The stablecoin boom will not continue without decentralized interoperability
Stablecoins are the cornerstone of the digital asset market with a market capitalization of over $ 100 billion. Governments have devoted considerable resources to catching up on this trend. A November 2021 report published by the US Presidential Working Group on Financial Markets describes various measures to ensure that regulation of stablecoins is implemented in accordance with government guidelines. A global central bank survey by the Bank for International Settlements (BIS) shows that 86% of central banks are currently in some way actively involved in central bank digital currencies. Of this cohort of central banks, seven have now officially launched CBDCs, while another 17 are in beta, according to the Atlantic Council’s CBDC tracker.
Like all other cryptocurrencies, stablecoins rely on blockchain technology to power peer-to-peer (P2P) digital transactions and give them the ultimate holding and settlement properties of cash. This underlying decentralized infrastructure promises faster transactions, lower processing costs, improved transparency and more control for end users.
Different market sectors, both public and private, have developed many fragmented blockchain networks. To get their full benefits, stablecoins need to work on many of them. Today, developers of innovative stablecoins such as Dai (DAI), TerraUSD (UST) and USD Coin (USDC) are faced with unreasonable costs and security risks in building a one-off bridge to make this happen. In order for the market to continue to grow and innovate, a global interoperability network is required that securely connects all blockchain networks. These globally interoperable solutions will also help CBDCs and stablecoin developers overcome the costs and security risks associated with a one-time build.
Demand for blockchain interoperability
Digital assets cannot reach their potential by operating on networks, and stablecoins are no different. Interoperable design solutions will enable resilient assets to play an important role in the economic transformation of many countries by improving the cost, time and management of cross-border transactions, remittances and even supply chain management. Interoperability solutions can facilitate the delivery of digital assets both on blockchain networks and between specific CBDCs.
USDC, one of the most dominant stablecoins on the market, is a prime example of the need for interoperability between blockchains. After USDC was initially deployed on Ethereum, the Central Consortium, the developers of USDC, had to rebuild the USDC stack on other blockchain networks such as Solana and Algorand, among others, to meet the demand in these networks. When building these stacks, the USDC developers tackled real problems and shortcomings: Different technology stacks distribute the liquidity of their stablecoins.
A single network with interoperability between different blockchains can make decentralized applications (DApps) and assets available for the entire blockchain ecosystem without having to re-deploy hardware stacks in each new blockchain network. This will help reduce the pressure on developer resources at the protocol and application levels.
Blockchain interoperability means that stablecoin transactions, including payment transfers and staking, can be carried out between stablecoin issuers and owners of different blockchain networks. This type of solution will greatly boost liquidity and ensure greater agglomeration in the over $ 100 billion stablecoin market. It would also eliminate 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 about to introduce stablecoins, but where should they start?
CBDCs also require interoperability. The BIS report of July 2021 underlines both the need for multilateral cooperation and the need for network interoperability between the CBDCs. While some governments prefer protectionist policies, interoperability will benefit those who take a more open approach to facilitate international transactions with CBDCs, including: This includes cross-border trade flows, international money transfers and cross-border transactions. These benefits are likely one of the reasons the Banque de France partnered with the Banque Centrale de Tunisie for the seventh French CBDC experiment. When the Nigerian digital currency eNaira was launched, the Governor of the Central Bank of Nigeria acknowledged the benefits of the newly introduced digital currency, which operates in an interoperable framework.
Security and decentralization core for interoperable designs
The efforts of the developers on the world’s largest stablecoins outlined above show the need for interoperability. They also highlight the risks and costs of building ad hoc solutions in a world where there is still no universal interoperability protocol. Because of the complex requirements for interconnecting different blockchain networks, cross-chain interoperability adds additional security considerations. Exposure to multiple blockchains opens these networks to more potential vectors of attack. The world saw a terrifying example in August when an attacker siphoned over $ 600 million worth of cryptocurrencies from Poly Network, an interoperability bridge used in decentralized financial (DeFi) applications.
Every blockchain network that implements interoperability solutions must be built in such a way that the highest security standards in the industry are guaranteed while at the same time not affecting the liveliness, efficiency or decentralization of the network. Multi-party cryptography and decentralized consensus are key components that enable developers to build scalable and robust interoperable systems. The combination of these principles enables decentralized interoperability protocols to be built that securely protect cross-chain transactions and remain protected from the presence of many malicious participants.
Blockchain interoperability will open up new economic opportunities
As the implementation of CBDC pilots accelerates and the growth of stablecoins continues, world trade authorities, technologists, blockchain developers and payment providers will monitor the development and success of these CBDC programs and stablecoin projects. They investigate how these innovations can bring new processes into the national and international payment traffic landscape. The benefits of a global interoperability framework for stablecoins will increase the scalability of international payments between countries, enabling more efficient cross-border trade flows as well as improved, faster and more financially inclusive international transfers via digital devices such as smartphones. The growth of the digital economy emanating from such a system will help boost economic GDP in many countries.
Related: The scourge of stablecoins: regulatory hesitation could hinder acceptance
In order for societies and economies to take full advantage of CBDCs, global interoperability is required to underpin the integration and functioning of the international payments system. Likewise, stablecoins issued in different blockchain networks can only successfully enable digital payments if they are widely accepted in different blockchain networks. A global interoperability network that enables CBDCs and stablecoins to function effectively will bring more commercial and economic benefits to end-users, businesses and governments.
This article was co-authored by Sergey Gorbunov and Tai Panich.
Sergey Gorbunov is co-founder and CEO of Axelar, the decentralized interoperability network that connects blockchain ecosystems. He did a PhD. from MIT, where he met Dr. Microsoft was. Partner. Sergey is a co-author of many cryptographic protocols, standards and systems. He is also on the founding team of Algorand, where he works on the design and development of the core platform and leads the cryptographic team.
Tai Panich is Investment and Venture Manager at SCB 10X, the digital technology investment arm of Siam Commercial Bank, the largest and oldest bank in Thailand. She has over 20 years of technology investment experience in Silicon Valley, New York and Singapore. Her expertise includes investments in technology companies (both private and public), especially in the areas of Fintech, Blockchain and DeFi, Deep Technology (AI, robotics, semiconductors, software and software), enterprise hardware and Internet / media). Prior to this position, Tai was Portfolio Manager at Pictet Asset Management, where she invests in global technology companies with a focus on Asia.
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The stablecoin boom will not continue without decentralized interoperability
Stablecoins are the cornerstone of the digital asset market with a market capitalization of over $ 100 billion. Governments have devoted considerable resources to catching up on this trend. A November 2021 report published by the US Presidential Working Group on Financial Markets describes various measures to ensure that regulation of stablecoins is implemented in accordance with government guidelines. A global central bank survey by the Bank for International Settlements (BIS) shows that 86% of central banks are currently in some way actively involved in central bank digital currencies. Of this cohort of central banks, seven have now officially launched CBDCs, while another 17 are in beta, according to the Atlantic Council’s CBDC tracker.
Like all other cryptocurrencies, stablecoins rely on blockchain technology to power peer-to-peer (P2P) digital transactions and give them the ultimate holding and settlement properties of cash. This underlying decentralized infrastructure promises faster transactions, lower processing costs, improved transparency and more control for end users.
Different market sectors, both public and private, have developed many fragmented blockchain networks. To get their full benefits, stablecoins need to work on many of them. Today, developers of innovative stablecoins such as Dai (DAI), TerraUSD (UST) and USD Coin (USDC) are faced with unreasonable costs and security risks in building a one-off bridge to make this happen. In order for the market to continue to grow and innovate, a global interoperability network is required that securely connects all blockchain networks. These globally interoperable solutions will also help CBDCs and stablecoin developers overcome the costs and security risks associated with a one-time build.
Demand for blockchain interoperability
Digital assets cannot reach their potential by operating on networks, and stablecoins are no different. Interoperable design solutions will enable resilient assets to play an important role in the economic transformation of many countries by improving the cost, time and management of cross-border transactions, remittances and even supply chain management. Interoperability solutions can facilitate the delivery of digital assets both on blockchain networks and between specific CBDCs.
USDC, one of the most dominant stablecoins on the market, is a prime example of the need for interoperability between blockchains. After USDC was initially deployed on Ethereum, the Central Consortium, the developers of USDC, had to rebuild the USDC stack on other blockchain networks such as Solana and Algorand, among others, to meet the demand in these networks. When building these stacks, the USDC developers tackled real problems and shortcomings: Different technology stacks distribute the liquidity of their stablecoins.
A single network with interoperability between different blockchains can make decentralized applications (DApps) and assets available for the entire blockchain ecosystem without having to re-deploy hardware stacks in each new blockchain network. This will help reduce the pressure on developer resources at the protocol and application levels.
Blockchain interoperability means that stablecoin transactions, including payment transfers and staking, can be carried out between stablecoin issuers and owners of different blockchain networks. This type of solution will greatly boost liquidity and ensure greater agglomeration in the over $ 100 billion stablecoin market. It would also eliminate 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 about to introduce stablecoins, but where should they start?
CBDCs also require interoperability. The BIS report of July 2021 underlines both the need for multilateral cooperation and the need for network interoperability between the CBDCs. While some governments prefer protectionist policies, interoperability will benefit those who take a more open approach to facilitate international transactions with CBDCs, including: This includes cross-border trade flows, international money transfers and cross-border transactions. These benefits are likely one of the reasons the Banque de France partnered with the Banque Centrale de Tunisie for the seventh French CBDC experiment. When the Nigerian digital currency eNaira was launched, the Governor of the Central Bank of Nigeria acknowledged the benefits of the newly introduced digital currency, which operates in an interoperable framework.
Security and decentralization core for interoperable designs
The efforts of the developers on the world’s largest stablecoins outlined above show the need for interoperability. They also highlight the risks and costs of building ad hoc solutions in a world where there is still no universal interoperability protocol. Because of the complex requirements for interconnecting different blockchain networks, cross-chain interoperability adds additional security considerations. Exposure to multiple blockchains opens these networks to more potential vectors of attack. The world saw a terrifying example in August when an attacker siphoned over $ 600 million worth of cryptocurrencies from Poly Network, an interoperability bridge used in decentralized financial (DeFi) applications.
Every blockchain network that implements interoperability solutions must be built in such a way that the highest security standards in the industry are guaranteed while at the same time not affecting the liveliness, efficiency or decentralization of the network. Multi-party cryptography and decentralized consensus are key components that enable developers to build scalable and robust interoperable systems. The combination of these principles enables decentralized interoperability protocols to be built that securely protect cross-chain transactions and remain protected from the presence of many malicious participants.
Blockchain interoperability will open up new economic opportunities
As the implementation of CBDC pilots accelerates and the growth of stablecoins continues, world trade authorities, technologists, blockchain developers and payment providers will monitor the development and success of these CBDC programs and stablecoin projects. They investigate how these innovations can bring new processes into the national and international payment traffic landscape. The benefits of a global interoperability framework for stablecoins will increase the scalability of international payments between countries, enabling more efficient cross-border trade flows as well as improved, faster and more financially inclusive international transfers via digital devices such as smartphones. The growth of the digital economy emanating from such a system will help boost economic GDP in many countries.
Related: The scourge of stablecoins: regulatory hesitation could hinder acceptance
In order for societies and economies to take full advantage of CBDCs, global interoperability is required to underpin the integration and functioning of the international payments system. Likewise, stablecoins issued in different blockchain networks can only successfully enable digital payments if they are widely accepted in different blockchain networks. A global interoperability network that enables CBDCs and stablecoins to function effectively will bring more commercial and economic benefits to end-users, businesses and governments.
This article was co-authored by Sergey Gorbunov and Tai Panich.
Sergey Gorbunov is co-founder and CEO of Axelar, the decentralized interoperability network that connects blockchain ecosystems. He did a PhD. from MIT, where he met Dr. Microsoft was. Partner. Sergey is a co-author of many cryptographic protocols, standards and systems. He is also on the founding team of Algorand, where he works on the design and development of the core platform and leads the cryptographic team.
Tai Panich is Investment and Venture Manager at SCB 10X, the digital technology investment arm of Siam Commercial Bank, the largest and oldest bank in Thailand. She has over 20 years of technology investment experience in Silicon Valley, New York and Singapore. Her expertise includes investments in technology companies (both private and public), especially in the areas of Fintech, Blockchain and DeFi, Deep Technology (AI, robotics, semiconductors, software and software), enterprise hardware and Internet / media). Prior to this position, Tai was Portfolio Manager at Pictet Asset Management, where she invests in global technology companies with a focus on Asia.
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