• Implement strict reserve requirements for underlying assets
• Embrace radical transparency
• Tighten reserves and offer real-time pricing data
In the cryptocurrency market, the concept of a “stablecoin” has been gaining traction as investors look for ways to protect their investments from market volatility. Stablecoins are digital assets that are pegged to a fixed currency, or another asset such as gold, and are designed to maintain a stable value over time. However, as investors experienced in the Terra (LUNA) and UST crashes in May 2022, even stablecoins can be subject to diminishing value in times of volatility if the underlying peg is lost or drops in value itself.
As such, it is essential that the stablecoin space takes steps to better weather volatile periods and reassure investors. This can be done by implementing strict reserve requirements for the underlying assets supporting the stablecoin, such as a fixed ratio of reserves to the total supply of stablecoins in circulation. This ensures that there is sufficient backing for the stablecoin, reducing the risk of its value deviating from its peg. Furthermore, providing verifiable proof of reserves, undergoing independent audits and keeping back-end systems open-source (when possible) are all ways of embracing radical transparency, which can help to calm fears and stabilize the value of the stablecoin.
In addition to reserve requirements, tightening reserves and offering real-time pricing data to the market are also important steps to ensuring stability in the stablecoin space. By proactively monitoring the underlying asset’s price and adjusting the reserve accordingly, the stablecoin will be able to better weather periods of market volatility and maintain its desired price point. Additionally, providing real-time pricing data to the market will allow investors to make more informed decisions and better manage their risk.
Finally, it is also important for the stablecoin space to monitor and address any potential conflicts of interest. This includes ensuring that any individuals or entities associated with the stablecoin have no incentive to manipulate the price or otherwise benefit from a devaluation of the asset.
Overall, the steps outlined above are essential for ensuring stability in the stablecoin space and reassuring investors. By implementing strict reserve requirements, embracing radical transparency and tightening reserves, the stablecoin space can better weather volatile periods and attract continued and new investment.