A stable coin deployed on a scalable and secure Layer 2: A revolution in the making!
Cryptocurrencies are still in their infancy. While they offer a way to transfer value without censorship or third party interference, but it is far from simple when compared to the alternatives available via fiat. No business wants to be paid with a currency that is worth $10 today and then be worth $8 the next day. A lot of businesses operate on wafer-thin margins and can’t be exposed to cryptocurrency value fluctuations which are commonplace. This volatility will not only hurt them but also threaten their existence. Thus, although we have cryptocurrency payments available but there are not many businesses that do use them to make and receive payments. Furthermore, blockchain transactions are too costly for small value transfers and hence are rendered useless for day to day payments.
So how to solve the issues of volatility, high fees, and slow transactions together? Let’s first discuss volatility.
How can stablecoins tackle this.
Stablecoins are cryptocurrencies which have their value pegged to a fiat currency and therefore aim to enable transfer of value without the risk of volatility. There are a lot of stablecoins in the market but we will be discussing MakerDao’s — DAI in this article. We start with DAI as it is a decentralized stablecoin and uses only cryptocurrencies as collateral, hence cannot be shut down, isn’t dependent on third parties and is openly audit-able on the blockchain, unlike other stablecoins.
DAI is pegged to USD and is currently collateralized using Ethereum; which simply means that to obtain DAI, one has to lock Ether as collateral and open a Collateralized Debt Proposition — CDP, from which DAI is issued. DAI has proved itself by maintaining its stability in market conditions which saw Ethereum dip in value by more than 80%.
By providing stability DAI makes large B2B transactions feasible. While it’s great to have a stablecoin that people are willing to use for payments, but, in order to unlock the full potential of blockchain based payments we need to enable faster and cheaper transactions. To achieve that, we need to scale transactions on Ethereum.
This can be solved by pairing a stablecoin with a Layer 2 scalability solution.
Matic Network is a layer 2 scaling solution that is based on an adapted version of Plasma. Plasma is a scaling framework that was proposed by Vitalik Buterin and Joseph Poon — https://plasma.io/plasma.pdf.
Plasma works by taking transactions off-chain onto sidechains while still offering asset holders the transaction and asset guarantees on mainchain. These sidechains are secured via a Plasma construction which consists of various cryptographic mechanisms, periodic checkpoints to mainchain exit queues, fraud proofs etc. These plasma sidechains can process a lot more transactions than the Ethereum mainchain at negligible costs thereby bringing scale to Ethereum.
Matic has successfully integrated and tested DAI transfers on its testnet. We believe, this combination can unlock the hitherto unknown potential of blockchain enabled value transfers.
As with any new technology breakthrough — DAI on Plasma will not only unleash a major shift in how payments are currently made but also foster some unique usecases which we haven’t even thought of yet.
Drawing a parallel with the Internet — While it enabled emails — a faster and much improved way to communicate as compared to its analog alternative — postal mail, it also gave birth to online social networks which has transformed how we communicate and connect to our friends, ushering in new business models and thus having major impact on our lifestyles.
We think a stablecoin on a scalable blockchain, will enable something similarly disruptive. The impact of programmable money with near instant transfers and no third party intermediation — is a powerful combo! Essentially this will be the foundation of DeFi applications — and will make open finance go mainstream.
Consider the two scenarios below to explore the impact of DAI on Plasma:
- Existing use cases that are currently possible with fiat and/or are expensive or not possible to implement on current blockchains
- Use cases natively enabled by blockchains using cryptocurrencies
To understand the first category let’s consider the following twitter thread:
Takeaway: A business wanting to make payments via crypto faces a lot of hassles — the current crypto infrastructure can’t support payments in a feasible way due to high fees and waiting periods.
Additionally let’s take a look at the below tweets:
Takeaway: Although there seems to be a need to replace subscription based services with opt in services, where people can opt to pay for what they consume( text, videos, music etc) — This can’t yet be enabled via crypto due to scaling issues.
Based on the above examples, the major issues that can be identified are :
1. Blockchain payments currently are not scalable, also they are not business & user friendly
This hinders the ability to experiment with new business models and also to implement existing ones thus impacting user adoption.
2. Its difficult to transfer money overseas — Especially smaller amounts.
When possible it is plagued by either considerable delays or high fees e.g. SWIFT, Paypal. In this hyper-connected world economy where information already flows freely in a digital environment, money should be the reasonable next step.
DAI on Plasma will be extremely easy to use and will address both the above issues. For a start, It will have a considerable impact on businesses which are operating on subscription based revenue models. If you can pay for what you consume why pay extra? It will change how content producers compete.
We believe this is possible using DAI on Plasma, having experienced the potential of plasma chain transactions and also while mentoring and supporting developers who are building Dapps integrating DAI on plasma chains. There is already an application under development and will share more details in an upcoming post.
Update: Cryptostaw has it’s testnet Beta live now! Read more about it here and try it out here: https://cryptostaw.com/
Although it’s impossible for anyone to envision the novel use cases that will be brought about by DAI on Plasma, still, for the second category let’s use this post to set context:
This is a use case which isn’t possible to implement with the current payment infrastructure. No company/business pays its employees every second — Let’s classify this under micro-payments. It’s not economical and will be a nightmare to implement without micro-payments being based on programmable money. We believe that the innovative early use cases of DAI on Plasma will be for enabling micro-payments both in traditional use cases and in say IoT.
DAI/Stablecoins on its Sidechains will help Matic Network to :
- Enable gas fee payments using stablecoins in the future
- Help list DAI pairs on sidechain based DEx’s
- Onboard retail focused DApps that need a stable medium for payment
Therefore stablecoins will be be an integral part of the ecosystem in coming days.
Note: Below is a sneak preview of the Matic Wallet which is going to be released soon.
In conclusion we can say that DAI on Plasma can and will be a lethal combo to nail the tough nut of mass adoption. It will have a big impact on behavior patterns related to payments, spawning new use cases while making the older ones more efficient. The impact will not just be felt in the realm of tech & crypto but will hugely impact the lifestyle of people all around the world.
Watch out for DAI on Plasma!!
Note: In case you have any queries or feedback do reach out to us on: info(at)matic.network