Solving the liquidity problem of a euro stablecoin

Transcript

Hi everyone. So, Monerium has been issuing stablecoins for 7 years now. And we've learned a thing or two along the way, which I'm going to share with you here. I just want to caveat this with being a regulated stablecoin issuer, we do a lot of things off-chain. You know, whether it's managing the reserves, reconciling them against the issuance, or just onboarding users. But our true North Star has always been DeFi, and we love kind of some of the properties, the atomic nature of transactions, and I really do believe and I'm of the opinion that these properties have some real value in innovation that can't be used

in in TradFi. So, with this kind of intro, let's just dive into the talk of solving the liquidity problem of a euro stablecoin. So, in order for this conversation to be meaningful, I think it's important that we try to understand the stablecoin market structure. So, it's fair to say that stablecoins have reached a payment network scale. Last year's transactional volume was $30 trillion, and we now see the TVL of stablecoins or the supply uh above 300 billion, up from around 30 billion 2020,

and last November uh Treasury uh Secretary Scott Bessent predicted that we'll reach uh 3 trillion um by the end of 30 2030. And actually, most of the leading financial institutions reach the same two two to four trillion range within the same time range. The euro represents roughly 0.35% of the stablecoin market, which by definition means there's not a lot of liquidity in that market, and that affects the slippage and the price of of swaps.

On the US side, we also have mostly two issuers that are accountable for most of the TVL. In the on the European continent, we see a completely different story. The the liquidity is scattered among 20 odd issuers, creating liquidity silos for an already scarce liquidity. So, we see the the rails work, but the structure doesn't. And if we now zoom in from sort of the high level down to some of the key challenges any stablecoin issuer is facing,

let me walk you through three of them. Number one, distribution, meaning how do users get their hands on the stablecoin in exchange for fiat currency? The US dollar denominated stablecoins are mostly minted and redeemed through centralized exchanges, on and off ramps, and other centralized intermediaries. For the euro, that has been a challenge because those exchanges haven't been incentivized to bring it on because many of the exchanges don't even have a US euro denominated trading pair, right?

Uh and these And then number two, liquidity. So liquidity is how you get how you trade and and trade in and out at scale or how efficiently you're able to do it and connect into the wider ecosystem of assets, and we usually measure this efficiency by the slippage or the spread on the asset. And here again, non-US dollar stablecoin issuers have faced some challenge because many of the exchanges again haven't had any euro-denominated pair, and even the European exchanges

uh they have more volume in the dollar pairs for Bitcoin or ETH. Uh so it's kind of it's kind of a struggle for uh non-US dollar uh issuers. And this again affects the pricing of of stablecoins. Then thirdly, it's the use cases. So for any stablecoin to be valuable, it needs to kind of break out of uh the the crypto-only speculation. And for US dollars, they have had a very valuable use case for people and around the world living in countries with weak uh currencies. So just holding onto a dollar has been one of the use cases.

Unfortunately for a euro or a non-dollar stablecoin, we haven't had the same privilege, so that hasn't been a use case, even though the political changes we're seeing right now may actually be changing the wind in in our direction. So stablecoins uh are mostly traded on two kind of venues. It's the centralized exchanges and the decentralized exchanges, and each comes with their own pros and cons.

So let's walk through the centralized exchanges. We can issue our token and list it on an exchange. Usually the exchanges will require a listing fee that ranges anywhere from 100,000 to 500,000 per exchange. In order to support the launch on an exchange, a certain base liquidity is required or else the token, you know, risks getting delisted. So, this is when generally where market makers come into the equation that are placing both buy and sell orders on behalf of the issuer so that the users on the exchange are able to use the product.

The market makers themselves will generally demand monthly retainer fees and they will demand an inventory of the token to to to place the orders. And if this issuing a stable coin is as a bit different than than any DeFi token where the team behind the token may hold a portion of the token from the initial allocation in their treasury and can use that those tokens in order to provide this liquidity.

For a stable coin, that's much harder because as we know, it needs to be backed fully by a euro in the bank in order to issue the tokens. Now, for a DeFi, that's a different story. You're generally not required to pay any listing fees. Anyone can deploy and seed the pool with an asset and a stable coin and now you have a market. And the protocols themselves will generally share the fee revenue the trading fees with the liquidity providers in order to attract more liquidity for better pricing.

However, as we've seen, usually those revenues um aren't enough to attract the liquidity. So, the issuers themselves are expected to incentivize liquidity. And the cost is roughly 100,000 euros per 1 million. Uh and then you can take that and multiply that by the number of the pools that the the token is traded in and by the number of chains and you get to a big number. So, all of this exuberant cost uh makes it so that neither option is really uh viable. And even I would go as far as to say that the AMM model, which I love for

the tail assets uh of DeFi, is not efficient for for stablecoins um that kind of mimic the the FX market. So, as I mentioned, these DeFi and decentralized exchanges have certain properties that are advantageous. And one of them is that liquidity can be sourced from multiple pools. So, you can have Uniswap and Balancer with the same tokens and that can be aggregated into more liquidity and settled in one transaction.

The other thing that is interesting is a user that wants to trade on a token from A token A to token C can actually do so by exchanging A for an intermediary token B and then from B to C. Uh and all of this is settled atomically uh in one single go. This would be the equivalent of you being able to buy Bitcoin on Kraken, selling it uh on for dollars, let's say, and selling it on on Binance for ETH, right? And all of this happening in one single settlement, which is obviously not possible in TradFi.

So, intent-based trading emerged as a solution to one of the quirks of DeFi, namely solving the user experience. So, instead of the users interacting directly with the protocol itself, now you'd have a network of solvers racing against each other to finding the best routes, and therefore the best prices, uh and then settling in one go, including the transaction fees for the blockchain itself. So, this was a much better user experience.

But crucially, the solvers themselves can use both the liquidity they see in the pools, but they can also source private liquidity. Um So, when we were faced with this liquidity issue, we could take this in two directions. We could have either raise funds in order to seed the pools, pay the market makers, pay the listing fees, and so on and so forth, or we could try to do something innovative and new.

And we decided to try to understand uh can we use the atomic nature that I mentioned in my intro to do something clever? And we started to ask ourselves, what if we don't, you know, with the atomic nature of the blockchains, what if we don't just use it to exchange and swap two pre-minted assets, but we actually mint the euro on demand into the settlement?

So, this was a key insight that we saw that we as the minter of the tokens, we hold a special privilege. And we have an unfair advantage over everybody else who wants to make liquidity for our tokens. So, what we have essentially built is uh a trading facility, and we're market making our own tokens in a way where users can swap from USDC into euros where the we mint on demand.

And again, this new liquidity primitive is, of course, composable, meaning that solvers will find paths from any token that has liquidity against USDC. And uh and then now that that that token now has liquidity for euros. So, how it works is we stream our liquidity to the solvers who then use that liquidity to showcase that in the UI of the uh venues like CowSwap.

When the user does the trade, they give their signature, the trade happens, we mint, and now we hold USDC. We sell off this USDC in exchange for euros that now back up the EUR that we just minted. So, that is a a real innovation in in our minds. Uh we are starting with Ethereum mainnet, and we uh will be launching on other chains as well. We're also going to be able to do this not just for the euro, but also for the GBP, the pound that we do, and any token that we wish that we will do in the future.

And the cool thing here is we can actually use reuse the same liquidity across all chains because we don't need to pre-fund the trades in and have it sit idle in one pool where, you know, it may not be utilized where there's liquidity needed in another pool. We can just stream the liquidity in all the pools and wherever the trade happens, that's where we meant. So, I was here last year kind of hinting at this capability and this year I am telling you that this is live.

This is now we support up to 100,000 euros and dollars in both directions. Um we will be taking that up. We can effectively do virtually unlimited amounts in the direction USDC to euros. And here we're seeing cow swap on the left side where the user will get 85,852 euros. And if we compare that with the best, let's say retail product for TransferWise, TransferWise, we're beating that by a small margin.

So, it's at least at par. The other cool thing is that the user on the left, he will get the you know, the settlement is happening in 15 seconds whereas TransferWise can only guarantee delivery of the euros the day after. So, here again, we are able to create liquidity for any token in your wallet that has liquidity with USDC. So, if you are now building on top of Monerium uh or if you're building let's say a neo bank use case or a payment service and you need conversion between all of those tokens, we've got you covered.

So, lastly, I just wanted to mention I think we now start to see kind of the the recipe for bringing the world's money world's world's money supply on chain. Number one, it needs to be regulated. I think that's become evident by now and Monerium was the first regulated stablecoin to get a license in Europe back in 2019. Number two, you need access to local rails. Monerium was the first to connect the SEPA system to blockchains back in 2021, effectively connecting the 21 trillion dollar euros in the SEPA system which freely flows on chain and back and we support third-party payments in the name

of the customer and the account holder. Deep liquidity, that's what we've been talking about, liquidity on demand. This is a new efficient primitive that is way more efficient than pre-funding all the trades. Global offering. So, we've just expanded the scope of whom we can onboard. It used to be Europeans only. Now we support over 150 countries where we could onboard users. And lastly, I think it's important that this infrastructure is all composable meaning that, you know, if you're building a neo bank, you can you can share KYC data with us, open up an IBAN for your users and therefore create a Revolut-like

experience that is, you know, globally available from from day one. So, if you're either user, please try it out. If you're building, help us bring the world's money supply on chain. Thank you. I don't know if we have time >> There's there's some time for questions. So, if anybody has a question here for Gisli, please raise your hand and we'll be handing the microphone. There you have some.

>> Um you mentioned that you guys are expanding to GBP E. Um do you guys have any plans to to go to other uh stable coins from different countries that you with the license that you have, you can also operate? >> Yeah, great question. So, I think there are two angles here. Of course, I mean, with the license we hold, we can issue any any stable coin we want, right? Um so, at some stage, I think that will be a reality.

The only issue remains, if we take a look at the first slide here, where we're kind of covering the market structure, it's evident that the dollar is still king. The euro's number two, and all the remaining currencies are less than the euro, right? So, I think it's very important that we focus on the adoption uh of the currencies today and make sure that the euro has a good standing, and then we'll branch out to other currencies. Any further questions? >> Thank you. Thank you, Gizli. Thank you.

Thanks.