Paying fees on the foreign exchange market is a real headache for players. Although there are tricks to limit them as much as possible, the cost of these fees is still high overall. Today, it is almost impossible to operate in this market without spending significant sums in transaction fees. The solution to this challenge may be emerging.
Towards a foreign exchange market with more accessible costs?
Are we moving towards a low-cost foreign exchange (Forex) market for operators? This seems to indicate the recent report by a group of researchers from decentralized financial technology companies Circle and Uniswap. The report has been available since Thursday 19 January.
The report establishes that it is possible to reduce costs spent on various operations on the foreign exchange market. Achieving this requires forex to move away from the current centralized mechanisms of finance to embrace blockchain-based decentralized finance (DeFi) protocols.
The study titled “On-chain Foreign Exchange and Cross-border Payments” is based on the analysis, from July 2022 to January 2023, of transactions involving the USDC and EUROC stablecoins. These stablecoins are backed by the dollar and the euro respectively.
Over this period, these stablecoins posted a total trading volume of $128 million for almost $8 million on some days. For researchers, this is a sign that there is indeed an alternative ” within reason ” to the traditional foreign exchange market.
The DeFi protocol, an under-exploited technology in Forex?
While DeFi protocols have seen a meteoric rise in the financial sector in recent years, a similar trend is rarely seen in Forex. According to the researchers, this market would benefit from adopting the mechanisms of decentralized finance in its procedures. A choice which can consequently increase the income of the actors.
By comparing the costs associated with the traditional banking model, the most widely used system in Forex, to those generated on the foreign exchange markets using DeFi, analysts from Circle and Uniswap were able to establish that the use of DeFi protocols would allow participants of the foreign exchange market to achieve much greater savings. More specifically, we are talking about up to 80% transaction fees.
The challenge for operators in this market is to manage to stimulate adoption of these large-scale mechanisms. An approach that could accelerate or even impose itself with the growing enthusiasm for stablecoins.
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