The stablecoin boom won’t continue without decentralized interoperability

Stablecoins are the cornerstone of the digital asset market with a market capitalization of over $ 100 billion. Governments are already investing considerable resources to keep up with trends. A November 2021 report released by the United States President's Task Force on Financial Markets details the Various measures to ensure the regulation of stablecoins. it is implemented within government guidelines. TO global central bank survey The Bank for International Settlements (BIS) shows that 86% of central banks are now actively engaged in some way with central bank digital currencies (CBDC), a government-backed form of a stablecoin. Of this cohort of central banks, seven have already officially launched CBDCs, while 17 more are in the pilot phase. according the Atlantic Council's CBDC tracker.

Like all cryptocurrencies, stablecoins are based on blockchain technology to support digital transactions between pairs (P2P), which gives them the properties of a bearer instrument and final settlement of cash. This underlying decentralized infrastructure has promises like faster transactions, lower settlement costs, greater transparency, and greater control for end users.

Multiple different market players, both public and private, have developed multiple fragmented blockchain networks. To be fully useful, stablecoins must trade many of them. Today, innovative stablecoin developers such as Dai (DAI), TerraUSD (UST), and USD Coin (USDC) face undue costs and safety risks by building unique bridges to make this happen. For the market to grow and innovate even more, a universal interoperability network is needed that securely connects all blockchain networks. These universal interoperability solutions will also help CBDC and stablecoin developers overcome the costs and security risks associated with single builds.

The need for blockchain interoperability

Digital assets cannot reach their potential by operating on siled networks, and stablecoins are no different. Interoperable design solutions will enable stable assets to play a critical role in the economic transformation of many countries by improving costs, time, and administration associated with cross-border transactions, remittances, and even supply chain management. Interoperability solutions can facilitate the deployment of digital assets, both on blockchain networks and between specific CBDCs.

USDC, one of the most dominant stablecoins on the market, gives us a good example of the need for interoperability between blockchains. After USDC was initially implemented on Ethereum, the Center consortium, the USDC developers, had to rebuild the USDC stack on other blockchain networks such as Solarium and Algorand, among others, to respond to the growing market demand for applications in these networks. By building these stacks, the USDC developers were addressing real problems and shortcomings: Different technology stacks fragment the liquidity of their stablecoin.

A single network of interoperability between different blockchains could make these decentralized applications (DApps) and assets available to the entire blockchain ecosystem without re-deploying software stacks on each new blockchain network. This would help reduce demand pressure on developer resources at the protocol and application level.

Blockchain interoperability would mean that stablecoin transactions, including payment transfers and gambling, could be executed between stablecoin issuers and holders of different blockchain networks. This type of solution would greatly increase liquidity and ensure greater compounding capacity within the stablecoin market of over $ 100 billion. It would also deny the need for stablecoin issuers to go through the cumbersome processes of listing their stablecoins separately on each blockchain network, as they currently do.

Related: Regulators are coming for stablecoins, but what should they start with?

CBDCs also require interoperability. A BIS report from July 2021 the need stands out so much for multilateral collaboration and the need for network interoperability between CBDCs. Although some governments will want to pursue protectionist policies, interoperability will benefit those who take a more open approach, facilitating international transactions involving CBDCs, including cross-border trade flows, international remittances, and cross-border transactions. These benefits are perhaps part of the reason why the Banque de France associated with Banque Centrale de Tunisie for the seventh CBDC experiment in France. On launch of Nigeria's eNaira digital currency, the Governor of the Central Bank of Nigeria embraced the benefits of its newly launched digital currency that works within an interoperable framework.

Core of security and decentralization for interoperable designs

Developer efforts, described above, on the world's largest stablecoins illustrate the need for interoperability. They also underscore the risks and costs of building ad-hoc solutions in a world that does not yet have a universal interoperability protocol. Due to the complex requirements of connecting different blockchain networks, interoperability between chains adds additional security considerations. Being exposed to multiple blockchains opens these networks up to more potential attack vectors. The world witnessed a devastating example of this in August when an attacker depleted a cryptocurrency valued at more than $ 600 million from Poly Network, an interoperability bridge used in decentralized finance (DeFi) applications.

Any blockchain network that aims to implement interoperability solutions must be built to ensure the highest security standards in the industry, but at the same time not compromise its vitality, efficiency or decentralization. Multi-party cryptography and decentralized consensus are the key components that allow developers to build robust and scalable interoperable systems. Combining these primitives allows you to create decentralized interoperability protocols that can securely protect cross-chain transactions and remain secure in the presence of multiple malicious participants.

Blockchain interoperability will open up new economic opportunities

As the rollout of CBDC pilot projects accelerates and the growth of stablecoins continues, global trade bodies, technologists, blockchain developers, and payment providers will follow their development and success. CBDC stablecoin programs and projects. They are looking for ways these innovations can introduce new processes to the domestic and international payments landscape. The benefits of a universal interoperability framework for stablecoins will increase the scalability of international payment transactions between countries, thus facilitating more efficient and improved cross-border trade flows, faster settlement of international remittances, and more financial inclusion through digital devices such as telephones. smart. Digital economic developments derived from such a system will help boost economic GDP in many countries.

Related: The scourge of stablecoins: regulatory hesitancy can make adoption difficult

For societies and economies to reap the full benefits of CBDCs, universal interoperability will be necessary to support the integration and operation of the international payments system. Similarly, stablecoins issued on different blockchain networks can only successfully facilitate digital payments if they can be universally accepted on various blockchain networks. A universal interoperability network on which CBDCs and stablecoins can operate effectively will open up more economic and business benefits for end users, businesses, and governments alike.

This article was a co-author of this article. Sergey Gorbunov and Tai Panich.

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