5 Use cases of Stablecoins in Africa
Over the years, we have seen cryptocurrencies fluctuate. This has created millionaires in one night and severe losses to some. It could be a thrilling experience for investors, but for traders who peg on the currency to buy goods and services, it can be extremely risky. The volatile nature of cryptocurrencies has been a hindrance to their adoption. Then came stablecoins, a bridge between fiat currency and cryptocurrency.
So, what are Stablecoins?
Stablecoins are a form of cryptocurrency whose value is tied to assets such as the US dollar or gold. By this, we mean that the price of the currency mirrors the asset it’s pegged on keeping its value steady. Stablecoins are more appealing because they attempt to give people options and the best of both worlds. On one hand, you get a stable currency that you can rely on, and on the other, you get the security and privacy that comes with cryptocurrency.
How do Stablecoins differ from traditional Cryptocurrencies?
Most cryptocurrencies are decentralized in nature meaning there is no central control and the users determine its value hence its volatility. However, this is not the case with stablecoins. Having pegged their stability with an asset, the price of stablecoin is stable as long as the value of assets is stable. Stablecoins tend to be centralized with one entity acting as custodians of the reserved assets. This is based on trust that the reserve exists and is valued correctly.
There are three kinds of ways to back a stablecoin; using fiat, algorithmically and using cryptocurrency as a collateral.
Stablecoins in this category is backed by fiat currency and physical commodities such as oil, gold, and precious metals i.e. silver. Although there are a variety of fiat currencies, the most popular is the US dollar. The value of the fiat-backed token is equivalent to the US dollar at a 1:1 ratio. It’s easy for a stablecoin holder to redeem their stablecoin token for one dollar at a time. This is possible because the company that develops the stablecoins owns the dollar reserves equal to the number of stablecoins in circulation. The reserves are regulated and audited for adherence to necessary compliance by independent custodians. An example of a fiat-backed stablecoin is Tether which pegs its value to the dollar with USD as its collateral.
This stablecoin uses a computer program to maintain stability. It is not backed by any commodity but rather by the supply based on its market. Using an algorithm, the program will track the value of i.e. US dollar and adjust how many coins are in circulation based on the coin’s value. The algorithm can automatically remove coins from circulation or produce more coins based on the demand for stablecoin. For instance, an algorithm stablecoin pegged at one US dollar will rise when the stablecoin rises and the algorithm will release more tokens to bring the price down. If it falls below the dollar, the algorithm will create a demand for the tokens to bring the price up. An example of this is the TerraUSD (UST) that pegs its value on the Luna token.
These are stablecoins that are backed by cryptocurrencies. Due to the volatile nature of cryptocurrency, these stablecoins are over-collateralized. By this, we mean that the cryptocurrency held in the reserve is worth more than the stablecoin issued. The stablecoin ensures a 50% decline in its reserves hence the worth of the cryptocurrency is 150%. An example of this is the Dai stablecoin which is backed by Ethereum and other cryptocurrencies.
The functions of stablecoins serve different ecosystems. Their uses have multiplied beyond acting as an alternative to the volatile cryptocurrency market. Here are five ways stablecoins are being used.
Stablecoins are primarily used to facilitate trading on different platforms. For crypto traders and investors, buying crypto using fiat can be difficult due to the price change of cryptocurrencies such as Bitcoin. By on-ramping using stablecoins, crypto traders reduce such exposure and then trade the stablecoin for volatile cryptocurrencies. Trading with stablecoin instead of fiat ensures investors and traders can maintain all their transactions in their crypto exchange which allows them to buy and sell more digital assets quickly.
An example of a popular stablecoin used for trading is Tether. According to Cryptocompare, Tether accounts for more than half of all the Bitcoin traded into fiat or stablecoin. Traders buy USDT from fiat and once it’s in their crypto wallet, they can decide to buy other cryptocurrencies with it or not. By this, they get to avoid the price volatility of on-ramping cryptocurrency.
Paxful, a crypto trading platform is using stablecoins for exchange from one traditional cryptocurrency to another. When traders in Africa want to exchange one form of crypto for another, they convert their crypto to stablecoin using Kotani Pay and then to the crypto they need. Kotani Pay helps traders in Africa off-ramp their crypto to their mobile money when they need to cash out.
Cross-border payments to low and middle-income countries account for $605 billion globally. Overseas workers send money to their loved ones but it doesn’t come cheap. According to the World Bank, a remittance of $200 can incur an average fee of 5% to 9% depending on the Country. This high fee is caused by the middleman in the transaction. Aside from the high transaction cost, one is not assured of the safety of their money and it takes much more time to receive funds. Users also have to depend on the accessibility and availability of banks.
Stablecoins have made remittance a fast, easy, and safe way for people to send money across borders. Having pegged its value to a currency such as a dollar, overseas workers can send money directly to their families at any time anywhere in the world. Stablecoins also cut down the transaction cost by 200%, saving the sender more money. In terms of speed, transactions are in real-time from one wallet to another.
Remittance has been made easy using stablecoins such as those on the Celo network, a mobile-first DeFi platform that is backed by fiat and cryptocurrency. Overseas workers send their money using Celo Dollars (cUSD) and other Kotani Pay-supported stablecoins which are received on the recipients’ Kotani Pay wallet and converted to their local currency. Kotani Pay facilitates off-ramping of their funds to their mobile money for use.
Stablecoin lending is a lucrative opportunity for debt investors as it offers high yield interest. Just like fiat, individuals or organizations lend out their stablecoins to borrowers who post collateral of digital assets. The borrowers are then able to access the stablecoins and pay back the borrowed money with interest. Stablecoin lending makes it possible for anyone to be a lender or a borrower from anywhere in the world. This is made possible by smart contracts that ensure that both parties fulfill their obligations. The demand for stablecoin loans is high and with it, an increase in interest up to double digits. This depends on the digital assets used and how long the loan is provided.
A use case of this is Pezesha, a lending platform for Small and Medium Enterprises (SMEs) that connects entrepreneurs and merchants to working capital. Pezesha worked with Celo and Kotani Pay to leverage blockchain-powered lending to merchants across supply chain verticals in Kenya and Ghana. By tapping into the blockchain ecosystem, Pezesha was able to receive international funds from lenders across the world. The fast and cost-effective transactions made the loans easily accessible for Pezesha. Pezesha received the money in their bank accounts through the help of Kotani Pay’s off-ramp service.
When it comes to flexibility, it is not only about where you hire but how you pay your employees especially if it’s an international team. Companies are now opting to pay their global employees in stablecoins to ensure efficiency and reduce transaction costs. By directly paying their employees in stablecoins which are less volatile, they cut down the transaction fees and currency fees.
Mercy Corps Ventures rolled out a pilot program together with Corsali, Appen, and Kotani Pay. The pilot was working with Appen gig workers doing microtasks. Once they accomplished their task, they were paid in Celo Dollars (cUSD) using the Corsali app which deposited their funds into their Valora account. Some opted to save their cUSD using Valora and get rewarded while others opted to off-ramp using Kotani Pay to their mobile money accounts. The pilot showed a 93% reduction in transaction fees, drastically boosting participants’ daily take-home earnings.
Stablecoins are used like any other currency and today in the cashless world, stablecoins are used to facilitate payments of goods and services. Stablecoins make the payment process fast, efficient and safe for users. By eliminating the middleman, payments are done directly between the sender and the receiver in an open and transparent way that fosters accountability.
Kotani Pay has worked with NGOs in facilitating transactions from donors to recipients. This has been fundamental in minimizing fraud and corruption in NGO programs. A use case of payments is the Universal Basic Income (UBI) payments to refugees in Africa. Kotani Pay works with Impact Market, ORAM, Debora Amoi Foundation, Lensational Photographers, and Basic Income Earth Network among other NGOs in facilitating UBI payments to refugees. Funds are sent in form of cUSD or other supported stablecoins from the NGOs directly to beneficiaries’ Kotani Pay wallets. Once they receive their funds, they can choose to off-ramp to their mobile money even without access to the internet. These UBI payment has seen thousands of refugees in Kenya and Ghana benefit from it.
As the stablecoin ecosystem continues to grow, its use cases keep evolving beyond the five. For Africa, stablecoins act as a hedge against inflation that has been a drag on the continent’s economy. It is with this knowledge and potential that fintechs and crypto start-ups are maximizing their potential by opening up more world use cases of these crypto-assets.