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Cosmos Boards the DeFi Train with Native USDC Support

source-logo  blockworks.co 02 June 2023 15:07, UTC

For any decentralized finance or DeFi ecosystem to function efficiently, stablecoins are crucial. They enable liquidity — the easy movement of value from one place to another — with less friction and volatility risk.

Both Ethereum and Solana have enjoyed vibrant DeFi environments, at least partly due to the ease of access to stablecoin utility within their networks. This has not yet been the case for the appchain ecosystem that calls itself the “internet of blockchains” — Cosmos.

The folks at Noble and Celestia are well aware of this shortcoming. Recently deciding to team up for the cause, the companies behind Noble, a general asset issuance chain and Celestia, a data availability (DA) layer, are together building native stablecoin capacity into the Cosmos ecosystem.

On the 0xResearch podcast, Blockworks research analyst Sam Martin says the two companies are partnering up to “enable the minting of native USDC (USDC), by default, for any modular chain that leverages Celestia as a DA layer.”

The move is an important step, Martin says. “In order to have a vibrant DeFi ecosystem, stablecoins are incredibly important.” Stablecoin tokens like USDC and USDT allow investors to generate yield on digital assets while minimizing the risks of market volatility through the token’s steady value, which is pegged to fiat currency.

“That’s been a main pain point for Cosmos,” Martin says, “but now that they have USDC, I feel like there’s gonna be a lot less liquidity fragmentation.”

“I definitely think that this is a huge development,” Blockworks research analyst Ryan West agrees. “The reason that their DeFi hasn’t taken off, despite them being around for a while, is because there wasn’t that native stablecoin.”

The ability to use Circle’s USDC stablecoin natively via Celestia’s DA layer will “supercharge” growth for the ecosystem, West believes.

Celestia is a layer-2 rollup that uses light nodes to verify that transaction data is public and available “without needing to download all the data for a block.” This is achieved through a mechanism called “data availability sampling,” according to the company website.

“I think it’s really gonna jump-start things,” West says.

Will Tether miss out?

Blockworks research analyst Dan Smith asserts that USDC will enjoy “first-mover advantage” as the first native fiat stablecoin in the ecosystem. He imagines the move might encourage leading stablecoin issuer, Tether (USDT) to “copycat” and follow in Circle’s footsteps, “but we haven’t seen any of those actions being taken.”

Three major ecosystems — Solana, Ethereum and the Cosmos ecosystem of appchains — have been at the forefront of development over the past year, Smith says.

“We already have USDC and Tether on Solana,” Smith adds, in addition to their presence on Ethereum and its layer-2s, but “we haven’t really seen that happen in the Cosmos ecosystem.”

Smith says he wonders if the addition of native USDC to Cosmos may spark the beginnings of a “Cambrian explosion of Defi applications and use-cases” in the industry.

“And if we do start moving in this world,” he asks,”is this gonna be a miss for Tether?”

“It’s definitely good for Defi to have that trustworthy fiat stablecoin that can provide that one-to-one pegged value,” but it would be preferable, he says, for “market diversity to shard some of the risk of relying on a single asset.”