In our previous articles we stressed the importance of supporting different payment types, including credit/debit cards, loyalty/gift cards, ACH, and cryptocurrency payments. The more payment types your platform supports, the more diversified your customer base and revenue stream are. In this article we decided to focus on the importance of cryptocurrencies.
Why are cryptocurrencies and decentralized finance (DeFi) services becoming so popular?
Coronavirus pandemic delivered a tremendous blow to world economies. In order to deal with the consequences, many countries and financial organizations worldwide had to spend significant amounts of money on rescue measures.
The two state-level strategies to reduce the economic impact of the pandemic are as follows. First, in order make borrowing for consumers and, more importantly, businesses easier (more affordable), the Federal Reserve cut the interest rates. Second, targeted relief funds were allocated to businesses (as small business loans) and individuals. US government has already allocated about $ 6 trillion on the rescue packages. And this amount might grow even larger.
Traditional investment vehicles favored before cryptocurrencies
Traditionally, savings accounts, certificates of deposit (CD accounts), money markets, and government bonds were considered low-risk investments. However, all these investments generate very modest yield. Those searching for risk-free investment, were mostly relying on savings accounts and other listed investment vehicles. As a result of interest rates’ reduction, the yield of all of these investment instruments got extremely low.
At the same time, after all of the money injections into the economy, the inflation is about to grow. The official target of the Federal Reserve at this point is the inflation level of 2.5%. However, real inflation levels are likely to be even higher, easily reaching 4% and above.
Saving your money in a savings account paying 0.5%? Buying government bonds yielding below 2%? Well, with inflation level of 4% or more these investments do not make financial sense. Consequently, people are searching for alternative options.
A new boost for cryptocurrencies
People always considered cryptocurrency market (or crypto market) an extremely risky and volatile environment. So, cryptocurrencies, traditionally, were a high-risk investment. However, in recent times several companies introduced the so-called stablecoins, pegged to a specific currency, namely US dollar. Examples of stablecoins include USDC (US dollar coin), BUSD (Binance USD), USDT (Tether), PAX (Paxos standard token), and others. You can easily find them in worldcoinindex. These coins are pegged to US dollar rate. So, they do not suffer from major price fluctuations, unlike more well-known currencies such as Bitcoin or Ether.
Consequently, several companies started offering saving accounts and other investment vehicles, denominated in these stablecoins. On these accounts they offer up to 16% of annual yield.
Under the current financial circumstances, it begins to make sense for a lot of people to keep their savings in stabelcoins, as opposed to US dollars. Some of these companies are even accepting conventional currencies, such as US dollars or euros, and still offering 8% or more of annual yield.
So, what’s next?
In all likelihood, the increase of money supply is going to continue. As a result, the inflation might become a tangible threat (at least in the minds of investors). Therefore, the search for higher yield is likely to be the game of the nearest future. Naturally, customers will be interested in keeping their savings in cryptocurrencies. Moreover, things would become much easier for them, if they are able to make payments directly from their cryptocurrency accounts.
Some of the listed stablecoins have retained their peg for several years already. So, they become an equivalent of conventional currency. It is handy to keep your investment in stablecoin account. Plus, stablecoins can be relatively easily transferred between wallets. Additionally, you can invest stablecoins with such companies as Nexo and Celcius. Finally, you can use them in various decentralized finance (DeFi) projects (such as Compound, AAVE, or PancakeSwap). So, a stablecoin wallet eventually becomes similar to a checking account.
The problem of high gas fees
Presently, low-ticket payments might be a problem for some of blockchain platforms, such as Etherium, because of high gas fees. After all, most stablecoins are currently issued on Ethereum blockchain. However, every day more and more blockchains (such as Binance Smart Chain or Terra) are being introduced. Many of them support already existing stablecoins, or issue their own. All of them are striving to reduce and minimize the cost of transactions, therefore, making their infrastructure a viable foundation for low-ticket payment processing.
In the near future it will be extremely important for payment gateways to support stablecoin payments. In order to keep up with this trend, Visa has already announced that transactions can be settled using USDC.
The main advantage of stablecoins is that their price does not change. So, stablecoin payments will be convenient for both merchants and their customers. And this makes support for cryptocurrency payments (particularly, stablecoin payments) a top priority for gateway platforms.
Feel free to contact our specialsts at UniPay Gateway to learn more on the subject.