Bringing Stablecoins to the World - One Local Currency At A Time
October 24 2024
by Victoria Calmon
Highlights from "Blockchain Banter" X livestream with Bancor and CarbonDeFi, featuring Markus Franke, Co-Founder and CEO of Mento Labs, hosted by Jen
Watch the full episode here.
Markus: Hello! I'm a co-founder and the CEO of Mento Labs, the development team behind Mento. Mento is a platform for launching and operating decentralized stablecoins. At Mento Labs, our mission is to launch a transparent local currency stablecoin for every country in the world.
The first project in the space for me was working on Celo. I come from an economics background. I completed a PhD in economics, with research in monetary economics and portfolio theory, and then worked as a postdoc researcher at the University of Munich and the Columbia Business School in New York. I started working in traditional economics and traditional finance fields. After that, I evolved in the TradFi industry, working for asset managers and banks such as JP Morgan, Merrill Lynch, Allianz Asset Management Group, and others.
Around seven years ago, a very good friend of mine, Rene, told me about the idea of using blockchain technology to bring financial primitives to folks in emerging markets who don't have the same access to the traditional banking system as in Europe, to build something really inclusive, to build for mobile phone users. The name of the project was Celo. I became super interested in the potential for this technology and the impact it could bring.
From day one on Celo, the idea was to build for end users, to build for people who don't have the same access to financial solutions as we do in Europe. It is still the same mission driving us building Mento today. When we were building Celo, it was clear that if we want to build infrastructure for financial inclusion, we need a scalable blockchain. We need a blockchain that can be accessed easily on low-end mobile phones. But we also need to build infrastructure that includes stablecoins, because stablecoins are a function on blockchains that allow for stable transactions that can enable a range of use cases such as saving, lending, borrowing, payments, and remittances.
Celo is an Esperanto word for purpose. Mento is an Esperanto word for mint. So in the end, Mento enables the minting of stablecoins on Celo. When Celo became bigger and bigger with a fully decentralized mainnet, the community understood that we needed to have a separate project to focus on stablecoin use cases. Therefore, Mento Labs spun out from the core dev team working on Celo.
Jen: Why was it so important for Mento and Celo to have stablecoins in local currencies?
Markus: We have great DeFi products that are live in the space. If you look at, for example, the user numbers of USDt, there's more than 1 million daily active users around the world that are using Tether. It is really accessible in many frontier markets and young economies around the world - especially in African countries. And it is not only accessible, but also highly liquid. Therefore, I think this is a great stablecoin product that enables a lot of use cases.
In emerging markets where there's high inflation, and where the local currency is losing value against the dollar, easy access to a dollar stablecoin is a vital use case, because it allows users to save in a stable currency and therefore, work around the problem of inflation in these countries.
Saving is one of the great use cases of stablecoins, but there's more. There is on-chain FX, providing a very efficient way to settle FX transactions, engage in FX trading, FX forwards, FX futures, and FX options. There are applications in micro-funding, applications in on-ramping, and getting new users into the Web3 ecosystem can be extremely efficient when we have more local currency stablecoins available.
One of the key use cases I want to talk a bit more about is access to credit. There's a huge credit gap in the world. In many countries, this credit gap is preventing small and medium entrepreneurs from growing their businesses. There's a lot of creativity and entrepreneurial spirit, but access to credit is missing. When a small or a medium business, an entrepreneur, a business owner, or a merchant needs a loan and they don't have access to a bank, one solution would be to get a loan on-chain.
Now, if there were only dollar stablecoins available, that would be a problem, because it would expose these small business owners to FX risk. These small and medium businesses and entrepreneurs in emerging markets have revenues in their local currencies. When they take out a loan to expand their business, they will need to pay their loan back at some point. They also need to pay for the input factors in local currencies. They need to pay taxes in local currencies. But most importantly, as their revenue is in local currencies, if they only had access to a dollar loan, and if their local currency loses value against the dollar, paying back the loan would become more expensive for them. Therefore, they would be exposed to unnecessary FX risk they shouldn't have.
This is why I think the credit use case is a very important one among all others that I mentioned earlier, and why I believe decentralized local currency stablecoins are extremely important. Among the initial projects we are working on with partners are several micro-lending projects that make loans accessible on-chain for their users. We also partner with remittance companies and cross-border payment projects around the world, because this is another big use case for stablecoins, being able to send money across borders.
Jen: What was the first stablecoin that launched on Mento?
Markus: The first decentralized stablecoin on the Mento Platform is a dollar stablecoin, cUSD. cUSD has been followed by Euro (cEUR), Brazilian Real (cREAL), West African Franc (eXOF) and Kenya Shilling (cKES) decentralized stablecoins. The exciting latest addition is the Philippine Peso, called PUSO, which means heart in Filipino.
For local currency stablecoins, certain use cases are relevant for a lot of end users. For example, in Kenya, micro-lending is an amazing use case. We just completed a pilot project with partners, Haraka, Clixpesa and Kotani Pay on the ground in Kenya for micro-lending and enable users access to loans in cKES, the Kenya Shilling stablecoin. For the Philippines, the remittances use case is huge. People are located over many different islands across the country. There's not always a bank in reach. Also, people travel the world and work in many different countries and want to send money home to their families. There are huge remittance flows to and from the Philippines. So I think both credit and remittances are excellent use cases for local currency stablecoins.
If there's a real need for a market, the market will come into existence. I think it's really important to be able to launch local currency stablecoins in different countries and make them accessible to users. Liquidity plays a big role. You want to have local currency stablecoins accessible, but you also want to have them accessible at the right price, which means they have to be liquid. Therefore, to have local currency stablecoins available in every country, we need good infrastructure.
Now in the Web3 space, more and more infrastructure is coming together and making local currency stablecoins possible. When I'm talking about liquid stablecoins for users that need a small loan outside of Nairobi in Kenya to expand their shop, to have liquidity in that specific place, we need to have a functional market. Therefore, we need partners like Carbon DeFi that allow users to do order strategies, to have different order types, so that there can be an efficient market for these stablecoins.
Having local currencies is also about giving users choices in the currency they want to use. I mentioned that micro-lending is a significant use case for local currency stablecoins, because users are not exposed to FX risk. At the same time, it is not only about micro-lending. Also, projects here in Europe would prefer to use a Euro rather than a Dollar for their transactions, for their trading, etc., because they also don't want to be exposed to the FX risk of the Dollar.
I think this is a new trend in the space. In the past, even traders in DeFi didn't care about the FX risk, because everything that was traded was so much more volatile than the FX. Now, as the market matures, FX risk is a real factor in their trading strategy. So traders need access to different currencies. They might also want to use different instruments to bring their FX trading strategy on-chain. All of this infrastructure is now emerging and is very important for FX use cases.
Jen: Markus, why did the Brazilian Real launch on Mento? After cUSD there was cEUR, but in terms of local digital currencies, cREAL was the first. Can you tell us why?
Markus: I think in every country, what Mento needs as a decentralized stablecoin platform, is strong partners on the ground with end users that have a need for a local currency stablecoin. I mentioned in the Philippines, the latest decentralized local currency on Mento is the Philippine Peso called PUSO. This stablecoin was launched by the Celo Philippines DAO. In the Celo Philippines DAO, there are not only Celo community members, but also corporate community members, representing well-known institutions PDAX and GCash. They have many users in the Philippines, and these users have a need for a decentralized local currency stablecoin.
In Kenya, cKES, Kenya Shilling decentralized stablecoin on Mento, was initiated on the forum by the Celo Africa DAO. Celo Africa DAO has a big presence across Africa. I was at ETHSafari in Kilifi recently, where there were a lot of community builders from across the continent. You could really see the huge presence Celo has there on the ground. If you want to build something for the real world in Web3, you probably build on Celo in Africa. This is because Celo Africa DAO is doing such a great job in supporting local builders in the ecosystem.
In Brazil, it is the same. There is a strong user community in Brazil. Brazil is an interesting case because the PIX, a central bank digital currency, is live, but still, users there want a choice in terms of what type of stablecoin they use. Some users may not have trust in centralized stablecoins issued by banks or by the government. Therefore, they want something that is fully transparent, on-chain, and decentralized. I think Brazil was a really interesting first experiment for Mento.
In Brazil, we also learned it takes some time to find traction for a local currency stablecoin, because projects only start to implement and include the stablecoin once it's live. So there's always these chicken and egg problems you have in Web3, where on the one hand, wallets only want to integrate when there's a lot of users, but users cannot use the stablecoin without any wallets. That is always a challenge. Especially, when we talk about end users and not always pure trading use cases, this is also a long game we have to play, as it takes time to find, onboard and develop use cases for a stablecoin. So, I think for all of these decentralized stablecoins I mentioned - cREAL, PUSO, and cKES - we still need some time to bring together a lot of partners that have a lot of end users, but we're getting there.
Jen: You mentioned wallets. It does make so much sense. It's kind of a "you first, no you first" situation. Have you found that it is easy for wallets to grasp these new concepts or these new experiences and transactions? Are we at the point where wallets have integrated local currencies and they're actually in use?
Markus: We're getting there. We mentioned it before, wherever there's a need for a market, a market comes into existence. Wherever there's also a need for certain technology or decentralized stablecoins, then people will actually learn how to use them and adopt them.
I think we've seen a lot of improvement in the general infrastructure across the board over the last few years that now enable these end-user experiences. You mentioned Celo has been focused on stablecoins from day one. We can really see proof in the end-user experience on Celo. It's relatively easy to send transactions from phone number to phone number. You can find other users through their phone number via SocialConnect, which I think is a really important feature for the end-user experience.
The gas fees are low and the ability to pay for gas fees in stablecoins on Celo is also important. If I'm a user that only has cKES in my wallet and I want to send funds to my friend, I don't need to hold any other currency for gas fees. I can also pay for gas in cKES. Needing another currency for gas fees not only makes the process complicated, but also brings in a volatile element, because often the crypto currencies used for gas fees are volatile.
Also, transactions are fast and cheap and settle fast on Celo. We've seen in the pilot we've done with local lending circles called “Chamas” in Kenya, that we are now at the point where we can work with users who have never interacted with blockchain technology before, and who are not DeFi degens. However, they are experts in their fields, they are small entrepreneurs from all different backgrounds and like every business in the world they have a need for capital, that they now can access on-chain.
We're also at a point where wallets are becoming more easy to use. In this pilot in Kenya, users interacted with a wallet called Clixpesa, with the on-ramp partner Kotani Pay. There are other Web3 wallets that are becoming easier and easier to use. Valora, for example, offers an easy user experience in the Celo ecosystem and is built from the start. Also, MiniPay by Opera, is a wallet that is growing very fast across Africa because it abstracts away the typical Web3 user experience. It's a lightweight wallet, less than two megabytes. I think the fact that all of these improvements are coming together, - we now have end users and we can enable end users to use this technology. What we build is interoperable and open source and can be integrated into different projects that can be used across borders, we have immense advantage to leverage the unique features of blockchain technology.
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