Stability is a facade in the financial world, and like most lies in finance, it's often successfully sold to the target market.
However, when it comes to stability, the reason behind its success is that the target market aren't people that really need much convincing, they are people that are already desperate for it because the idea of short-term risks to their income frightens them.
Stability as a concept serves the short-term, but the problem oftentimes is that people who buy into the idea end up staying in place longer than the intended short-term embrace.
How this happens is quite simple. I have option A, to get paid in BTC, and option B to get paid in USD.
I consider BTC volatile and a huge short-term risk that I can't afford. On the other hand, I consider USD a stable alternative suitable for sustaining my short-term needs.
So I choose to get paid in USD, but I end up using USD as default for every other payment because it's short-term stable, whereas in reality, I have stopped analyzing the risks and it has slowly depreciated in value, yet, I continue to stick to it because BTC is just too volatile.
This is the understanding most people have when it comes to money, it's better stored in a stable currency with zero upside potential, than in an asset with multi-directional price movements.
Some key points to note is people holding their income in currencies they consider stable don't expect upward price movements. In fact, being able to access goods at cheaper rates doesn't make them think that their currency has appreciated in value. Stability to them is that their 100 USD remains 100 USD when they get their accounts.
It's not about the purchasing power, fundamentally, it's about the lack of changes in the numerical value “100.”
DeFi needs to capitalize on this for stability
Stability here, as explained above, just means that numbers don't go down. And for DeFi it means that DeFi native assets won't depreciate in price value due to yields and stablecoins will hold their pegs due to the involuntary longs that result from yields paid in said stablecoins.
Decentralized finance suffers a problem only stablecoins can fix and it's truly interesting how literally no one in crypto is doing this yet.
Now when I say decentralized finance, I'm quite frankly referring to all of crypto, from block rewards to yield farms, all of these processes should have yields paid in stablecoins and never in the native assets of the protocols.
The reasoning behind this isn't to exploit the vulnerability of people falling for the false sense of stability in those associated stable currencies, but because when rewards are paid in stablecoins, there's less incentives for people to want to immediate sell their holdings, which creates room for stability(numbers not going down) and simultaneously creating a scenario where more network participants are essentially bulls, longing the native assets of these chains and protocols, without direct derivative exposure of course.
Scenario 1: block producers earn block rewards in a native stablecoin — zero need to convert to anything else especially when there's sufficient paired liquidity to other stablecoins and wide usage, it essentially becomes a default payment currency.
Scenario 2: yield farmer earns all yields in stablecoins and has zero incentives to convert to secure the value of said yield because it's already in a stable token.
The reason most yield farmers sell their assets earned from their positions is because a price crash is expected and they need to pack these yields in stable tokens.
By making native stablecoins the default yield token, we remove a significant burden from native protocol assets.
The strategy becomes even more interesting to explore when you consider that for chains with transaction fees, said fees are paid in native assets but those assets are burned to mint stablecoins in its place, making said asset deflationary.
Of course, the risk remains the price stability of the stablecoin itself and that is something that just will be left to how well its liquidity is grown across the ecosystem and its adoption for payments. With the right systems in place to scale these stablecoins, the native assets of these protocols will appreciate in ways that makes the debt created in stablecoins sustainable.
It is not without its flaws, but it's, in my opinion, worth exploring as an alternative to the system of yield today.