Stablecoins and Smart Contracts: The New Era of Secure Digital Currency
The world of cryptocurrency is evolving fast, and so are the roles of stablecoins and smart contracts. Stablecoins are a special type of digital currency that aim to keep a stable value and
avoid the volatility of other cryptocurrencies. Smart contracts are crucial for stabilizing coins, as they enable automatic adjustments to supply and demand to maintain consistent prices.
This article will explore the benefits of connecting stablecoins and smart contracts, examining the importance of security, and offering some best practices for safe implementation along
with a case study to illustrate the realities.
What are Stablecoins?
Stablecoins are digital currencies designed to maintain a consistent value for a specific asset, hence the name "Stablecoins". Unlike traditional cryptocurrencies, which are highly volatile,
stablecoins are more reliable, consistent, and stable. One of their primary features is their ability to maintain a steady value. In addition to stability, stablecoins offer other benefits,
including ease of use for transactions and transparency through blockchain technology. They achieve stability through various means, such as tying their value to a particular asset or adjusting
the stablecoin's supply using computational procedures in response to changes in demand.
Stablecoins come in various types, each with its own advantages and disadvantages. Some stablecoins, known as fiat-backed stablecoins, are backed by paper currency, such as the US dollar, like
(USDT) and Gemini US Dollar
(GUSD). Commodity-backed stablecoins, on the other hand, are backed by specific commodities, such as
gold or silver, like Paxos Gold
stablecoins utilize complex algorithms to adjust the stablecoin's supply in response to fluctuations in demand, such as DAI
. Figure 1 shows the circulating supply of the top ten public
stablecoins that are pegged to the USD, based on their market capitalization, from January 2019 to September 2021. The "Other" category includes stablecoins such as Fei
, Paxos Dollar
, Neutrino USD
Figure 1: Circulating supply of the top ten public stablecoins [Source
Smart Contracts and Stablecoins
Smart contracts and stablecoins are a powerful combination that offers numerous benefits for businesses and investors. Smart contracts are essentially virtual contracts that automatically execute
when specific conditions are met, making them ideal for enforcing agreements between parties. When it comes to stablecoins, smart contracts can help maintain their stability by regulating the
supply and demand, limiting their usage, and even triggering asset buying or selling.
The use of smart contracts for stablecoins brings several advantages, including transparency, efficiency, and security. By eliminating the need for intermediaries, transactions can be executed
faster and more securely, without the risk of fraud or abuse. Additionally, smart contracts can be scaled up or down, regulating the distribution of stablecoins in response to market fluctuations.
This ensures that stablecoins remain stable even during times of economic uncertainty, increasing their acceptability as a reliable and predictable asset class.
Security of Smart Contracts Implementing Stablecoins
In the world of smart contracts and stablecoins, security is paramount. When designing and implementing smart contracts, it's crucial to have robust security protocols in place to ensure that the
contract is free from vulnerabilities or flaws. Any breach in security could have a detrimental impact on individuals and organizations alike, negatively affecting the entire supply chain. That's
why security should be the top priority during smart contract development and deployment.
Stablecoins, in particular, are vulnerable to security threats such as malicious attacks, coding errors, or human error, which could compromise their stability and consistency. To avoid these risks,
it's essential to adopt safety protocols and best practices to safeguard smart contracts that utilize stablecoins.
One crucial safety measure is auditing, where competent auditors like Truscova
, Trail of Bits
, thoroughly evaluate smart contracts at different stages, both before and after deployment, to spot any flaws or coding bugs.
Truscova has a detailed guide on verification of smart contracts
which can be followed by development and verification teams to ensure the security of smart
contracts. Additionally, it's vital to monitor contracts regularly for any suspicious activity and apply the latest security fixes to prevent any potential risks to safety.
Moreover, coding protocols must be strictly followed, such as eliminating the use of outdated or unprotected functions, implementing manual intervention methods, and using libraries with solid
encryption. By adhering to these safety protocols, businesses can ensure that their smart contracts are secure, reliable, and consistent, giving them the confidence to utilize stablecoins
for their financial transactions.
Stablecoins backed by smart contracts are revolutionizing the financial industry by providing a decentralized, transparent, and efficient means of conducting transactions. Among these implementations,
stands out as a compelling example of how stablecoins can be implemented through smart contracts. Dai operates on the Ethereum blockchain, and
its value is guaranteed by collateral. Maker Smart Contract is responsible for controlling Dai's price, ensuring that it remains pegged to the US dollar. This system of smart contracts is widely known
for its decentralized nature, lack of trust, and reliability.
USDC is another successful stablecoin implementation that utilizes smart contracts. USDC is backed by bank account reserves of US dollars, and a system of smart contracts running on the Ethereum blockchain
governs its administration. The widespread adoption of USDC and its reliable, certified reserve mechanism are two of its major advantages.
Tether is another stablecoin that is pegged to the US dollar and operates through smart contracts on the Ethereum and Bitcoin blockchains. However, it has faced criticism for its claims that its stablecoin
and traditional dollar reserves are in a 1:1 ratio.
To ensure the stability and consistency of these stablecoins, smart contracts play a crucial role in automating transaction execution and maintaining intended protocols. Collateralization is another crucial
factor that helps stabilize these currencies and minimize market volatility. Furthermore, decentralized systems and smart contracts lower the likelihood of fraud and corruption, making stablecoins a more
secure and trustworthy means of conducting transactions.
It's essential to recognize that stablecoins are still in their infancy and offer untapped technological capabilities. The implementations of stablecoins require careful analysis of the administrative
concerns and standing of those implementations. The lessons and insights gained from these implementations emphasize the role of accountability and openness in maintaining stablecoin reserves and
ensuring their success in the future.
Stablecoins and smart contracts are revolutionizing the cryptocurrency industry, offering benefits that traditional currencies and contracts can't match. Stability and reliability are the hallmarks of
stablecoins, while smart contracts enable automated changes to supply and demand, maintaining stable prices. The combination of stablecoins and smart contracts offers unparalleled transparency,
efficiency, scalability, and security in transactions. While the security risks in smart contracts implementing stablecoins are genuine, rigorous auditing, monitoring, and coding protocols can
address these challenges effectively. Case studies of successful implementations such as Dai and USDC offer invaluable insights into the potential of stablecoins and smart contracts. By leveraging
the power of smart contracts, stablecoins are opening up new opportunities and creating a new era of digital currencies that offer stability, security, and efficiency. As stablecoins continue to
evolve and improve, they will likely become more widely adopted, transforming the way we think about money and transactions.
Truscova comes with 30+ years of academic research and hundreds of academic publications which pioneered the area of Formal Verification.
The team combines academic leadership, industrial strength and Blockchain expertise. Truscova currently analyzes Solidity code combining Formal
Verification techniques: abstract interpretation, constraint solving, theorem proving, and equivalence checking.