Why We Need On-chain Liquidity to Support Non-USD Rails, NOT APIs

In this article · 13 sections

1. 01Background: the State of Global FX Market
2. 02Post-2008 Regulations Made Bank Balance Sheets Expensive
3. 03A Decomposition of All-In Corridor Costs
4. 04The Minimum Viable Fee of Dealers
5. 05Why Banks/ Professional MMs can Offer Low FX fees for Major Currencies, not Exotic Currencies?
6. 06Why Quote Aggregation (API Companies) is not the Same as Liquidity Creation
7. 07Unbundling Risk-bearing Capital from Legacy Banking Infrastructure
8. 08The Supply Curve Appears when Participation Costs fall
9. 09Convex Inventory Costs Imply Cheaper Distributed Warehousing
10. 10Why We Must Move Away from purely the US Dollar Bridge
11. 11The Cost of Forced Routing (USD Triangulation)
12. 12Direct Non-USD Liquidity is a Threshold Problem
13. 13Conclusion: Redefining the Global FX Liquidity

Stablecoin payment can make cross-border payments faster, but not necessarily cheaper. This week we have a few stablecoin FX companies announcing over $100M fundraising amount, but they are merely an API layer of OTC firms, allowing customers to have access to the FX rates in the form of Request for Quotes (RFQ). Because these platforms still route through legacy OTC firms, they inherit the exact same structural flaws of the traditional system—centralized, expensive, risk-bearing capital tied to legacy banking infrastructure. As a result, they are incapable of providing much lower FX rates for transactions that are settled in local currencies.

To slash the cost of global payments in emerging markets, we need a fundamental unbundling of the bank—a democratized, decentralized, non-USD liquidity venue that allows a diverse array of participants to share inventory risk and supply the liquidity that legacy dealers simply cannot afford to provide.

Before going deeper into the FX issue, we need to answer one fundamental question: why is it so hard and expensive to send money across borders, especially in developing countries? The short answer is: the lack of supply of immediacy. Immediacy means having someone ready and willing to take your local currency and give you foreign currency almost instantly, at the size you need, and within the legal rules. In major currency pairs (like Euros to US Dollars), big banks are happy to do this. This big FX issue happens in smaller ”thin” corridors of emerging markets. As a result, everyday users in these regions pay high fees to cover the massive institutional costs of making that trade possible.

Hence, the high cost of cross-border, local-currency payments is a structural market failure of inventory risk, not a technological routing problem. Rather than simply building better software (APIs) on top of broken traditional systems, true cost reduction requires unbundling risk-bearing capital from legacy banking infrastructure with democratized liquidity.

To explain how FX fees of exotic currencies can be significantly reduced by democratizing liquidity through blockchains, this article aims at achieving 5 things:

• Isolate the True Costs: It defines and separates the unavoidable fundamental risks of an exotic currency from the avoidable, bloated institutional costs currently passed on to users.
• Deconstruct the Legacy Premium: It provides a mathematical cost breakdown of why traditional banks, professional market makers, and OTC firms are forced by post-2008 regulations to charge high fees to cover their balance sheets.
• Model the On-Chain Unbundling: It models decentralized liquidity as a fundamental shift in production technology, unbundling risk-bearing capital from the massive fixed-cost stack of traditional dealing desks.
• Prove the Efficiency of Distributed Risk: It demonstrates mathematically that spreading inventory risk across a diverse network of participants on a blockchain is inherently cheaper than concentrating it on a single institutional balance sheet.
• Challenge the USD Bridge: It shows why bootstrapping direct, non-USD trading pairs is a mandatory threshold problem we must solve to truly liberate emerging markets from legacy inefficiencies.

Background: the State of Global FX Market

BIS data report average daily global OTC FX turnover of USD 9.6 trillion in April 2025, but aggregate turnover says little about the cost of executing a specific corridor at a specific time, in a specific size, through a legally usable and operationally final settlement path. The relevant question is not whether global FX is large, but whether corridor-specific immediacy is abundant where actual firms and households need it.

This distinction is crucial because the real economy does not transact in “global average liquidity.” It transacts in executable corridor liquidity. A payroll processor must convert one working-capital balance into another by a settlement deadline. A small importer must pay an invoice in the supplier’s local currency. A remittance provider must move value at retail ticket sizes with high reliability and low delay. The friction that matters to such users is the all-in executable fee, not a notional inter-dealer midpoint. This is why there is huge discrepancy between the "bank rates" of exotic currencies and the actual FX rates incurred by businesses and enterprises.

Post-2008 Regulations Made Bank Balance Sheets Expensive

After the 2008 financial crisis, Basel III regulations forced banks to hold more capital to cover potential losses, by strengthening the prudential treatment of counterparty credit risk (CCR) and introducing a dedicated capital charge for credit valuation adjustment (CVA) risk. The regulatory cost for a currency corridor between currency a and currency b can be written as:

$$K_{ab}(q,T) = K_{ab}^{\mathrm{CCR}} + K_{ab}^{\mathrm{CVA}} + K_{ab}^{\mathrm{LR}} + K_{ab}^{\mathrm{liq}}$$

where the terms capture, respectively, default-risk capital, CVA capital, leverage-ratio balance-sheet cost, and liquidity-related balance-sheet usage, with the clear breakdown below:
• K(q,T): Total capital cost for a trade of size q over time T,
• CCR: Capital required for Counterparty Credit Risk
• CVA: Capital for Credit Valuation Adjustment (risk of the counterparty’s credit rating dropping)
• LR: Costs related to the bank’s leverage ratio limits
• Liq: Costs related to keeping liquid assets on hand

The economic message of BASAL III is straightforward: balance-sheet-intensive matched-book activity is no longer cheap by default. In other words, because of these rules, banks can no longer cheaply hold inventory for slow-moving, thin currency corridors.

A Decomposition of All-In Corridor Costs

The all-in FX fee charged by banks/OTC firms and paid by an end user to convert currency a into currency b for notional size q, settlement horizon T, and route length n can be expressed as follows:

$$f_{ab}^{\mathrm{all}}(q,T,n) = f_{ab}^{\mathrm{fund}}(q) + f_{ab}^{\mathrm{inv}}(q,T) + f_{ab}^{\mathrm{cap}}(q,T) + f_{ab}^{\mathrm{comp}} + f_{ab}^{\mathrm{pref}}(q,T) + f_{ab}^{\mathrm{settle}}(T) + f_{ab}^{\mathrm{route}}(n) + \frac{F_{ab}}{q}.$$

where
• f_all = The total percentage fee paid by the user for trade size q, settlement time T , and n routing steps;
• f_fund = Irreducible premium for macro volatility, sovereign risk, convertibility risk, issuer risk, and genuine counterparty risk, i.e. the unavoidable fundamental risk (e.g., the country’s economy is unstable);
• f_inv = Inventory warehousing and hedging premium, i.e. the cost for the dealer (banks, professional MMs or OTC firms, etc) to hold the currency in their inventory;
• f_cap = Balance-sheet and capital premium, i.e. the cost of the regulatory capital the dealer must hold;
• f_comp = Compliance costs (anti-money laundering checks, operations);
• f_pref = The cost of keeping money pre-funded in foreign accounts;
• f_settle = The premium charged for the delay in settlement;
• f_route = Intermediary and routing markup across the route;
• F_ab/q = The fixed costs to run the corridor (F_ab), divided by the size of the user’s trade (q)

This section clarifies why SMEs are punished disproportionately. For small tickets, the term F_ab/q is large. That means identical corridor infrastructure can produce acceptable execution for a very large corporate and punitive execution for a small exporter or remittance user. Thin-corridor pricing is therefore often regressive: the user least able to bear fixed institutional costs is the one over whom those costs are spread least efficiently.

This article's discussion is about how decentralized liquidity can compress the non-fundamental wedge (omega), which is:

$$\Omega_{ab}(q,T,n) \equiv f_{ab}^{\mathrm{all}}(q,T,n)-f_{ab}^{\mathrm{fund}}(q)$$

The Minimum Viable Fee of Dealers

In the legacy regime, corridor liquidity is produced mainly by a narrow class of vertically integrated institutions. These institutions combine risk-bearing capital, pricing models, settlement access, legal documentation, operations, compliance, funding, and hedging infrastructure within a single firm.

Take banks as an example. A traditional bank will only offer to trade a currency pair if it makes a profit. The expected profit can be calculated as:

$$\Pi_{ab}(f;q,T) = fq - \mu K_{ab}(q,T) - r B_{ab}(q,T) - O_{ab} - \xi (1-\theta_{ab})\sigma_{ab} q \sqrt{T} - \zeta \sigma_{\varepsilon,ab} q \sqrt{T}$$

where
• f = Proportional fee charged to the end user;
• K_ab = Capital consumed by serving the corridor;
• B_ab = Balance sheet tied up in pre-funding, trapped liquidity, or settlement exposure;
• O_ab = Fixed operating cost;
• θ_ab ∈ [0, 1] = The internalization ratio, i.e. how often buy and sell orders cancel each other out;
• σ_ab = Corridor volatility;
• σ_ε,ab = Residual hedge error from proxy hedging, i.e. the error/risk leftover when the bank tries to hedge its bets;
• μ, r, ξ, ζ are cost multipliers (interest rates, risk premiums), mapping these costs into expected P&L space

Setting profit to zero and solving for the fee f gives us the absolute minimum fee (the minimal viable fee) the bank can charge:

$$f_{ab}^{\mathrm{min}}(q,T) = \mu \frac{K_{ab}(q,T)}{q} + r \frac{B_{ab}(q,T)}{q} + \frac{O_{ab}}{q} + \xi (1-\theta_{ab})\sigma_{ab}\sqrt{T} + \zeta \sigma_{\varepsilon,ab}\sqrt{T}.$$

Payment corridors of emerging markets are far more expensive because the institution currently producing immediacy is balance-sheet-intensive, compliance-heavy, and operationally overqualified for the problem.

Why Banks/ Professional MMs can Offer Low FX fees for Major Currencies, not Exotic Currencies?

One of the deepest structural advantages enjoyed by major currency markets is not merely lower volatility. It is high-frequency two-way flow. Let buy and sell order arrivals over interval ∆ be N∆+ and N∆−. Unmatched inventory is

$$I_\Delta = N_\Delta^+ - N_\Delta^-$$

If arrivals are approximated as Poisson with symmetric intensity λ, then

$$\theta_{ab} \approx 1-\frac{1}{\sqrt{2\lambda_{ab}\Delta}}$$

where,
• I∆ = Unmatched inventory over a time period ∆;
• N+, N− = Number of buy and sell orders;
• λ = The intensity or frequency of orders.

The interpretation is powerful: thicker markets are easier to warehouse per unit of flow. As λ rises, relative inventory imbalance falls. This accounts for low FX rates of major pairs. The dealer is not repeatedly taking large directional bets; it is often matching flow against itself. Thin corridors lack that privilege: poor internalization (netting) and expensive inventory warehousing . In other words, for thin corridors of emerging markets where λ is low and orders don’t cancel out, institutions easily get stuck holding the exotic currency, which is expensive.

Why Quote Aggregation (API Companies) is not the Same as Liquidity Creation

Fintech wrappers can improve search and user experience, but that does not mean it creates a new supply curve. If incumbent dealer quotes are {Pd(q)}d∈D, a wrapper offers something like

$$P^{\mathrm{wrap}}(q) = \min_{d\in\mathcal D} P_d(q)+\delta,$$

where δ is the wrapper’s own operating load or markup.
This can reduce quote dispersion, search cost, and some information rents. But if the supplier set D is unchanged, then the underlying supply of corridor liquidity is unchanged. Discovery has improved, not production. The distinction is foundational: routing optimization changes how liquidity is found; market redesign changes how liquidity is produced.

Unbundling Risk-bearing Capital from Legacy Banking Infrastructure

Why do we need to bootstrap liquidity of stablecoins on blockchains instead? The most important economic innovation of a decentralized venue is not simply “putting FX on chain.” It is the unbundling of risk-bearing capital from the full fixed-cost stack of a traditional dealer.

In legacy FX, a participant needs capital and pricing systems and connectivity and settlement access and reconciliation and compliance infrastructure. That makes many potential suppliers economically mute even if they have genuine risk appetite.

$$r_i^{\mathrm{legacy}}(q_i) = \rho_i + \beta_i + \chi_i \sigma\sqrt{T} + \frac{F_i}{q_i}$$

where ρ_i is compensation for bearing the currency risk, β_i institutional overhead, χ_iσ settlement and warehousing risk, and F_i the fixed cost of participating as a supplier.

For liquidity infra on blockchains, the heavy infrastructure is shared. The new required fee becomes:

$$r_i^{\mathrm{chain}}(q_i) = \rho_i + \bar\beta_i + \bar\chi_i \sigma\sqrt{\bar T} + \frac{\bar F_i}{q_i},$$

with

$$\bar F_i \ll F_i, \qquad \bar T \ll T, \qquad \bar\beta_i < \beta_i$$

The new marginal suppliers can be anonymous retail actors, regional treasury desks, exporters with natural receivables, remittance distributors with corridor float, proprietary trading firms, cash managers, and crypto-native funds willing to warehouse short-duration local-currency risk. The economic point is not sociological. It is that a broader class of balance sheets becomes admissible.

The Supply Curve Appears when Participation Costs fall

This is the essence of DeFi - it allows people from any corner of the world to be able to participate in the capital market insofar as they have capital and a higher risk appetite, without the need of having the expertise of market-making. Let G(i) denote the distribution of potential suppliers. Aggregate liquidity supply at fee f can be written as

$$Q_S(f) = \int q_i \mathbf{1}\{r_i \le f\} \, \mathrm{d}G(i),$$

where r_i is the supplier’s reservation fee under the relevant technology. Lowering a meaningful mass of reservation fees shifts QS(f) outward for all relevant fee levels.

This is the precise sense in which a decentralized venue can create a “missing supply curve.” The curve was not missing because global capital was absent. It was missing because the fixed participation cost required to convert that capital into executable corridor liquidity was too high under legacy architecture. The key of creating an on-chain FX solution is to lower the cost of participation.

Convex Inventory Costs Imply Cheaper Distributed Warehousing

Risk-bearing costs are typically convex in inventory size. If one institution warehouses all corridor imbalance, the required premium is high; if the same imbalance is spread across many heterogeneous risk budgets, aggregate required compensation falls.

Suppose total corridor inventory Q must be allocated across N providers with quadratic risk-bearing costs:

$$\min_{\{q_i\}_{i=1}^N} \sum_{i=1}^N \frac{\gamma_i \sigma^2 q_i^2}{2} \quad \text{subject to} \quad \sum_{i=1}^N q_i = Q,$$

where γi > 0 is provider i’s risk-cost curvature. Then the optimal allocation is

$$q_i^* = \frac{Q/\gamma_i}{\sum_{j=1}^N 1/\gamma_j}$$

and minimized aggregate warehousing cost is

$$\Psi(Q) = \frac{\sigma^2 Q^2}{2\sum_{j=1}^N 1/\gamma_j}$$

In the symmetric case γ_i = γ for all i,

$$\Psi(Q)=\frac{\gamma \sigma^2 Q^2}{2N}$$

where
• Ψ(Q) = Total cost of warehousing the risk;
• γ = How sharply costs rise as a provider takes on more risk;
• N = Number of liquidity providers

The efficiency gain does not come from pretending the corridor is safer. It comes from the fact that convex risk-bearing costs make concentrated warehousing inefficient. In other words, distributing a large trade across 10 smaller liquidity providers is mathematically cheaper than forcing 1 large bank to take the whole trade.

Why We Must Move Away from purely the US Dollar Bridge

The Cost of Forced Routing (USD Triangulation)

A common analytical mistake is to assume that once settlement occurs on a blockchain, the architecture has been fixed. Not so. If all local-currency transactions must still route through USD (as manifested in the stablecoin sandwich model today), then the system has digitized the old hierarchy rather than replacing it.

Represent the currency universe as a graph G = (C, E), where nodes are currencies or settlement assets and edges are liquid executable links. Let the cost of traversing edge e be ce. The end user’s execution problem is

$$C_{A\to B} = \min_{\pi \in \Pi_{AB}} \sum_{e\in \pi} c_e,$$

where ΠAB is the set of feasible routes between currencies A and B. If USD, denoted U, is a compulsory bridge, then

$$C_{A\to B}^{U} = c_{A,U} + c_{U,B} + \xi_{\mathrm{basis}} + \xi_{\mathrm{rebalance}}$$

where the last two terms capture proxy-hedge basis and treasury rebalancing costs. A direct non-USD route instead costs

$$C_{A\to B}^{\mathrm{dir}} = c_{A,B}$$

Direct routing is superior when

$$c_{A,B} < c_{A,U}+c_{U,B}+\xi_{\mathrm{basis}}+\xi_{\mathrm{rebalance}}$$

The point is not anti-dollar. USD will remain important as reserve asset, hedge asset, and benchmark unit for a long time. The point is that mandatory USD routing is a topological choice, not a law of nature. A mature architecture should allow USD intermediation where it is actually cheapest, not where the system leaves no alternative.

Direct Non-USD Liquidity is a Threshold Problem

Why do direct non-USD markets not already dominate everywhere? Because they require seeded depth. Let direct execution cost satisfy

$$c_{A,B}(Q,L) = c_0+\lambda \frac{Q^2}{L}$$

where Q is target trade size and L seeded corridor liquidity. Combining with the formula of indirect routing above, a direct pool dominates bridge routing only if

$$L > L^* \equiv \frac{\lambda Q^2}{C_{A\to B}^{U}-c_0}$$

That means, for decentralized liquidity to be meaningful, it must cross a minimum depth threshold before users rationally prefer it to the incumbent bridge route. Hence, insofar as there is a way to bootstrap liquidity of non-USD stablecoins at a very low cost and the scale of liquidity passes the minimum threshold, this could be a game changer to serve the whole new market of developing countries haunted by the inefficiencies from the legacy system for decades.

Conclusion: Redefining the Global FX Liquidity

The recent wave of stablecoin FX solutions, despite their impressive fundraising, fundamentally misdiagnoses the friction in cross-border payments. By building sleek API wrappers on top of legacy OTC desks, these platforms merely optimize the discovery of liquidity while leaving the production of liquidity entirely unchanged. They remain tethered to the same centralized, balance-sheet-intensive banking infrastructure that makes exotic currency corridors prohibitively expensive in the first place. As we have seen, the high cost of FX in emerging markets is not a technological routing problem; it is a structural market failure rooted in concentrated inventory risk and punitive regulatory capital requirements.

To achieve a meaningful reduction in the cost of global payments, we must move beyond digitizing the old hierarchy. The true promise of on-chain FX lies in the fundamental unbundling of risk-bearing capital from legacy banking infrastructure. By leveraging blockchain technology to democratize liquidity, we can open the market to a diverse, global array of participants—from regional treasury desks to crypto-native funds and local exporters.

This decentralized approach is not just an ideological shift; it is a mathematical imperative. Because risk-bearing costs are convex, distributing a corridor's inventory imbalance across N diverse participants inherently minimizes the aggregate warehousing cost, Ψ(Q), making it vastly cheaper than forcing a single traditional dealer to absorb the entire risk. Furthermore, by bootstrapping direct, non-USD stablecoin pairs that cross the necessary liquidity threshold L∗, we can finally eliminate the forced "USD Triangulation" tax that has burdened developing nations for decades.

Ultimately, the missing piece of on-chain FX is not better software—it is democratized liquidity. If we can successfully lower the fixed costs of participation and invite the world to share in inventory risk, we will not just marginally improve cross-border payments. We will completely reshape the market structure of foreign exchange, bringing unprecedented financial immediacy to the emerging markets that need it most.