Moving between exchanges, without currency fluctuation thanks to Blend
Something that is done a lot in TradFi is using debt services, so operators are not exposing themselves to exchange rate fluctuations. Let's use Blend in the Stellar Blockchain to do the same.
Imagine yourself in this situation, you want to send 1,000.00 Euros from one of your Stellar accounts to another one (it’s the same if you use another blockchain), but you don’t want to send the funds directly from your account because you want to keep them separated for privacy reasons… so you decide to use an exchange for that. But, there is an issue: the exchange only accepts XLM. Does that mean you will need to be exposed to currency fluctuations? That used to be the case, but because we have smart contracts in Stellar and lending protocols like Blend, you won’t need to, so let’s take a look at how you can use this protocol for that.
Two accounts, one protocol
Technically, you could use any protocol/service that lets you borrow some funds, but because we are decentralized geeks, we will use Blend, a fully permissionless protocol in the Stellar blockchain. And so, having picked the protocol to use, it’s time to list the steps we will follow:
Note: because we are using a fully permissionless protocol, we need to use collateral; this could be a problem if you want to send funds to a completely brand new account. In such cases, it is better to use a service that doesn’t require collateral.
With our second account (Account B), we calculate how many XLMs we need to exchange in order to get the same 1,000.00 Euros that the first account (Account A) will send. Let’s say we will need to sell 2787.12 XLMs in order to get that amount.
We deposit enough collateral in Blend with Account B so we can borrow 2787.12 XLMs.
As soon as Account B has the XLMs, we exchange the 2787.12 XLMs for 1,000.00 euros, and at the same time, we exchange the 1,000.00 euros owned by Account A for 2787.12 XLMs.
At this point, you are already safe and you won’t be exposed to currency rate fluctuations.
We send the 2787.12 XLMs our Account A now holds to our exchange account.
After a few seconds (or minutes, depending on the exchange you’re using), we take the XLMs we just deposited and send them to Account B.
Once the funds have arrived in Account B, we will pay back the XLM loan we took from Blend, and we will withdraw the collateral we deposited in step 2.
And as simple as that, we used one of the many tools available in the Stellar blockchain to protect ourselves from exchange rate fluctuations.
Note: it’s also important to take into consideration the borrowing fees from the protocol and the gas fee the exchange will charge you… But in my experience, both combined for this example will be less than two dollars. So I skipped that in order to keep the example simple.
Why not just exchange from Euros to XLM and then to Euros again?
You might think, “wouldn’t it be easier if I just exchange Account A Euros to XLM, send them to the exchange, and once I receive them in Account B, I change them back to Euros?” and… that’s ok too, especially if you’re sending small amounts (like 100 bucks). But what if we are sending something like 50,000.00 Euros or more? Would you be ok with the volatility?
It’s common to see 3-5% movements in just a couple of minutes in XLM or any other cryptocurrency, sometimes even 10% in a matter of minutes… Will you be ok with losing up to 5,000.00 Euros from that transfer just to avoid the “hassle“ of following the steps from above? I certainly wouldn’t, and I get why we could see those steps as something annoying, but if something I have learned all these years in the crypto space… is that everything is annoying until you do it the first time, after that it becomes just easy and natural to do.
If the network gives you a tool, use it.
So that’s it, a simple and short guide on how you can use a lending protocol like Blend to avoid exchange rate fluctuations. In this case, we used it to move funds from one account to another, but the truth is that this same principle applies to many other situations, so every time you need to move between different currencies, there is a high chance that a protocol like Blend can help you do it better. Until next time!
Disclaimer:
This content is for educational and informational purposes only and does not constitute financial, investment, or legal advice. Always do your own research and consult with a qualified professional before making any financial decisions.