With a value pegged to another currency, stablecoins in theory maintain steady price levels — hence the name. However, as investors saw in the Terra (LUNA) and UST crashes in May 2022, even stablecoins are subject to diminishing value in times of volatility if underlying pegs are lost or drop in value themselves.
As investors continue to search for reliable instruments in the face of inflation and market uncertainty, enhancing stability in the stablecoin space is an essential effort for attracting continued and new investment. Below, six members of Cointelegraph Innovation Circle discuss practical ways the space can improve stability and reassure investors.
Implement strict reserve requirements for underlying assets
There’s only one solution: Implement strict reserve requirements for the underlying assets supporting the stablecoin, such as a fixed ratio of reserves to the total supply of stablecoins in circulation. This ensures that there is sufficient backing for the stablecoin, reducing the risk of its value deviating from its peg. This reserve must be available for everyone to audit. – Erki Koldits, OÜ Popspot
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Embrace radical transparency
The cure for instability and uncertainty is radical transparency. Showing verifiable proof of reserves, undergoing independent audits and keeping your back-end systems open-source (when possible) is the best way to calm fears and stabilize what should always be stable. – Jae Yang, Tacen
Look into crypto collateralization
Looking closely into collateralization can come in handy. There are three forms of collateralization in stablecoins: fiat-based, non-collateralized and crypto-collateralized. When these forms are compared, investing in crypto collateralization might be the safest bet. Since these coins are “over-collateralized,” they can account for price fluctuations, leaving excess reserves in case of a significant drop in value. – Vinita Rathi, Systango
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Improve and standardize real-time price data and reliably track reserves
Stablecoin issuers should improve and standardize real-time price data to keep up with volatile exchange rates while maintaining tamper-proof methods to track reserves. Oracles are capable of collecting, verifying and deploying this information, but their consistency, reliability and security can be uncertain. Optimistic rollup-like mechanisms could play a significant role in this. – Yaoqi Jia, AltLayer
Maintain reserves of known stable assets
One thing the stablecoin space can do to improve stability in times of volatility is to maintain a strong backing by reserves of assets that are known to be stable, such as fiat currencies or low-risk securities. This can help to ensure that the stablecoin retains its value even when other cryptocurrencies or financial markets are experiencing volatility. – Wolfgang Rückerl, ENT Technologies AG
Pump the brakes on issuance
With problems of liquidity leading to insolvency in the ecosystem, stablecoins could try to avert these pitfalls by pumping the brakes on issuance. At the same time, crypto companies should reprioritize over-collateralization to ensure they can meet their community’s expectations. This will ensure that circulating value never eclipses reserves while giving users renewed confidence in holdings. – Oleksandr Lutskevych, CEX.IO
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.