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Decentralized forex will reduce cost by as much as 80%: Report

Decentralized forex will reduce cost by as much as 80%: Report

If the foreign exchange market starts using decentralized finance (DeFi) protocols inste of the current centralized systems, the cost of remittances could be reduced by “as much as 80%,” according to a Jan. 19 paper jointly published by researchers at Circle and Uniswap.

On-chain foreign exchange (FX) is a new model of global value exchange that offers a faster, cheaper, and more efficient alternative for cross-border payments.

Our recent research paper with @circle has it all https://t.co/NGniRo8yrp

— Uniswap Labs (@Uniswap) January 19, 2023

The paper, titled “On-chain Foreign Exchange and Cross-border Payments,” was written by Uniswap Data Scientist Austin Adams, Circle Chief Economist Gordon Liao, Mary Catherine Ler, David Puth and Xin Wan.

The authors studied the tring activity of Circle’s U.S. Dollar Coin (USDC) and Euro Coin (EUROC) on Uniswap from July 2022 through January. They found that the coins h $128 million in total volume, with some days having tring volume as high as $8 million.

During this time, the stablecoins USDC and EUROC tred within a few basis points of exchange rates found in the wholesale forex market for their backing currencies, USD and EUR. In the authors’ view, this showed that the DeFi forex market was providing a reasonable alternative to tritional forex, with good price efficiency, despite its smaller tring volume.

Related: DeFi auditor nets $40,000 for identifying Uniswap vulnerability

However, the researchers wanted to know if using DeFi protocols like Uniswap could provide savings to participants in the forex market. So they analyzed the costs associated with the tritional “correspondent banking model” of forex vs. those associated with DeFi forex.

Correspondent model of forex vs. DeFi model. Source: “On-Chain Foreign Exchange and Cross-Border Payments” by Adams, Lder, Liao, Puth and Wan

They used World Bank estimates to determine the price of a $500 remittance done through the global banking system. They then compared this with the cost of buying stablecoin (either USDC or EUROC) through an exchange, swapping it for the other coin on Uniswap, sending it to another person, and having the other person cash it out at an exchange.

The researcher concluded that the DeFi model causes users to incur many different fees, including exchange commissions, DeFi tring fees, network fees and fees for transferring cash to and from an exchange. Even so, the fees are up to 80% less than the average price of remittances, based on World Bank estimates.

Circle released the EUROC in June. EUR/USD is the most widely tred currency pair in the world, according to Investopedia.

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ARTICLE: Decentralized forex will reduce cost by as much as 80%: Report
PUBLISHED: 2023-01-19 21:30:00 
SOURCE: https://cointelegraph.com/news/decentralized-forex-will-reduce-cost-by-as-much-as-80-report
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