While the notion of a non-volatile, price-stable cryptocurrency is often bandied about in economic literature, there are numerous organizational and algorithmic roadblocks associated with this technology. “Stablecoins,” as they are called by the greater blockchain community, are digital tokens (much like Bitcoin and Litecoin) that are intended to provide measurable stability and security.
According to this article, these coins are “designed to be used as a unit of account and even as a store of value.” Digitally, these tokens would have extremely broad and substantial implications across the world of fintech.
“Stablecoins are what allow us to fully realize the promise of blockchain technology,” says Cryptolinks. “Any application which requires a low threshold of volatility to be viable on a blockchain, consumer loans for example, simply cannot be denominated in a currency which fluctuates 10–20 percent in a day, like Bitcoin and Ether. If you’re using Bitcoin to send a remittance from one country to another, there’s a good chance that the price movement over the period of one block confirmation (how long it takes the blockchain to include your transaction) will be larger than the fees charged by Western Union or PayPal.”
The outstanding problem, however, is that no team has been able to develop a universally accepted stablecoin that does not compromise features of security or decentralization.
There are a few companies in the space making headway. For example, the TrueCoin Project is building a USD-backed stablecoin that is 100 percent collateralized, legally protected and transparently audited. The team comes out of Stanford, Palantir and Google; its backers include Founders Fund Angel, Stanford’s StartX and Blocktower Capital. TrueCoin has developed a legal framework for collateralized cryptocurrencies in collaboration with Cooley and Arnold & Porter, and has a growing network of fiduciary, compliance and banking partners.
The TrueCoin project offers a much-needed alternative to Tether, a USD-backed stablecoin that has grown to over $1.5 billion but is widely distrusted by crypto exchanges and traders. Tether holds their fiat currency in a centralized bank account and does not offer legal protection for token holders. TrueCoin’s solution offers transparent monthly auditing, 100 percent collateral in USD and enforceable legal rights for token holders, enabling the first trustworthy USD-backed stable coin. This is a massive upgrade for financial stakeholders who seek stability in cryptocurrencies.
TrueCoin leverages trusts to provide certificates of ownership of USD in a real set of bank accounts. Trusts are extremely flexible and robust financial vehicles that are often subject to daily auditing and complete legal protection for token holders under trust law. Serving as a more secure, distributed substitute for a single central bank account, trusts will empower near-instantaneous exchanges between tokens and fiat currencies, enabling real-world utilization.
Through TrueUSD, “users have access to a growing network of trust accounts, each managed by distinct professional fiduciaries. As users add or redeem USD in each trust account, the account will mint or destroy the corresponding tokens.” Thus, this innovative stablecoin can scale up by adding more bank accounts without increasing counterparty risk.
Stablecoins could quickly become the universally accepted, international currency of the future. They have the potential to empower everyone to take part in an evolving crypto-economy, without compromising security and freedom. If implemented at scale, they are poised to become a foundational component of the next-generation economy.
It will be interesting to see how different teams take on this technical and operational challenge of scaling up a stablecoin.
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Last modified: March 4, 2021 5:04 PM