Solving the liquidity problem of a euro stablecoin

Transcript

[applause] >> Hello. I'm Gisli, the CEO and co-founder of Monerium. So, we've been issuing stablecoins for 7 years now, and we have learned a thing or two along the way. Even as a state centralized issuer, there's a lot of things that we do off-chain, whether it's managing the reserves, reconciling the issuances against those reserves, or just onboarding and KYC'ing users.

But, our true North Star has always been DeFi, and kind of as playing a role in moving the world's money supply on-chain. I have to admit, in some cases, this has been a test of character. For example, in the very early days, when minting a single euro and transferring cost more than 80 bucks. Ouch. The future of finance was obviously here. Um, but I think for us, we are here because we believe that, you know, DeFi and blockchains have something important, a characteristic that is the composable nature and the atomic settlement, and

that's why we are here. So, with having said that, I just want to dive into the talk of solving the liquidity problem of a euro stablecoin issuer. In order for this talk to be productive, I think it's important that we understand the stablecoin market structure. So, we already know that the the the stable that stablecoins have reached a payment network scale. Last year, the annual transaction volume exceeded 30 trillion dollars.

And this in its size, the TVL, the market is already at 300 billion, up 10x from 2020. And last November, US Secretary Scott Bessent said that he predicted that the stablecoin market would become would be in the three trillions range. And the leading US uh or not the US, the leading financial institutions agree that somewhere in the range of two to four four trillion dollars will be the stablecoin market uh in in the same time range.

If we look at the euro, however, it accounts for roughly 0.35% of the market. This obviously means, by definition, that there's a there's not a lot of liquidity in the market for a euro stablecoin. And this creates high slippage. On the US side, we have mostly two major issuers accounting for all the liquidity in the in the market. But, on the European continent, we see a different story.

The the liquidity is fragmented across roughly 20 issuers, creating liquidity silos for the already scarce liquidity. So, we see the rails work, but the structure does not. So, going from the high level and into something more concrete, let's focus on some of the key challenges that a stablecoin issuer faces. Distribution. How do you get the the stablecoin in exchange for fiat currency?

And the US stablecoins, they have traditionally been minted and burned through centralized intermediaries. These are the exchanges, on and off-ramps, and other third parties. Now, if you are a euro issuer, that becomes more challenging, because these exchanges, they don't have the incentive to distribute the tokens um because they don't have stablecoin uh euro pairs on their exchange.

Liquidity, meaning how efficient can you actually trade the asset against a stablecoin? So, going in and out at a scale, and we usually measure this uh measure liquidity in how how much slippage or uh spread there is on the pair. And um yeah. Uh and here again, the European issuer is at a disadvantage because, again, the crypto exchanges, they don't necessarily have a European stablecoin pair.

And thirdly, the use cases that drive the adoption of the stablecoin beyond just crypto speculation. I think it's evident that for any stablecoin issuer around the world, if they want to be successful, they need to break out and be useful outside of the crypto realm. And for the US dollars, uh they've already been very valuable to users and citizens in countries around the world uh where they have weak currency.

Unfortunately, the euro has not been seen as a strong currency for this use case. But, maybe the political winds are changing in our favor. I've talked extensively in the past at ECC and elsewhere about many of these challenges that uh stablecoin issuers faces. But, I want to double-click on one of them. I want to double-click on liquidity. So, let's break it down. There are essentially two ways for a user to trade a stablecoin.

These are centralized exchanges and decentralized exchanges, both with their own advantages and disadvantages. If we take the centralized exchange, a listing a listing fee is usually required. And this can range from anywhere between 100,000 uh dollars to 500,000 dollars per exchange. And there is a certain liquidity that is needed as a base, or else the token will get unlisted. So, this is generally where market makers come into the picture.

They are placing orders on behalf of the issuer uh both on the buy side and the buy side and the sell side, and they will do so in exchange for a monthly fee, but also in in exchange for a uh an inventory of the stablecoins. And this is quite different to many of the other DeFi projects or crypto projects that may actually have had some allocation from the pre-mine that they can actually use to seed the initial liquidity.

For a stablecoin issuer, you need to have one-to-one backing with a euro in the bank account, making this very costly for the team behind the stablecoin. The decentralized exchanges usually don't require any listing fee. Anyone can create a pool where you seed where you deploy a smart contract, a pool essentially, and you provide the stablecoin and the asset. And the pool itself will generally capture revenue through uh through fees, trading fees, and they will share that with the

liquidity providers in order to to incentivize more liquidity into the pools. However, this liquidity usually isn't and sorry, the revenue from the trading usually isn't enough to incentivize the users and have the required yield for the liquidity providers. So, the issuer is expected to provide extra incentives. And this is this can be seen this is somewhere in the range of 100,000 euros per 1 million of liquidity uh across different pools, and of course across different chains across the different chains. Uh

so, this effectively creates a a position that is, I would say, not very efficient. And because of this exuberant cost for the European stablecoin issuer, the euro has mostly been paired with other stablecoins such as USDC. And for those pools, the fee revenues are even lower, so I think it's safe to say that the AMM pools that we have today are generally not very efficient for stablecoin swaps.

But, as I mentioned before, DeFi and decentralized exchanges have certain properties that are both interesting and advantageous. Number one, liquidity can be shared between pools and settled in an atomic fashion. And number two, assets can be traded with an intermediary asset. So, even though a pool does not exist between, let's say, asset A and C, a trade can be settled between a pool that has A and B, and another pool B and C, effectively creating a route from A to C.

This would be the equivalent in in TradFi of being able to buy uh Bitcoin on Kraken and sell the Bitcoin on Coinbase for ETH and being guaranteed that you are able to settle both or none at all. So, intent-based trading emerged as a new paradigm for trading DeFi, which was supposed to alleviate one of the biggest hurdles, which was just user experience.

So, in the intent-based trading world, you have solvers that try to compete for the best routing of the trade and therefore the best liquidity and therefore the best price. The solvers themselves, they will aggregate the liquidity they see in all the pools that exist, but more importantly, they also can have uh they can source the private liquidity. And they will then, at the end of the day, settle all the trades in one atomic swap um uh across all the different pools uh and it's composable.

So, for a European issuer like Monerium, when we were faced with trying to create this liquidity, we basically had two options. Either we raised funds to seed the pools, pay the market makers, and so on and so forth, or alternatively, we tried we tried to come up with something clever. And we thought, what if we could effectively use the atomic nature of the blockchain to not only settle two pre-minted assets, but instead inject the liquidity as the trade was being settled.

This was a key insight that we had and understanding that we had an an an unfair advantage over everybody else who wanted to provide liquidity for the EUR. So, last year, I was here on stage and we were kind of hinting at what we were thinking about. And this year, I'm here to announce that we've cracked the nut. We are launching what we call liquidity on demand. And the way it works is whenever a user goes to um intent-based trading venue, they will be able to see liquidity that does not exist.

But when they accept the trade, what happens behind the scenes is the solver will query Monerium that is now not just a stablecoin issuer, but also a market maker for our tokens against USDC. And the solvers themselves, they will be able to and are able to source this liquidity on demand for the trade. So, the so the EUR doesn't exist until the trade happens.

And we can be guaranteed that we receive the USDC and then we sell it off instantly in order to back up the new supply of the EURs. So, um we are we're starting with Ethereum mainnet and we are going to and we are allowing our users to trade up to 100,000 EURs in both directions uh as in the in the beginning.

And we are also going to be adding other chains and the cool thing about that is when we do, we're actually able to share the liquidity between the chains in contrast to DeFi as it exists today where you have a lot of idle capacity in one pool, but another pool is being used heavily and there's a need to rebalance between the chains. Of course, by the by extension of DeFi, we can also create markets not just for the EUR against USDC, but this the solvers will find all the paths to all the assets that are in your wallet today, effectively creating a EUR

market for all the tokens in the wallet. Um So, today you can go to any of the intent-based trading venues like CowSwap and BalancerSwap. And here, I'm comparing 100,000 USDC against EUR. And the cool thing here is that you will receive 85,852 EURs in contrast to TradFi, which gives you something less.

And another key property is if you use the platform on the left, you'll have instant settlement in about 15 seconds or so. On the right-hand side, TradFi only guarantees the delivery of the EURs in about a day or so. So, we are also And and as mentioned, like we have so many tricks up our sleeves. I'm sorry, there's somebody calling me here.

We have so many tricks up our sleeves to number one, increase the liquidity and the ambition is to have one single trade being able to settle for 1 million EURs in both directions, and tricks to tighten the spread, making the prices even more competitive. So, with that in mind, um I think we have a recipe for how to bring money on chain.

Today, as we mentioned, most of the supply is in dollar dollars. And in the current political form, this creates an a reliance on the dollar, which is which can be a problem for the rest of the world. But what we need now is more tokens, not just a dollar and and something else. So, Monerium, of course, uh I think it's evident by now that every stablecoin around the world will either need to be or now or soon be regulated. And Monerium was the one that became the first EMI to become a regulated stablecoin issuer

uh for public blockchains, which has now been enshrined into MiCA. Number two, you need local access to local rails. And in 2021, Monerium was the first to connect what we call the Web3 IBANs with a payment system, effectively allowing money to flow from bank accounts to blockchains in virtually seconds in the name of the holder and then supporting third-party payments. Number three, deep liquidity to connect to the rest of the ecosystem, and that's what we're here to announce.

Global offering. Last year, we opened up our services to extend not only for Europe, but outside of Europe and we now support over 150 countries. And last but not least, composable infrastructure, meaning having allowing use cases like neo banks to access the this offering and extending it into their product offering. So, I think like if you you you can just imagine what kind of products can be built when every jurisdiction in the world has capabilities like these and you have a

regulated stablecoin with those properties. The only question that remains is, can we do so without relying on the dollar too much? Thank you. >> [applause] >> And there is some time for Q&A. One minute. Yeah. Hi, thank you for the presentation. Actually, I was I was here last year listening to your previous presentation. Um my question is related to this mechanism that you have come up with.

Uh doesn't this mechanism allow you to literally uh basically mint unlimited amounts of EUR based on how much USDC or USDT liquidity is available? And And what is the constraint constraint there to offer 1 million in swaps? You're absolutely right. This is the key insight here that when we control the minter key, there's effectively unlimited amount. However, there's like precautions to be made. Uh we need to be able to sell off this liquidity as fast as we can. And we've been trying this out internally. We've been doing this with a few partners, even a few users that just have found out. And so, we're

kind of just ironing out the wrinkles in the process, but so far, so good and we do expect to have way more liquidity coming online uh pretty soon. And there are just so many interesting things that you can build on top of this. It's like in this case here, we only control one of the assets. But what if we control both of the assets? Or what if there's like a network of participants that combined control other assets like stablecoins in different jurisdictions around the world. So, the the the landscape here is quite vast and we can't could be more excited to bring this which we think is like a a real innovation and this has not been done before to our our knowledge, but we

think essentially think that you know, this will be the the paradigm that every stablecoin issue is going to be wanting to to to use in the future. Thank you. Thank you so much. >> [applause]