Imagine receiving your entire salary in Bitcoin. All of your friends and family would call you crazy. The erratic price point of the currency would hamper your ability to invest in any long-term planning and would largely prevent you from participating in the modern economy.
As Vitalik Buterin, the co-founder of Ethereum, prophetically pointed out back in November of 2014, “One of the main problems with Bitcoin for ordinary users is that, while the network may be a great way of sending payments, much more expansive global reach and a very high level of censorship resistance, Bitcoin the currency is a very volatile means of storing value.”
Economically unpredictable, Bitcoin is fundamentally incapable of supporting the inevitable emergence of cryptocurrencies as mediums of payment in the mainstream economy. This is a major limiting factor for the otherwise valuable technology.
Stable alternatives more viable?
TrueCoin, a highly anticipated blockchain startup with venture investments from Blocktower Capital, Founders Fund Angel and Stanford’s StartX, has developed a U.S. dollar–backed stablecoin, designed specifically to solve many of Bitcoin’s shortcomings. They have also created a proprietary legal framework that effectively collateralises cryptocurrencies, providing an extra layer of insurance.
This security provides a heightened level of assurance to the crypto-economy. Built by a team of top engineers from Stanford and Google, TrueCoin, if implemented at scale, is poised to accelerate the global adoption of digital assets.
Their solution leverages a growing network of trusts, each managed by a professional fiduciary, to provide a fully auditable, legally enforceable cryptocurrency. Trusts, unlike conventional bank accounts, are extremely flexible and adaptable legal entities, subject to consistent auditing and wholly insured legal protection for token holders under a robust application of trust law.
The requirements of the trust are mirrored into an Ethereum-based smart contract such that, as users exchange fiat currency (USD), the trust account will automatically create or destroy the corresponding tokens. This enables token holders to legally bind trustees to exchange one token for one dollar in the trust, meaning they can immediately use the cryptocurrency as a form of payment in the real world.
When users want to redeem fiat for TrueUSD tokens, they go through a traditional identity-verification process, much like they would when registering for a new bank account. Their Ethereum address is then added to a whitelist of individuals with whom they may exchange tokens. This address is also appended to TrueCoin’s aggregator smart contract, which controls who can send money to whom.
With this structure in place, individuals can simply send TrueUSD tokens to the aggregator smart contract, which will automatically trigger a message to the user’s “host” bank to write them the corresponding amount of USD. This process also works in the other direction.
Importantly, since there is no single bank in control, the TrueCoin network can scale without compromising security risk or decreasing counterpart risk. The currency custodianship, rather, is “distributed” via a series of bank accounts.
Their platform takes user security extremely seriously. In their contract, they detail that they are legally obligated to exchange a user’s tokens for USD, which is enforced by trust law. These features bring an unprecedented level of transferability and stability to the industry. Coupled together, they have numerous real-world applications.
Perhaps the most promising opportunity is to bring the benefits of cryptocurrencies into the financial world.
Incumbent institutions, to date, have largely shied away from the crypto-economy because of the extreme volatility of trading prices. With TrueCoin’s stablecoin operating in a liquid market, numerous important stakeholders within the fiscal industry will have access to the benefits of crypto. Crypto-exchanges will finally be able to price their assets in terms of USD, a more easily understood system of measure. We can expect this nuanced change to help new users enter the community with far less friction.
Stablecoins as an effective tool for hedging
Crypto-traders can use the stablecoin to hedge against the volatility of alternative currencies and reduce portfolio exposure to the rollercoaster prices of Bitcoin and Ethereum. Financial institutions of all sizes will be able to operate using a legal structure that they are familiar with (trusts), in an asset they trust and depend on (USD).
Making the elements of cryptocurrency less unknown and more transparent is the desperately needed first step in supporting the healthy growth of this community. Furthermore, providing true currency stability will dramatically accelerate the adoption of digital assets within financial markets and services.
We are, however, still very much in the early days of a revolutionary movement and are likely to see a gold rush in the blockchain economy over the next few years. As the technology becomes more accessible to developers and startups, it will be interesting to see which decentralised applications come to fruition and gain public recognition.
Incumbents will have to respond to a budding ecosystem of upstarts entering this space to protect their market share. Regardless of the distribution of this industry’s time horizon, stable cryptocurrencies surely represent a key building block, essential to the growth of the crypto-economy.
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