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If the foreign exchange market starts using DeFi protocols instead 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.
The Chain Exchange (FX) system is a new global securities exchange model that provides a faster, cheaper and more efficient alternative to cross-border payments.
Our recent research paper with @circle has it all https://t.co/NGniRo8yrp
— Uniswap Labs (@Uniswap) January 19, 2023
The paper, "On-chain Foreign Exchange and Cross-border Payments" was prepared by Austin Adams, Uniswap Data Scientist, We have Gordon Liao, chief economist, Marie Catherine Laders, David Puth, and Dioxin Wan.
The authors studied the commercial activity of the coin in US dollars of the circle (usdc) and the coin in euros (euroc) on uniswap from July 2022 to January 2023. They found that the pair had a total volume of 128 million dollars, with some days having a volume of up to 8 million dollars.
Meanwhile, usdc and Euroc currencies traded at a few basis points of the exchange rates found on the wholesale exchange market for their support currencies, USD and Euro. According to the authors, this demonstrated that the challenge forex market provided a reasonable alternative to traditional forex, with good price efficiency, despite its lower trading volume.
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However, the researchers wanted to know whether the use of challenge protocols such as Uniswap would save forex market participants money. Thus they have analysed the costs associated with the traditional forex "corresponding banking model" vs. Those linked to forex challenge.
They used World Bank estimates to determine the price of a $500 remittance done through the global banking system. They then compared this to the purchase cost of stablecoin (either usdc or euroc) by a swap, the exchange for the other piece on Uniswap, send this to someone else, and ask the other person to redeem it.
The researcher concluded that the challenge model imposes many different costs on users, including currency exchange fees, challenge the costs of negotiation, network fees, and the costs of transferring money into and out of a scholarship. Even so, fees are up to 80 percent lower than the average price for remittances, according to World Bank estimates.
Circle released the EUROC in June, 2022. EUR/USD is the most widely traded currency pair in the world, according to Investopedia.
