Can Polkadot Become the Blockchain of Forex?

Upcoming decentralized finance protocol Pendulum has become the latest project on Polkadot to secure a parachain slot, doing so in record fashion by securing the fastest ever crowdfunding in Polkadot history. The loan was fully funded in just 90 minutes and could prove to be a watershed moment for DeFi and its integration with traditional financial services such as Forex.

Parachains are independent blockchains linked to the Polkadot relay chain, a unique mechanism that enables them to share resources and security while maintaining functionality and features. The number of parachains is limited, so projects that want one must secure a crowdloan by raising funds from the wider Polkadot community.

Pendulum’s record-breaking crowdloan campaign allows the project to work towards its ambitious goals. It is a blockchain that intends to provide composable fiat services to bring traditional “fintech” companies into the world of DeFi. Its vision is to serve as the missing link between DeFi and fiat currencies by providing a fiat-optimized smart contract network.

By creating on-chain tools for the world’s most important fiat currencies, Pendulum believes it can pioneer a more open, fair and inclusive financial future for the world. It enables traditional financial services such as Forex, trade finance and savings accounts to seamlessly integrate with DeFi applications such as lending protocols, yield farming and specialized Forex automated market makers. In this way, Pendulum promises to unlock new DeFi use cases for all major fiat currencies by becoming the “Fiat Internet”.

A pivotal year for Polkadot

It’s an ambitious dream that fits Polkadot’s potential. Polkadot is widely seen as the most viable smart contract blockchain alternative to Ethereum, which hosts most of the world’s Dapps, but is plagued by low transaction speeds, high fees and other inefficiencies. Polkadot enters 2023 on the back of a momentous year full of ups and downs that saw it launch its first parachain auctions, resulting in the launch of a number of highly promising projects. However, the excitement over the launch of projects such as Moonbeam, Acala, Centrifuge and Clover Finance was soon overshadowed by the emergence of a brutal crypto winter that saw the price of Polkadot’s native cryptocurrency, DOT, plunge from an all-time high of $54.98 in November 2021 to a crushing lows of less than $5 per coin.

At the same time, Polkadot endured a number of other problems throughout what became crypto’s “annus horribilis”, with its flagship project Acala falling victim to a major hack, and the collapse of a proposed multi-million dollar sponsorship deal with Barcelona leading to even more negative press.

With 2022 now behind us, the new year could prove to be a pivotal year for Polkadot, and the pressure is on for one of the most auspicious blockchain projects to start delivering on its promises. Polkadot needs to reward investor faith and start providing real value to users, or risk slipping into irrelevance like so many other once-lauded projects have done in the past.

This is why Pendulum is getting so much attention from the Polkadot community. Unlike most other Polkadot initiatives, Pendulum has perhaps the most revolutionary potential with its ambitions to bring TradFi into the world of DeFi. Most promising is Pendulum’s goal of becoming the “blockchain for Forex,” a multibillion-dollar industry that benefits from decentralization.

What Blockchain Brings to Forex

Traditional Forex is traded on centralized networks operated by traders, banks, brokers and other market participants. It is an international network of networks that enables 24-hour Forex trading worldwide, with multiple sessions opening and closing across the globe.

Forex has become a massive industry, but the market is challenging. Perhaps the biggest problem is that there is no single centralized body that oversees the regulation of the Forex market, making it a particularly risky endeavor for even the most experienced financial traders.

By moving to the blockchain, Forex gains many advantages, the most important of which may be much faster transaction speeds and lower trading fees. Banks and other financial institutions that enable Forex trading are known to charge expensive fees to process international transactions. A World Bank report suggests that moving Forex to the blockchain could result in savings of $16 million in transaction fees per year.

A blockchain network like Pendulum promises to all but erase currency trading fees by eliminating the concept of intermediaries and brokers. Instead, all Forex trades will operate in a peer-to-peer fashion, governed by smart contracts that automatically process transactions when certain conditions are met.

The other benefits blockchain can bring to the Forex industry include transparency and security. Because blockchain is a public ledger, transactions can be seen by anyone. This will help dissolve the network of brokers and market makers that dominate today’s Forex markets, consolidating all trades into open, fully transparent platforms. In addition, blockchains are immutable, meaning they cannot be manipulated by hackers, and they can also preserve privacy by encoding data using hashes, removing the risk from cybercrime.

Pendel looks poised for success

Several players have attempted to create specialized blockchain platforms for the Forex industry, but developing such a platform is a complicated task. One of the most interesting early initiatives was Vanguard’s partnership with Symbiont to develop a post-trade automation platform for Forex transactions. But although it launched a proof-of-concept in 2021 alongside major players such as State Street, BNY Mellon and Franklin Templeton, Vanguard has yet to come up with the finished product.

It is difficult to develop a blockchain system with easily accessible rules and configurations that can be adapted to the complex Forex market. Other projects working to achieve this include Core-FX, which is partnering with HSBC and Wells Fargo to settle foreign exchange trades using real currencies and real accounts powered by a decentralized network.

Another project that has potential is Ripple, the creator of the XRP cryptocurrency designed for international transaction settlements between banks, but it has yet to make its mark on the Forex market.

As such, the closest approach to Forex trading on the blockchain is found by DeFi protocols such as Curve Finance, Uniswap, Balancer and Aave, which support trading of fiat-linked cryptocurrencies such as USDC.

Pendulum on the other hand has stated its intentions to enable decentralized Forex on a global scale and has already laid the groundwork to achieve this. Most recently, it announced an upcoming technical integration with the Stellar blockchain. The so-called Spacewalk Bridge is designed to ensure compatibility between Stellar and all Polkadot parachains, including Pendulum. Once the bridge is up and running, Pendulum will be able to offer DeFi tools to a variety of fiat stablecoins and deliver a faster, more transparent and reliable Forex experience than any blockchain platform to date.

Pendulum is therefore in a strong position to become TradFi’s first real pilot for executive Forex transactions on a decentralized blockchain. If that happens, don’t be surprised to see Pendulum emerge to play a key role in shaping the next generation of DeFi.