Naira Stablecoins
A “Stablecoin” is a digital currency that can be reliably and stably exchanged for its equivalent value in a regular (fiat) currency. Their value is indirectly upheld by the government, through value of a widely trusted fiat currency.
This value pegging is maintained either by a central authority or Decentralized Autonomous Organization with control over a pool of fiat liquidity. The essence of these stablecoins is to combine the stability of fiat currencies with the programmability of cryptocurrencies.
In December 2019 BuyCoins Africa (YC S '18), a peer-to-peer cryptocurrency exchange, announced a stablecoin pegged to the Nigerian Naira called NGNT. This was an exciting announcement within the fintech-saturated Nigerian startup ecosystem, which has already made major strides in building reliable payments and financial services, and also attracted a lot of investment.
What's the difference between Fiat & Cryptocurrencies? A fiat currency is any legal tender backed by a government.Their intrinsic value and flow are determined by monetary policies set by Central Banks.The interest rate and money supply of currencies often target the inflation rate to ensure price stability is determined by the government. Commercial banks and other financial institutions insured by the FDIC use these rates set by the Central Banks as placeholders to determine the interest they charge on loans and the interest they give for savings.
As transactions occur between these middlemen, value is created through the money multiplier. The basis for all the interest rates is pegged to the rate issued by the national bank in that country. Hence the true/intrinsic value of any country is determined by a centralised authority. Governments sell loans to the public and the rate on those loans are ‘risk-free’. The more people trust the government's ability to pay the loans, the lower the interest and vice versa. To summarize, the value of a fiat-currency is determined solely by the public's trust and belief in the ability of the government. And with the level of corruption in Nigeria, the trust in the government is not high.
Unfortunately for many African countries these commercial financial institutions also charge fees for the the services they provide e.g. credit card charges, online banking fees, overdraft fees and so on. The more the middle men are involved in the transaction or business process the higher the fee charged. Cryptocurrencies like Bitcoin and Ethereum, were created to address some of these problems with fiat currencies. However, the values of these currencies are almost purely determined by their demand, and the lack of any hard mediations of their value means that their value can change rapidly and by huge amounts.
Stablecoins arose in response to the notorious volatility of regular cryptocurrencies; prominent currencies like Bitcoin and Ethereum might be useful as investment engines but are too unstable to be used to make everyday purchases like buying coffee or recharge cards.
Cryptocurrencies have already been of interest in Nigeria, since at least 2017.
During Nigeria’s foreign-exchange crisis, cryptocurrencies provided traders and consumers with an alternative market to access foreign currencies, when the central bank’s supplies were too scarce and the black market prices too steep.
The hope with these inherently stable cryptocurrencies, is that their stability will allow them to be used for more purposes and appeal to the masses of everyday Nigerians.
Dollar Ti Won, Make We Buy Eth
There’s something a little counterintuitive about the logic of establishing a Naira stablecoin: the Naira isn’t exactly a stable fiat currency, at least in recent times.
As mentioned, The Naira has been notoriously volatile in response to global oil prices.
Amongst other factors, as a member of OPEC, Nigeria is subject to agreements about how much it can sell it’s crude for, regardless of its production capacity.
In response to crude price fluctuations in 2016, Nigerians rushed to convert their rapidly devaluing Naira into USD so they could preserve their savings and make crucial overseas transactions.
The CBN reacted to this increased demand by setting significant restrictions on it’s forex reserves, stating that it would give priority to only the most essential requests, such as tuition payments and manufacturing equipment purchases.
This process was generally considered to be very disorganized and corrupt, with preferential treatment given to people with government connections.
It was at this point that some Nigerians started to look into converting their liquidity into cryptocurrencies, because they provided a higher value, albeit more volatile alternative to the Naira.
Central Governments devalue their currencies in order to make their exports more competitive in the foreign market.
Hence stimulating demand for their goods exports over substitute exports produced by other countries.
The devaluation also makes imports much more expensive.
In 2019, the government in an attempt to strengthen production in the country not only devalued the currency but also banned the importation of some goods.
These banned imports were cheaper than goods produced within the country.
This increased poverty rate because of the inflation that occurred as a result of the devaluation of the currency as well as the banned imports.
While the Naira might not always be reliable itself, the interoperability of Stablecoins means that we can still get a lot of flexibility out of a Naira stablecoin.
The initial appeal of stablecoins will be as an intermediary currency, with identical value to the Naira, for interacting with crypto assets.
But for a Naira stablecoin to really gain traction instead of only serving as an intermediary currency, more crypto-native financial services need to be built so consumers have more ways to actually utilize them.
This utility problem is still being solved by the crypto-ecosystem at large, and stablecoins might not really be the silver-bullet they’re presented to be.
Nonetheless, the stablecoins offer Nigerian startups with a leg-up towards building more interesting types of services.
While it’s still difficult to know what full crypto utility could look like, Africa’s relatively untapped finance landscape potentially provides a lot more opportunities.
We talk more about utility towards the end of the essay.
The expectation with the current saturation in the fintech space is that the services that can actually work will prove themselves by finding product market fit.
The same can probably be expected of stablecoins, but this will depend more on how attractive their platforms are to builders, and consequently the market share they are able to gain.
In this regard, NGNT’s Ethereum-based implementation also means it will be able to interoperate with Ethereum and any assets on the Ethereum Blockchain, such as Coinbase’s USDC.
ABCD is based on Binance Chain, sharing an ecosystem with Binance’s own USD-pegged stablecoin BUSD.
Ethereum’s ecosystem has a lot more interesting innovation around things like Decentralized Autonomous Organizations (DAOs) and Prediction Markets -- which are higher-level financial innovations native to crypto.
Competing Standards
NGNT’s launch announcement made mention of it being the first stablecoin pegged to the Naira but there’s some dispute to this claim.
Back in October, Binance Labs-backed BitSika, a cross-border cryptocurrency-based remittance service, released their own Naira stablecoin called ABCD on Binance Chain.
BitSika have gradually onboarded developers to build applications on their platform.
Both BuyCoins and BitSika followed Coinbase’s lead and set up independent “trusts” for managing the value of these new currencies.
Coinbase partnered with Circle Payments to start a minting consortium called Centre, while BuyCoins teamed up with Alpha Training Lab to establish TokenMint.
The incentive for BitSika and BuyCoins to develop their own stablecoins is so they can easily integrate a Naira equivalent currency into their products, and build pools of Naira liquidity when they issue currencies through their apps.
To kickstart this, BuyCoins quickly started to offer their users attractive interest rates if they locked up their NGNT with BuyCoins.
From the perspective of Blockchain die-hards, the hope for stablecoins is that they will provide an on-ramp from fiat to full cryptocurrencies, moving control over the economic system from centralized governments to the decentralized network of people who use said currencies.
Perhaps having multiple stablecoins pegged to the Naira will create a better more competitive landscape for services built around either currency.
A more pessimistic prediction is that these currencies will create an even more fragmented space of competing currencies, with few hopes of future interoperability, since the currencies are built to serve largely the same purpose.
What About the “Real” Use Cases?
The current ecosystem of Ethereum-based cryptographic assets and applications is still relatively limited.
“Fun” utilities like unique Cryptokitties are interesting proofs-of-concepts which show that value can accrue on blockchain-based assets.
But tools that provide real utility, like Dapps providing access to loans or other credits and rewards systems, are still largely lacking.
This is a big issue in the crypto space in general, and the sophistication of blockchain technology can only be justified if there’s considerable gain in value or convenience with their use.
In the ICO-boom of 2017, many companies staked their valuations on the eventual utility of the tokens they’re based on and we’re yet to see much of that value being realized.
Existing startups could benefit from integrating with these coins to reduce internal processing costs that come from integrating with archaic financial infrastructure that currently exists, and should focus on leveraging NGNT or ABCD’s programmability to build new systems, or reinforce their existing ones since they no longer have to be encumbered by slow processing times with banks.
But the organizations that champion these coins are left with the challenge of encouraging developers to come to build on their platform instead of their competitor’s – they’ll have to significantly ramp up their Developer Relations practices and compete to gain the most mindshare.
Blockchain consultancies like Consensys have done a really good job developing software solutions
to making running blockchain easier, and offering good developer relations and support.
But many scaling challenges remain and the underlying technology hasn't quite justified itself for
all the usecases it's being posited for.
Alongside this, they are mainly focused on institutional customers and big companies and private
blockchains, which is contradictory to the ethos of blockchain as a decentralizing force –
it doesn't matter if the data is decentralized if control over it is not.
These are issues that could be solved with better incentive and organization design and, there is also an opportunity to bring in a wide variety of systems knowledge, ranging from economic to ecological points-of-view, that could help ecosystems to converge on more robust models and adapt to new network conditions better.
Developer Relations is like marketing and outreach with software engineers as the target customers. It’s about providing resources to developers to make it as easy as possible for them to build products on your platform.
Stripe is considered one of the foremost companies in this regard, as exemplified through the thorough documentation and resources on how to use their payments API.
Local payment startups like Paystack and Flutterwave have followed Stripe’s playbook by putting a lot of work into their documentation and hosting meetups.
The final hurdle for this technology is marketing to consumers.
There’s two main routes for this: marketing based on the benefits of the platform (i.e.
cryptographically-secure, transparent), or marketing the benefits of the product itself.
The former route generally helps with increasing public confidence in all the products built on the platform, but it’s likely to only appeal to people who value the technical aspects.
The latter route of marketing depends on the uniqueness of the product, and will probably involve pitting the product directly against its competitors in the Fiat world.
“XX on the blockchain” hasn’t always been a winning strategy, so startups with such propositions will have to be very aggressive about finding product-market fit.
In this regards as well, blockchain products could do a better job at helping customers participate on the blockchain network itself. Blockchains also support miners and other address holders (i.e. regular users) having the ability to vote for modifications to how the Blockchain works, this is known as on-chain governance. It would be interesting to see services that allow users to participate in these new financial network through more than just buying and selling tokens.
Conclusion
Stablecoins could be one-step in restoring the public’s trust in Nigeria’s financial system.
It’s the best of both worlds because it combines the relative stability of fiat currencies with the security of cryptocurrencies.
The verdict is still out there on whether stable coins tied to the Naira would be successful but it is promising.
With early competition between ABCD and NGNT leading to attractive interest rates that benefit the people.
One should also be cautious of increased regulation by corrupt politicians as well as price wars that might render the value of the stablecoins lower than that of the Fiat-Currencies.
Would it be better to tie the value of a stablecoin to that of the Naira as well as a well trusted commodity such as Gold?