DeFi Forex will save costs by 80%
According to a joint study report issued on January 19th by Circle and Uniswap, using decentralized finance (Defi) protocols in the foreign exchange market may reduce remittance costs by up to 80%.
The study, titled "On-chain Foreign Exchange and Cross-border Payments," was written by Austin Adams (Uniswap Data Scientist), Gordon Liao (Circle Chief Economist), and others.
The authors of the study report examined the trading activities of Circle's USDC and EUROC on Uniswap from July 2022 to January 2023. They determined that the digital currency had a total transaction volume of $128 million, with certain days showing up to $8 million in trading activity.
During the study period, USDC and EUROC traded at prices that were extremely close to the exchange rates discovered in the large-scale forex market for the USD and EUR, respectively. Despite its tiny trading volume, the authors conclude that the Defi currency exchange offers a legitimate alternative to traditional forex, with competitive pricing and price efficiency.
The researchers want to investigate the possible cost savings that may be obtained in the foreign exchange market by utilizing decentralized finance protocols such as Uniswap. To accomplish so, they contrasted the expenses associated with the traditional correspondent banking forex system to those connected with Defi forex.
The researchers calculated the cost of a $500 transfer via the international banking system using World Bank statistics. They then compared this pricing to buying a stablecoin (either USDC or EUROC) on an exchange, exchanging it for the other coin with Uniswap, transferring it to another person, then exchanging it back for the original currency on an exchange.
The researchers concluded that, while the Defi model does contain expenses like exchange fees, network fees, Defi trading fees, and charges connected with sending and receiving money from an exchange. According to World Bank estimates, these costs are still much less than the typical remittance cost, by up to 80%.
Defi is transforming the world's financial systems.
Decentralized finance, or Defi, is changing the way we think about traditional financial institutions. Defi systems can provide a variety of financial services without the use of centralized middlemen by utilizing blockchain technology and smart contracts. As a result, there has been an explosion of innovation in the field, as well as an increasing number of users lured to the transparency, security, and accessibility of Defi platforms.
The possibility for everyone with an internet connection to access a wide range of financial services is one of the most intriguing elements of Defi. This covers lending and borrowing, as well as trading and investing insurance and savings. Defi platforms may deliver these services at substantially cheaper rates and with better transparency by eliminating the need for traditional middlemen such as banks and financial institutions.
Smart contracts, which are self-executing contracts with the conditions of the agreement explicitly put into lines of code, are another important feature of Defi. This enables the automation of numerous financial procedures, which can decrease the risk of fraud and mistakes.
Furthermore, by storing all data on a decentralized blockchain network, smart contracts may help safeguard users' privacy and security. The total value locked in Defi platforms is expected to reach more than $30 billion by 2021, with the number of users on these platforms expanding at a similar rate. As a result, there has been an inflow of institutional investors and established financial firms wanting to join in on the action.