Disrupting the Banking Industry: Atomic Swaps and Stable Coins
How two emerging technologies will destroy one of the biggest industries on the planet
Blockchain technology has always been good at payments. One of the first use cases that startups started implementing when Bitcoin was gaining in price years ago was remittance services: the ability to send money back to another country. It is a simple use case for Bitcoin because it was designed to send money essentially anywhere in the world for pennies. Much cheaper than the many wire transfer fees that could happen for large amounts of money or the huge fees that Western Union charges for smaller amounts of money.
Bitcoin was innovative enough to really hurt an industry but you still have most people sending money internationally through wire transfers and Western Union. Obviously there are a number of reasons for this:
- A learning to curve to cryptocurrencies
- The need to buy/sell it on exchanges in both the receiving and sending countries
- The high volatility of Bitcoin that could reduce the amount sent by 10% in a matter of hours, effectively diminishing the value of the service
Blockchain as a technology has advanced significantly in the past few years though. In comes the magical Stable Coin: a coin attached to the value of a sovereign currency such as USD.
Currently there are two methodologies to the creation of stable coins.
The first and theoretically easiest methodology is you must trust a company or project to control dollars you send to them in a custodial bank account with the assumption that your tokens are redeemable for those dollars at a later time. There are a few projects using this method such as Tether and TrustToken. It’s a simple concept but you have to trust an entity to not go and buy a bunch of Lamborghinis with your money.
The second method as pioneered by MakerDAO is a stable coin that has assets (collateral) backing it. In the case of Dai, the stable coin has a basket of different cryptocurrencies meant to be paid out if the value of the underlying assets goes below a certain ratio compared with the stated rate of 1 USD per Dai. This method creates some waste because you have to over collateralize an asset but it’s also the most decentralized and therefore safest option.
Either way in the end you now have cryptocurrencies that are worth USD or other currency equivalent at a 1:1 ratio. This means that regular people who don’t want to deal with volatility of owning cryptocurrencies can own a stable coin and gain all the advantages of cryptocurrencies like being able to send any amount of money anywhere in the world for a single penny. With this new technology there are also fantastic opportunities to served the billions of unbanked individuals around the world.
When users start to get used to having their money on the blockchain there will need to be an easy way to transfer it instantaneously to whatever token they may need to use the hundreds of emerging dApps coming out this year. Since every dApp uses a different token for paying fees or any number of reasons, people will want to hold USD or Ether but be able to exchange it for what they need, when they need it. This is where Atomic Swapping comes into play. Atomic swapping is the concept of being able to exchange a token to any other token at any given moment. A pretty simple concept but so far it’s been a serious endeavor for the projects to create it.
The most prominent project right now for Atomic Swapping of Ethereum tokens is AirSwap. They’ve created an automated market maker so there is always liquidity at the fair market price of any token you’d like to buy. So eventually a user will be able to hold Dai stable coin and deal with no volatility but be able to use whatever dApp they wish auto-magically.
Even beyond dApps, many people believe that there will be tokens for everything in life and we will eventually have wallets where it will spend the correct token at the correct place. No longer will we have credit cards or bank accounts, but we’ll be able to live a fully cryptocurrency based life. One day you may even buy stocks and bonds as their own tokens that you can hold. It will eliminate fraud and people over time may even be able to have privacy in their transactions because of emerging technologies such as zkSNARKs.
Atomic Swaps and Stable coins will be the building blocks to allow for major cryptocurrency adoption and use of the hundreds of fantastic cryptocurrency projects.
