With their value pegged to another currency, stablecoins theoretically maintain stable price levels – hence the name. However, as investors have seen in Terra (LUNA) and UST it crashes in May 2022, even stablecoins are subject to declining value in times of volatility if the underlying pegs are lost or decline in value.
As investors continue to seek reliable instruments in the face of inflation and market uncertainty, enhancing stability in the stablecoin space is a critical effort to attract additional and new investment. Six members below Cointelegraph Innovation Circle discuss practical ways the space can improve stability and reassure investors.
Implement strict reserve requirements for underlying assets
There is only one solution: Implement strict reserve requirements for the underlying assets backing the stablecoin, such as a fixed ratio of reserves to the total stablecoin supply in circulation. This ensures a sufficient background for the stablecoin, reducing the risk of its value deviating from its fixation. This reserve must be available for anyone to check. – Erki Koldits, OÜ Popspot
Embrace radical transparency
The cure for instability and uncertainty is radical transparency. The best way to calm concerns and stabilize what should always be stable is to show verifiable proof of reserves, undergo independent audits and keep your back-end systems open-source (if possible). – Jaeyang, Daddy
Check out crypto hedging
A careful look at collateral may be useful. There are three forms of collateral for stablecoins: fiat-based, non-collateralized, and crypto-collateralized. When these forms are compared, investing in crypto-hedging may be the safest bet. Since these coins are “over-collateralized”, they can account for price fluctuations and leave excess reserves in case of a significant drop in value. – Vinita Rathiová, Systango
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Improve and standardize real-time pricing data and reliably track reserves
Stablecoin issuers should improve and standardize real-time price data to keep pace with fluctuating exchange rates while maintaining tamper-proof reserve tracking methods. Oracle is able to collect, verify and deploy this information, but its consistency, reliability and security may 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 of reserves of assets known to be stable, such as fiat currencies or low-risk securities. This can help ensure that a stablecoin maintains its value even when other cryptocurrencies or financial markets experience volatility. – Wolfgang Rückerl, ENT Technologies AG
Pump the brakes on release
With liquidity problems leading to insolvency in the ecosystem, stablecoins could try to avert these pitfalls by curbing issuance. At the same time, crypto companies should re-prioritize over-provisioning to ensure they can meet the expectations of their community. This will ensure that circulating value never eclipses reserves while giving users renewed confidence in holdings. – Oleksandr Lutskevich, CEX.IO
This article was published via the Cointelegraph Innovation Circle, a trusted organization of blockchain technology industry leaders and experts who are building the future through the power of connection, collaboration and thought leadership. The views expressed do not necessarily reflect those of Cointelegraph.