Stellar Development Foundation
Our world is becoming more digital in almost all respects. From how we order groceries, to how we consult with our doctors, to how we catch up with our families, our digital and physical lives are now one and the same. This digital progression extends to, and is accelerating towards, how we engage with money, especially in the era of COVID-19. The latest Bain analysis shows that by 2025, an estimated 67% of transactions will be done digitally — that’s a 10% increase from pre-COVID estimates.
It’s a significant evolution as we see increased momentum for real transformation in financial services. But much of what is mainstream today is really just the start of the innovation potential to deliver on a new digital global payment standard.
Stablecoin has become something of a buzzword, and not everyone uses the term in exactly the same way. On the Stellar network, we consider stablecoins to be digital currency whose value is tied to fiat. They are digital tokens issued by financial entities and backed one-to-one by dollars or yuan or euros – or any global currency — so a user can easily convert the stablecoins back to the same value in fiat.
Why are stablecoins useful? Stablecoins enable global financial systems to be interoperable because they bridge the fiat-digital world. It’s the way blockchain brings together our digital and physical lives. Because through the use of stablecoins, users can move value from the traditional banking system, like a bank account, and into blockchain, where they can take advantage of a global network to make frictionless cross-border and cross-currency payments.
For example, if a user based in France wants to send money to a friend in Nigeria, they are able to convert traditional euros from their bank account to a euro-backed stablecoin that can easily and quickly be exchanged to a naira-backed stablecoin through a blockchain wallet (similar to the wallet apps many consumers use on their phones today!). No long wait times, or big fees from the bank. From there, the user in Nigeria has the flexibility to keep, save, or spend their naira stablecoins, or to send them to their bank account, converting them to traditional Naira. Stablecoins help make sending money almost as easy as sending an email… and with Stellar, that means global reach, near instant transaction times, and ultra-low costs.
Stellar was designed for stablecoins before stablecoin was even a word. Stellar was built with a core focus on asset issuance, with the ability to create a redeemable, tradable digital asset backed by any real-world asset. (That means not just fiat, but other forms of value, too, like stocks, bonds, commodities.) The ability to issue and redeem assets is one of Stellar’s most powerful features.
Stellar offers a generalized toolkit to issue stablecoins — with simple code and built-in compliance functionality. This functionality is at the protocol level; tokenization is a fundamental part of the network, so the supporting code is reliable, vetted, and easy to work with. Stellar also makes it easy for Anchors — which is what we call stablecoin issuers on Stellar — to connect to existing systems to handle KYC and convert tokens to money in the bank. Any financial institution that can accept deposits can easily integrate with Stellar to set up a network on/off ramp, i.e., money flows efficiently between traditional and digital financial rails. As more and more Anchors connect to the network and issue stablecoins, these rails become completely interoperable and the network effect is exponential.
Because if we go back to our France - Nigeria example... When euro and naira stablecoins are seamlessly exchanged through Stellar’s order book feature, they create a connected global financial infrastructure. That’s how interoperability comes to life. Now imagine that applied to every single geography across the globe. It means currencies are completely interoperable with each other, no matter where in the world, and that financial systems across the world can work together on a single platform.
This is just the beginning of the journey. It’s clear that the digitization of money is starting to catch on in the same way so many other digital transformations have brought new value to our daily lives — value that it’s hard to imagine we ever lived without. Now, it’s time to bring that kind of innovation to money and create the new global payment standard.
If you want to learn more about stablecoins on Stellar (who issues them today and how they do it), check out Anchor Basics.