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By Christoph Mussenbrock, CEO & Co-Founder of Etherisc
USDC’s depeg event in March this year raised questions about the resilience of stablecoins, which in principle are meant to be less volatile than other digital assets. Stablecoins still play a vital role in connecting traditional and crypto markets, underscored by continued interest from institutional investors in the asset class, but aren’t currently ‘stable’ enough for further reliable growth. Depeg protection through decentralized insurance is a perfect solution for bridging the gap between the promise of stablecoins and their current less than stable reality.
Growing Institutional Interest in Stablecoins
The stablecoin market, valued at approximately $128B USD, has driven institutional interest in digital assets. As a form of programmable money, stablecoins enable fast and efficient peer-to-peer transactions and cross-border payments without the need for financial intermediaries, streamlining business processes and saving institutions’ time and resources.
With these benefits in mind, in April, Societe Generale’s (GLE) crypto division, SG Forge, entered the stablecoin market, introducing a stablecoin pegged to the euro (EUR) on Ethereum. The banking giant highlighted increasing demand from its clientele for robust on-chain transaction, liquidity and refinancing tools.
This move by SG Forge was followed by Visa announcing a new focus on stablecoin payments as part of a product development initiative. While the USDC depeg event was a wake-up call, it was not the end of the road for stablecoins. Clearly, the benefits of programmable money continue to outweigh the costs for institutional investors, evidenced by ongoing investment.
Lessons Learned from the Stablecoin Market Rebound
By design, centralized stablecoins are linked to traditional banking and financial markets, and as such can be affected by events in this sector. Institutional investors may have the financial capital to weather these storms, but retail investors may not. With this in mind, it’s worth revisiting the USDC event, unpacking what went wrong, how the market rebounded, and what can be done to make stablecoins a more reliable asset class.
Before March, Circle had a track record for maintaining USDC’s peg to the dollar, which is maintained through its minting and burning process. Trouble arose with the collapse of the lender Silicon Valley Bank (SVB), with whom Circle had a significant amount of its reserves tied up, raising fear and uncertainty among USDC holders.
For institutions and consumers alike, this situation highlighted a key issue—unlike traditional bank assets, stablecoins and other digital assets are not banked with the same regulations which guarantee deposit insurance (up to $250k) to protect customers.
It’s worth noting that Circle had built a strong foundation of trust with its users, publishing monthly reserve reports. In response to this crisis, Circle deployed corporate funds to repay USDC owners. Even without regulatory enforcement, Circle and other stablecoin providers have prioritized transparency in their day-to-day operations to reassure customers.
The purpose of stablecoins is to provide a predictable haven within the volatile world of cryptocurrency. While stablecoin providers showed dynamism responding to the USDC depeg event, users need greater peace of mind in order to attract more capital to this emerging market—enter stablecoin depeg protection cover.
A Decentralized Insurance Model for Stablecoins
Stablecoin insurance provides an innovative solution to uncertainty in the stablecoin market, giving greater confidence to users who are concerned about the volatility of digital assets. Under such a scheme, an insurance marketplace can connect people seeking coverage with investors who can provide collateral. Investors benefit through return on their investment via premiums paid, while consumers’ investments are protected against loss in the case of a stablecoin losing its pegged value. This will bring greater liquidity to the market, which in turn supports innovation and long-term stability.
Not all insurance products are built the same, however, and in order to meet the needs of consumers, there needs to be a decentralized insurance model. Decentralized insurance cuts out the middleman by leveraging blockchain technology for peer-to-peer risk pools. Importantly, decentralization eliminates financial intermediaries and lengthy claim assessments, providing fast and reliable payouts in times of need.
A decentralized insurance support model for stablecoins would improve user confidence and lower the barriers to entry, enabling a more inclusive asset class. This solution is fit for the asset class it serves – abandoning the bureaucracy of traditional systems for a more efficient and democratized solution.
The Future of Stablecoins
While the USDC depeg event brought a shock to the system, it also provided a much-needed wake-up call, highlighting the need for greater transparency as an industry standard. Fluctuations have always occurred, both in traditional and crypto markets. Decentralized insurance models grant users peace of mind for such events, while avoiding the problems associated with the traditional insurance industry and financial intermediaries. The combination of security—granted through fast, transparent and automated payouts via decentralized, blockchain insurance—along with the utility of stablecoins will lay the groundwork for increased growth and innovation in digital assets.
About the author
Christoph Mussenbrock is the Co-Founder and Creator of Protocol and Architecture at Etherisc, where his leadership and technical expertise work to bring together groundbreaking new insurance solutions based on blockchain technology. He boasts an esteemed portfolio of experience in the financial and insurance sectors. After several years as a board member of a German cooperative bank, Christoph transitioned to the IT industry, undertaking the role of Chief Program Manager, and Chief of Strategy Development at Germany’s leading IT service provider, Fiducia & GAD IT AG.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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