The $129B stablecoin market is bubbling, housing hundreds of different stablecoins. However, the top 5 projects are all USD-stablecoins, comprise 94% of the total stablecoin market capitalization, and represent 99% of the stablecoin trading volume.
Yet, non-USD stablecoins have an essential role in onboarding billions of users to the blockchain ecosystem and DeFi. USD-stablecoins create friction and add currency exchange risks for users outside the US. Unfortunately, regardless of their design, non-USD stablecoins struggle to attain the network effect needed to grab market shares, the main issue being liquidity.
A surprising and reasonably simple way of solving this issue is an on-chain Forex market. This is what Jarvis Network has been working on with the launch of our first protocol, Synthereum, which allows anyone to borrow and exchange synthetic stablecoins called jFIATs. Synthereum uses Chainlink Price Feeds on multiple networks for real-time exchange rates on fiat that users reference to trade jFIAT stablecoins without price impact, enabling an on-chain Forex market. Synthereum and its whole ecosystem lay down the infrastructure that can help solve the liquidity problem for non-USD stablecoins, fostering worldwide inclusion of other global currencies and further increasing DeFi adoption.
Blockchain-based Forex: an on-ramp to access liquidity!
Forex is the largest traditional financial market, with as much as $6.6 trillion daily. Most of this trading volume comes from non-speculative use cases, with one particularly compelling: buying or selling currencies for investing in foreign markets.
In traditional financial markets, assets are quoted against a fiat currency: Apple stocks are priced in US Dollars, Mitsubishi in Japanese Yen, and Total in Euros. To buy a Japanese stock with Euros, one would first need to exchange them for JPY on the Forex market, the latter being a liquidity on-ramp.
In order book-based crypto exchanges, crypto assets are quoted against any fiat currency (or any other crypto asset, like ETH, BTC, or BNB). Still, the most liquid markets are quoted against USD. For example, on Kraken, the ETH/USD market is more liquid than the ETH/EUR one, which is more liquid than the ETH/AUD one. Because there is less volume in non-USD markets, there are fewer market makers, creating a vicious circle of liquidity constraints.
For someone holding AUD, it is more efficient first to exchange them for USD on the Forex market and then buy ETH in the ETH/USD market. Market makers could funnel all their resources into the ETH/USD market, the latter being hooked to any other currencies through the Forex market. Many fiat on-ramp services do this when possible to provide their users with the best price when using non-USD fiat currency. In this scenario, the Forex market is an on-ramp to access the most liquid markets in crypto.
An on-chain Forex market could play the same role for non-USD stablecoins, granting them access to the on-chain liquidity of USD-backed stablecoins.
Exploring an on-chain Forex market
In AMM-like exchanges, USDC, USDT, DAI, and BUSD are the stablecoins representing most of the liquidity. Anyone can pair non-USD stablecoins with their USD alternative, enabling an on-chain Forex market to connect any stablecoin to the rest of their liquidity through order routing. However, a few issues have prevented the emergence of large-scale, on-chain Forex markets on AMMs.
First, building liquidity is expensive and not capital-efficient, especially for crypto-collateralized stablecoins. Despite recent innovations like concentrated liquidity, this model can only scale at the expense of spending vast capital on liquidity and incentives, thus creating an opportunity cost and wasting resources.
Then, Forex pools on an AMM can only work if arbitrage can happen quickly to help maintain the peg. Arbitrage mechanisms can be slow or not efficient in some cases.
A low-slippage and capital-efficient on-chain Forex market that guarantees the execution of trades at the real market price can fix these issues. This is what Jarvis Network has launched with the Synthereum protocol!
Rather than using an AMM with traditional double-sided liquidity pools or an optimized bonding curve, the protocol's liquidity pools are the counterparty of all the trades, which happen at the real-time market price of Chainlink. Unlike traditional pools, Synthereum's pools only hold USD-stablecoins (USDC on Polygon, Optimism, Avalanche and Ethereum, BUSD on BNB Chain, XDAI on Gnosis Chain) and use a burn and mint mechanism to facilitate trades. Liquidity providers first seed liquidity pools. Then, when users exchange USDC for jFIAT, they send their UDSC to the pool, which mints the jFIATs. The latter are over-collateralized by the liquidity of the pool. Whenever users exchange jFIAT for UDSC, the pool buys back the jFIAT using its liquidity and then burns them.
This design is highly capital efficient: it only requires UDSC (or any other approved collateral): 1 USDC of liquidity allows one to buy up to $50 worth of jFIAT. This number depends on the risk the liquidity providers undertake. For example, 1 USDC of liquidity allows one to buy up to $11 worth of jEUR with the current liquidity providers' risk parameters.
USD stablecoins: the ultimate liquidity router
Synthereum allows users to perform Forex swaps between jFIATs and their collateral without price impact. They can exchange jEUR for USDC or jBRL for BUSD. Two or more transactions can also be combined to extend jFIATs liquidity!
Atomic swaps combine two transactions into a single one. For example, exchanging jCAD for jMXN requires first exchanging jCAD for USDC, then using these UDSC redeemed from the pool to exchange them for jMXN. Since there is no price impact between jCAD and USDC, nor between USDC and jMXN, there is no price impact between jCAD and jMXN. Atomic swaps enable a 0-price impact on-chain Forex market.
Atomic swaps can also combine a jFIAT exchange transaction with an AMM swap: for example, exchanging jNZD for WBTC requires first exchanging jNZD for USDC, and then swapping UDSC for WBTC. Since there is no price impact between jNZD and USDC, buying WBTC with jNZD or USDC has the same price impact! Atomic swaps provide jFIAT with the same market depth as USDC.
Atomic swaps connect jFIATs to the entire on-chain liquidity on multiple chains, elegantly solving the liquidity and peg issues met by other stablecoins.
Atomic swaps happen using our On-Chain Liquidity Router (OCLR) contracts. Other protocols, such as Paraswap or PicNic, leverage atomic swaps using jFIATs.
Synergies with other stablecoins
Despite the challenges, the non-USD stablecoin market is growing. Synergies can bring more value to this bubbling ecosystem and end-users.
Using stable pools (Curve, Uniswap, Balancer etc.), jFIATs could be swapped for other stablecoins and vice-versa with minimal slippage. These pools create symbiotic relationships between the stablecoins it contains since each stablecoin within the pool inherits the features of the others! For example, since fiat-backed stablecoins offer a cheap and direct fiat on and off-ramp service, pairing those with their jFIAT equivalent would easily enable going from fiat to DeFi. This is the case of the jCAD-CADC pool on Polygon: CADC provides the best fiat on and off-ramp experience, while jCAD gives access to CADC to the UDSC liquidity.
Another symbiotic relationship would be jFIATs pooled with a similar synthetic fiat currency to help the latter with its peg and liquidity. The jEUR-PAR pool, for instance, reinforces PAR's peg and liquidity by granting PAR access to jEUR's liquidity.
A happy consequence of such pools would be the generation of sustainable yield through trading fees.
Synthereum also features a Wrapper contract that can wrap one stablecoin into its jFIAT equivalence, easing the use cases mentioned above.
An infrastructure for wallets and stablecoins
Synthereum aims to be a user-facing protocol, grow an ecosystem of services and applications using jFIATs, and an infrastructure protocol, powering liquidity for other stablecoins.
On the one hand, the Synthereum protocol and its ecosystem can be the backend underpinning Revolut-like DeFi wallets all over the globe! Wallets can integrate the protocol to provide their users with an on-chain Forex market and many CRYPTO/FIAT pairs, credit without Forex risk, saving and high-yield accounts etc. Combined with local fiat gateways for jFIATs it can significantly drive user adoption.
On the other hand, through its Wrapper and its ecosystem of pairs with fiat-backed and other crypto-backed stablecoins, the protocol can become this much-needed on-chain Forex infrastructure helping other stablecoins to strive by achieving liquidity and stability and growing user adoption.
We think there is more value in the latter vision, but in either case, Synthereum can become a public good fostering non-USD stablecoins and DeFi adoption worldwide.
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⛔ Risk Warning: Investing in digital financial assets involves high risk and volatility and is unsuitable for all investors; do not risk more money than you can afford to lose. Please consult an independent professional financial or legal advisor to ensure the product is right for you.
⛔ Disclaimer: This article contains text, data, graphics, photographs, illustrations, and information ("Information") connected with Jarvis International and/or other entities part of the Jarvis group ("Jarvis"). Jarvis attempts to ensure information is accurate; however, information is provided "AS IS" and on an "AS AVAILABLE" basis and may not be accurate or up to date. This article's publication does not represent Jarvis's solicitation to buy or sell the tokens "Jarvis Reward Token" or any "Jarvis stablecoins", or to provide liquidity in any protocol mentioned above. It should not be considered a recommendation by Jarvis regarding the suitability of any investment, if any, herein described. No action should be taken or omitted to be taken in reliance upon the information in this document. Jarvis accepts no liability for the results of any action taken based on the information.
