Stablecoins are changing how money moves on blockchain networks. Instead of asking users to accept the price swings of cryptocurrencies such as ETH, they make it possible to transfer relatively stable digital payments while still benefiting from blockchain infrastructure. But a stablecoin is only as useful as the network supporting it.
This is where Ethereum plays an important role. In addition to hosting digital assets, Ethereum offers various other services, such as a settlement layer, smart contracts, liquidity, and financial applications, and also enables stablecoins to be more than just tokens. These can be applied to cross-border payments, automated transactions, corporate treasury management, decentralised finance, and the settlement of tokenised assets.
Ethereum may find its niche more in the background rather than the spotlight in the crypto trading space as stablecoins become more prominent. The network might get incorporated into the financial system, which will allow it to send digital money across the globe, function 24/7, and communicate effortlessly with software.
Ethereum Gives Stablecoins a Settlement Layer
When an Ethereum-based stablecoin moves from one wallet to another, the blockchain verifies and records the transaction. The Ethereum blockchain verifies and records the transaction of a stablecoin moving from one wallet to another when implemented on the Ethereum blockchain.
As it is implemented on the Ethereum blockchain, the transfer of a stablecoin from one wallet to another is verified and recorded by the blockchain. Each participant doesn’t need to keep a full copy of the ledger all the time; they can communicate with one another using the common ledger.
That has particular implications for cross-border payments.
Traditional international transfers may involve bank-to-bank, correspondent banking relationships, payment processors, foreign exchange, and other intermediaries. Every step can add other processing needs, expenses, and delays.
Ethereum provides another mechanism for transferring tokenized value directly from a blockchain address to a blockchain address.
This does not mean banks and payment providers suddenly disappear. Businesses may still need them for foreign exchange, compliance, custody, and converting stablecoins into local currencies.
What changes is the settlement infrastructure available underneath those services.
Smart Contracts Make Payments Programmable
Ethereum’s more significant role could be more than just facilitating faster money transfers.
It is monetising programming.
Stablecoins can interact with the smart contracts on Ethereum, allowing developers to build financial applets where payments are governed by a set of rules.
Think of an internet marketplace for bringing buyers and sellers together.
A smart contract may be used to keep the stablecoins in escrow until the buyer makes the payment. The contract might issue the payment as soon as the stipulations are met.
This can also be used for payroll, subscriptions, refunds, insurance payments, supplier payments, and revenue sharing.
Payment could be split up automatically between multiple parties for a business.
For example, a one-time stablecoin payment to a digital marketplace could be split into set amounts between the merchant, the platform, and service providers. The crucial difference is that payment instructions can be embedded in software.
Stablecoins Benefit From Ethereum’s Financial Ecosystem
The other reason why the underlying network is relevant is because of liquidity.
For a digital asset to be useful, there must be things to be done after receiving it.
There are many wallets, exchanges, DeFi protocols, and other blockchain apps that have sprung up around Ethereum, all of which are part of its large ecosystem. Many of these services can work with stablecoins.
For example, a business that receives stablecoins may convert them into other types of assets or utilize them in an on-chain application that is a treasury. Stablecoins can also help decentralized trading and lending platforms have liquidity. When that’s the case, the composability of Ethereum comes into play.
Each application can work with each other in a single multi-service payment system rather than as separate closed payment systems.
Cross-Border Payments Show the Potential
International payments are one area where this model becomes particularly interesting.A business in one country may need to pay a supplier, employee, or contractor thousands of kilometres away.
In the traditional transfer, you can get banking hours, different currencies, different settlement systems, and correspondent banks. There is an alternative rail in the shape of Ethereum and stablecoins which runs continuously.
Transferring Stablecoins can take place between blockchain networks, even if banks in either country are closed. This suggests possible applications in international payroll, supplier payments, remittances, and corporate treasury transfers.
However, the term “instant blockchain transaction” does not mean a transaction that would be completed instantly in real life. Recipients may receive stablecoins and then need to convert them into local currency. Other requirements include compliance reviews, foreign exchange conversion, banking relationships, and off-ramps.
Stablecoins Could Improve Corporate Liquidity
The effects of accelerated settlement may be more than convenient. As money can take time to move between markets, companies that trade internationally may have liquidity in a variety of markets.
Unfortunately, this capital is not always being invested purposefully. The ability for companies to get closer to their cash flow requirements with stablecoins may be able to decrease the amount of funds that must be pre-funded across other markets and accounts.
A reduction in transaction costs is beneficial for a business. Access to working capital may, however, be much more significant if it can be obtained more quickly. Financial infrastructure built on Ethereum could then enable more than just customers and merchants to transact with each other. It may also affect the internal financial management of companies.
Layer 2 Networks Could Make Smaller Payments Practical
Ethereum also faces an important limitation. Gas fees are charged on the Ethereum mainnet for transactions. When there’s a high demand for block space, gas fees can go up. This is an issue for regular payments.
It’s not worth paying a few dollars in transaction fees if you’re looking to buy something small or send a small remittance.
One of the reasons for the design of the Layer 2 ecosystem for Ethereum is to overcome the challenges of scalability and cost. Layer 2 networks can offer transactions with different degrees of connectivity to Ethereum for settlement and security while processing them in an efficient manner. That means there is a significant opportunity for stablecoin payments. Not all transactions have to occur on the mainnet of Ethereum.
Ethereum may still play a key role in the settlement layer, but lower-cost Layer 2 networks might be able to manage a greater share of the daily stablecoin traffic.
Ethereum in that model won’t lose its significance because the transactions are shifting in its ecosystem. Its function just shifts!
Ethereum Still Needs to Become Easier to Use
However, the technology has a number of challenges to be addressed.
One is fragmentation. Today, stablecoins are also working on a variety of Layer 2 and other blockchain networks as well as Ethereum mainnet. There are various fees, liquidity, wallets, and bridging requirements that the user can face.
That complexity is fine for cryptocurrency enthusiasts, but it is not ideal for payments.
The customer purchasing a product shouldn’t have to be aware of which Layer 2 the merchant is participating in.
Security is another issue. Users can be vulnerable to losses due to a number of vulnerabilities inherent in smart contracts, wallet security breaches, phishing attacks, and failures in the bridges.
Regulation matters too. There are rules that are necessary for stablecoin payments, such as reserves, redemption, custody, anti-money-laundering and consumer protection.
The ability of any digital payment to succeed depends on a lot more than just the performance of blockchain.
Conclusion
Stablecoins offer a more stable digital currency. Ethereum is the platform on which this value can interact, move, be liquidated, and be settled with other digital assets. This duo opens the door to potential opportunities that go far beyond crypto trading.
Stablecoin infrastructure might be used for a variety of applications, including cross-border payments, corporate treasury, automated transactions, DeFi, and tokenized financial markets.
Ethereum has yet to address issues with fees, scalability, fragmentation, security, and user experience. Layer 2 networks will play a crucial role in solving some of those issues.
However, the long-term potential of Ethereum for digital payments may not be directly tied to customers’ conscious preference.