How Stablecoins Can Ensure Transparency And Trustworthiness In The Crypto Space

News, Opinion | March 11, 2019 By:

Cryptocurrencies have had a rollercoaster ride over the past number of years. There has been criminal and negligent behaviour – think Silk Road in 2013, Mt. Gox in 2014, and numerous ICO scams in 2017 – but there has also been a significant increase in adoption levels and understanding of the potentials of this new technology. Following a dramatic year in 2018, the time has come for the weaker blockchain and cryptocurrency projects to be filtered out, leaving more space for the legitimate, well-built projects to thrive. All that is needed is the trust of users and traders. Stablecoins, which offer many of the key features of cryptocurrencies whilst being backed by tangible, real-world assets or commodities, play a crucial role in bringing this trustworthiness, legitimacy, and transparency to the crypto market and are drawing attention from significant institutional investors.

How are stablecoins different to cryptocurrencies

A strong hindrance to trust in the cryptocurrency space is volatility. The value of Bitcoin, for example, went from almost 20,000 USD in December 2017 to around 3,000 USD in December 2018. The fundamental difference between stablecoins and other cryptocurrencies is that stablecoins are linked to real-world traditional currencies or assets, such as USD and CHF, or commodities, such as gold or oil. These are assets that already hold value in the traditional financial ecosystem. Stablecoins will be essential in powering new blockchain-based products and services — for example, in the tokenization of real estate through the fractionalized ownership, the simplification of private equity processes, and the automization of shares on the blockchain. Combining traditional and emerging financial tools, stablecoins represent a comfortable entry point for institutional traders, bringing trust and security to a space that has been deemed too volatile by many. In addition, new services can be built on your standard accounting currency like USD, CHF, EUR or GBP.

Trust and Transparency

The status of stablecoins as a vehicle of trust for the wider crypto space, while addressing volatility concerns, can’t be understated. In order to ensure that users trust stablecoins, proof-of-solvency is paramount. Where users are unable to verify that there are indeed assets backing a stablecoin, trust is lost. Concerns around falsification of assets or asset manipulation completely undermine confidence in the stablecoin model. The rise of stablecoins is directly influenced by trust, a feature which is increasingly important in relation to volatility concerns among institutional investors.

Trust increases in tandem with transparency, which can be implemented through the independent auditing of a company and its assets, and independent reviews of the smart contracts in place, thus ensuring no manipulation of information. It is also important that the stablecoin be pegged to an asset that is not only real-world, but that has shown itself to be stable over time; currencies that are affected by inflation should be avoided. Economies that have proven themselves to be stable over time, like Switzerland, however, would offer a viable fiat currency to peg a stablecoin to. Trust must remain a core value of stablecoins in order to garner more mainstream adoption.

Stablecoins provide a unique opportunity expand the crypto ecosystem to new investors and players through a heightened sense of stability. With this foundation, the coming decade must be marked by a reduction in unpredictability of prices and value, so as to encourage further adoption of cryptocurrencies. Once the general population understands that stablecoins offer a far more trustworthy and transparent alternative to many of the cryptocurrencies they may have heard or read about over the past year, greater uptake and adoption will follow. With that, so will the potential for a new, technologically advanced financial services and economic model.