The biggest and most obvious problem with using popular cryptocurrencies like Bitcoin for transactional purposes at the moment is price volatility. Stablecoins can virtually eliminate this price volatility while still retaining many useful characteristics of cryptocurrencies — fast transaction speed, anonymity, and immutability. Despite these benefits, however, stablecoins have unique risks that are important to understand — specifically counterparty risks. There are several layers of counterparty risk associated with any individual stablecoin project.
- Regulatory risk, i.e. proper state and federal licensing
- Custodial risk, i.e. trust in the bank or regulated trustee holding the stablecoin
- Reserve risk, i.e. trust in a 1:1 backing of the issued stablecoins
- Security risk, i.e. secure code underlying a stablecoin’s platform and smart contract infrastructure
- Network risk, i.e. traffic and usability impact for stablecoins built on any one blockchain protocol
USDS Mitigates Counterparty Risk
With all of these counterparty risks in mind, Stably has laid the groundwork for the proper preparation, regulation, and transparency to effectively address these risks for our stablecoin, USDS. We believe that Stably’s efforts and corresponding disclosures lead the stablecoin industry in mitigating counterparty risk, protecting users, and building trust.
- Regulatory risk: Stably never directly touches the reserve. Instead, we partner with fiduciary trust companies that have the proper state and federal licenses to hold, send, and receive money. Additionally, every user of the Stably platform must go through proper KYC/AML.
- Custodial risk: Stably is working with PrimeTrust, a well-known and regulated trustee company to hold the USDS reserve. Stably will continue to add trusted banks to our network of regulated trustees, further mitigating risk to the user from any one account holding the full reserve for USDS.
- Reserve risk: To provide full transparency, Stably will provide users of our platform with a view our reserve balance in real-time, via a live feed from our regulated trustees’ APIs. Additionally, a leading third-party auditor, Cohen & Co., will provide regular attestations on our reserve balance.
- Security risk: Stably works with leading security firms to regularly audit our platform and smart contract code to ensure bank-grade security.
- Network risk: Stably will build USDS on several blockchain protocols. We are already live on the Ethereum mainnet, and exploring additional protocols to add, including Stellar, EOS, and Ripple.