Stablecoins can — and will — go mainstream | Opinion

With the signing of the GENIUS Act, it feels all but inevitable that crypto adoption will increase, with stablecoins leading the way in this change. Being pegged to traditional assets provides a degree of reassurance to users — especially those unfamiliar with the world of web3. However, there are still elements that need increased attention.

A bright road ahead? 

For over a decade, the dream of digital assets has been to see mainstream adoption in our daily lives. Naturally, there have been barriers to overcome to enable this mainstream adoption. Legislation has been one, as has increasing engagement from non-web3 users.

Fortunately, both of these factors are seeing a positive change. Legislation indicates positive signs towards the future adoption of these assets. Additionally, with a 33% increase in crypto ownership, the wider market is taking note of the asset. When put together, this paints a very positive picture about the future of assets like stablecoins.

But not every movement in stablecoins has seen a positive outcome. The 2022 collapse of TerraUSD (UST) showed systemic vulnerabilities in stablecoin design. Issues such as a lack of transparent, auditable reserves, an overreliance on smart contracts without fail-safes, and zero regulatory oversight demonstrate the problems facing stablecoins.

The response to these risks has been superficial at best. Many stablecoins are on general-purpose blockchains that are not built for regulated finance. The lack of a compliance-focused approach is a problem that will prevent stablecoins from entering the mainstream.

Ironclad stablecoins 

Not all stablecoins are designed equally. These tokens, once perceived as niche accessories to a disruptive industry, are knocking at the doors of giga-fincancial markets. As stablecoins accelerate through mainstream consumer markets, protocol-level compliance — and specifically privacy — will become increasingly vital.

At the same time, prioritising protocol-level compliance should not override user convenience. While there are many actively embracing the asset, stablecoins are still a foreign concept to many. Crypto-sceptics, especially, will need usability alongside compliance. 

Rewriting the smart contract 

While stablecoins have the potential for day-to-day use, they can also offer to the market. With a robust, protocol-driven infrastructure backing the asset, the potential for a stablecoin to become a diversified and flexible tool expands.

To date, smart contracts have been pegged as the tool to enable trust and automation for stablecoins. However, their effectiveness has fallen short. The unchecked flexibility of smart contracts has led to security vulnerabilities, resulting in billions of dollars in losses. From the DAO hack in 2016 to more recent bridge attacks and hacks, smart contracts have too often been a weak link in blockchain security.

For stablecoins to become a mainstay, industries need to go beyond code and establish something far more important — trust. However, there will never be a single unified understanding of trust with a digital asset. The exact definition will vary from country to country and even business to business. 

Making stablecoins smart

In order for stablecoins to establish mainstream trust in the market, they need to be able to adapt. Rather than relying on smart contracts to define the parameters of an agreement, the tokens themselves can do the heavy lifting. By embedding token standards directly onto the blockchain, the stablecoin can be adapted to suit the compliance requirements in place.

These ‘Smartcoins’ can then adapt to suit the legislation, demands, and requirements of the transaction, enabling a greater variety of use cases for the market. The secondary benefit is that by issuing stablecoins at the chain level, it removes the need for smart contracts, which in turn reduces security vulnerabilities. 

Private identification

But if the industry truly wants stablecoins to reach a level of mainstream adoption, there needs to be a more robust approach to ID verification. In the current landscape, there’s a contradiction between the need for ID to buy certain goods and services, while ensuring the purchaser’s details remain secure. Methods such as passport uploads or even facial recognition are not fit for purpose. Instead, a stablecoin transaction needs to provide the necessary information to all parties in a way that avoids identity disclosure. 

Specifically, a system built with zero-knowledge proofs can allow information to be verified without revealing unnecessary details in the process. Users would undergo an identity check before account activation on the network with a verified ID service provider. This information remains secure, but enables verification on a range of different parameters.

For example, an alcohol purchase would require age verification. A ZKP will confirm that the purchaser is of a suitable age to the seller without disclosing any private information in the process. The seller can remain compliant and assured that the sale is legal, while the buyer retains their privacy in the transaction. 

The growth of stablecoins is undeniable, but their effectiveness will be limited to how versatile — and secure — they can be. Instead of relying on previous methods that have proven to be subpar, the industry needs to establish better mechanisms that enable increased adoption. Only then can stablecoins truly enter the mainstream.

Boris Bohrer-Bilowitzki

Boris Bohrer-Bilowitzki is the CEO of Concordium, an L1 blockchain and technology firm. He worked previously as the chief commercial officer for Copper.co and as the senior relationship manager at Newscape Capital Group, both in London. He attended the University of St. Gallen and holds an MBA from IMADEC University.