves. Issued by Coinbase and Circle through a joint venture, USDC has secured all required licensing to operate in the United States.
USDC is used on both centralized exchanges and decentralized platforms.
In terms of supply management, anybody with a Coinbase account can convert USD for USDC. You can see that newly minted tokens first go to Coinbase (in blue), then to users (in red). This allows for much better liquidity.
USDC expands and contracts its supply based on demand. Higher demand for USDC would drive up its price, but that demand is countervailed by Coinbase users injecting more USDC into the system (meeting demand with supply) to maintain the 1:1 parity with the USD.
To be continued...tune in next week for Part 2 on Tether, the long-standing king of stablecoins with a market cap of over $8 billion at the time of writing.
About Decentralized Finance (DeFi)
At its core, decentralized finance is providing financial services through a public distributed ledger, instead of a centralized institution like a bank. It means anyone in the world with a smartphone and internet connection can access any financial service available to the wealthy today - savings, loans, trading, insurance, etc.
Smart contract blockchains, like Ethereum, enable developers to build DeFi apps. “Smart contracts” are programs running on the blockchain that can execute automatically when certain conditions are met. Stablecoins are one of the most successful DeFi projects.
DeFi is now one of the fastest growing sectors in crypto. Industry observers measure traction with a unique new metric — “ETH locked in DeFi”. At the time of writing, users have deposited over $894 million worth of crypto into these smart contracts.