With the signing of the GENIUS Act, it does seem almost inevitable that crypto adoption is going to rise, and stablecoins are going to be at the forefront of this shift. Tying back to traditional assets brings a certain level of comfort to users — particularly those who are new to the world of web3. But there are still aspects that require more focus.
Summary
Mainstream momentum — Ownership of crypto is up 33% and regulation is turning in a positive direction, paving the way for stablecoins to become part of international financial markets.
Beyond code to trust — Smart contracts have too often been security liabilities; mainstream adoption requires protocol-level compliance and flexible token standards ("Smartcoins").
Privacy-driven compliance — Zero-knowledge proofs can authenticate identities or attributes (e.g., age for buying alcohol) without revealing personal information, balancing regulation with consumer privacy.
Path forward — Stablecoins that are adaptable, safe, and privacy-protecting might overcome existing barriers to adoption and become mainstream financial utilities.
A bright road ahead?
For more than a decade, the vision of digital assets has been to witness mainstream adoption in everyday life. Of course, there have been hurdles to clear in order to allow mainstream adoption. Regulation has been one, as has growing participation by users who are not web3.
For both of these reasons, fortunately, there is a better turn expected. Law sees better indicators for future adoption of such assets. Moreover, since crypto ownership has risen by 33%, the broader market notices the asset as well. Combined, this says a very good thing about the future of assets such as stablecoins.
However, not all stablecoin movements have had a positive result. TerraUSD's 2022 collapse highlighted systemic instability in stablecoin design. Shortcomings include a lack of clear, auditable reserves, too much dependence on smart contracts with no fail-safes, and zero regulatory oversight that illustrate the issues stablecoins are experiencing.
The treatment of these risks has been cosmetic at best. Most stablecoins sit on general-purpose blockchains that are not designed for regulated finance. The absence of a compliance-driven strategy is an issue that will exclude stablecoins from the mainstream.
Ironclad stablecoins
Not all stablecoins are created equal. These tokens, once viewed as niche add-ons to a revolutionary industry, are knocking on the doors of giga-fincancial markets. As stablecoins gain momentum through mainstream consumer markets, protocol-level compliance — and, in particular, privacy — will grow more imperative.
Concurrently, emphasis on compliance at the protocol level should not take precedence over user convenience. Although there are numerous actively adopting the asset, stablecoins remain an alien phenomenon to most. Crypto-sceptics in particular will require usability as much as compliance.
Re-execution of 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.
So far, smart contracts have been touted as the solution to make trust and automation possible for stablecoins. Yet, their performance has been less than impressive. The unbridled freedom of smart contracts has created security flaws, and billions of dollars in losses have ensued. From the hack of the DAO back in 2016 to more contemporary bridge attacks and hacks, smart contracts have been an all-too-frequent vulnerability in blockchain security.
For stablecoins to become an integral part of the ecosystem, industries have to rise above code and create something much greater — trust. Nevertheless, there can never be a point of consensus on trust with a digital asset. The definition itself will change from nation to nation and even company to company.
Making stablecoins smart
For stablecoins to gain mainstream confidence in the marketplace, they must be fluid. Instead of using smart contracts to set the terms of a contract, the tokens themselves can handle the heavy lifting. By imprinting token standards directly onto the blockchain, the stablecoin can be customized to meet the compliance mandates in existence.
These 'Smartcoins' would then be able to adjust according to the legislation, requirements, and needs of the transaction, allowing more diversified use cases for the market. The second advantage is that by issuing stablecoins at the chain level, it eliminates the need for smart contracts, therefore decreasing 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. Rather, a transaction of a stablecoin must present the required details to all involved parties in such a manner that prevents identity revelation. 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 instance, a purchase of alcohol would need age confirmation. A ZKP will ensure the buyer is of appropriate age to the seller without revealing any confidential information in the process. The seller remains compliant and can be sure that the sale is lawful, while the buyer maintains their confidentiality in the transaction.
The rise of stablecoins cannot be disputed, but their success will be as versatile — and secure — as possible. Rather than falling back on past practices that have been subpar, the industry must establish better systems that allow for wider adoption. Only then can stablecoins really go mainstream
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