Disclaimer: I used to struggle connecting the DVD player and those wires were colour coded. Hence why I’m not a coder, or an engineer. This article is for people like me.
Quick intro (scroll down if you find these uninteresting, I usually do)
One of the first things that wave hello as you enter the rabbit hole is stable coins (SCs). When I encountered USDT late 2020 I really didn’t pay much attention to it. It was just a step in the process to go from fiat to crypto. But as I went down the elevator, I started to get more and more interested in SCs. Especially when I realised how large this asset type is.
Total Fiat backed SC supply (source)
One of the things that became apparent very quickly to me is trust and verification. How could I know that when I buy USDT with AUD that their fiat backed reserves increase by the same amount? And did this matter.
I decided (and still do to a degree) that it doesn’t matter for the following reasons.
Modern capitalism is built around fractional banking, so why can’t crypto
Huge CEXs wouldn’t let me down would they….
If USDT/C/Dai & others failed, the ramifications would be huge (insert Luna rant here)
I wasn’t playing for sheep stations
Anything that holds value IMO is based on trust and perception. All other attributes that prop up value are secondary to this (insert a heap of people disagreeing). But how do you build trust?
Trust, perception, & verification (start reading here)
If everyone is using a SC it must be safe, right ? To a degree yes. If everyone perceives a SC to have parity value, then it has parity value. But perception can change faster than Elon Musk can tweet, and while trust takes time to build it takes seconds to destroy. If you can’t verify that your SCs are collateralised, you are relying on perception and trust.
If people start to perceive that SCs are not backed by the correct ratio of assets, and they loose trust, how do you verify that your SCs are indeed collateralised correctly?
Chainlink’s Proof of Reserve - PoR (keep reading please)
Unless you’ve been living on a sheep station running a Nokia 3210, SCs are causing a lot of issues. Chainlink have recently announced a way to verify perception and underpin trust in SCs.
The catch phrase from Chainlink is “making stable coins more stable” (I hope that didn’t take marketing more than 5 mins to come up with). But as reserves are held off-chain, how do you validate it on-chain?
The PoR solves this problem. Using oracle solutions and APIs PoR validates collateral off-chain and provides smart contracts with the data required to ascertain collateral levels. TrueUSD (TUSD) is the case study Chainlink reference and here is the process.
PoR process – TrustToken (source)
Now of course you need to start digging into the code if you really want to verify all this, and I am sure some will, but that falls out of the scope of this article (and my intellectual ability). It’s also important to note that PoR relies on recurring audits by Chainlink into off-chain assets and as Wirecard investors will tell you, not every audit is created equally (insert rant from CPAs).
Conclusion (you can stop reading now)
This is a fantastic leap forward for SCs and the solution is coming from a project we all know and love. I can see this becoming very popular, very soon.
Maybe not on the sheep station, but mass adoption can only go so far.
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