Why Stablecoins Need Oracles for Institutional Adoption
Stablecoins are a key innovation that pioneered a now increasingly important subset of the onchain finance ecosystem known as tokenized assets. Stablecoins are the first and, so far, most successful implementation of tokenized real-world assets, representing an onchain form of the underlying fiat currency: digitally native, programmable, composable, and offering near-real-time settlement. With $170B of supply onchain, stablecoins are leveraged by ordinary users around the world to build an onchain savings account, protect against market volatility, leverage as a medium of exchange, earn yield, or send money across the globe. For financial institutions, stablecoins can be used to represent the cash leg for transactions involving other tokenized assets, making atomic delivery vs. payment workflows possible, since both the cash and security are tokenized.
The Role of Oracles in Enhancing Stablecoins
Secure oracle infrastructure can provide all of the key data, compute, and cross-chain capabilities that stablecoins require, making it easy for issuers to launch and grow stablecoins without introducing multiple dependencies. This enables banks and other stablecoin issuers to seamlessly and securely launch new stablecoins, which can expand their market and increase access to their services. All of this is possible with Chainlink while maintaining the high security standards that the finance industry demands.
Once minted onchain, Chainlink can power tokenized assets throughout their entire lifecycle, enriching them with real-world data (e.g., NAV, proof of reserves), providing secure interoperability between any private or public blockchain to increase liquidity, and synchronizing asset data between blockchains and existing systems to maintain a unified golden record.
In this post, we cover 7 essential capabilities that secure oracle infrastructure unlocks for the institutional adoption of stablecoins.
Key Capabilities Required for Stablecoin Adoption
1. Bootstrap Liquidity: Many leading DeFi protocols—such as Aave, the top DeFi lending protocol by total value locked—will only accept a stablecoin if there is a Chainlink Price Feed (or Chainlink Data Stream) to deliver accurate, reliable, and tamper-proof price data regarding it onchain. Without the industry-standard data solution, their applications (and the funds held within them) would be vulnerable to market manipulation attacks and other exploits. Therefore, Chainlink Data Feeds is a prerequisite for DeFi protocols to make stablecoins available in their dApps and thus broadly available across the onchain economy.
“Chainlink oracles will accelerate the adoption of Paxos’ USD and Gold-backed tokens in DeFi. With the proof of reserve and price available onchain, our regulated assets will become more accessible for DeFi users.”—Walter Hessert, Head of Strategy at Paxos
2. Unlock Programmability: Chainlink Data Feeds can enrich stablecoins with real-world information, such as available yields, real-time prices, and more. Chainlink Automation can then dynamically trigger preset stablecoin smart contract updates based on that offchain data—effectively making stablecoins a secure, programmable container of value and information. This increased utility ultimately translates to an increased demand for enriched stablecoins.
3. Establish User Confidence: Chainlink Proof of Reserve (PoR) verifies the collateral backing of stablecoins and publishes this information onchain. By providing end-users with additional verifications about the reserves of your stablecoin, you can increase their confidence in its collateralization, making them more likely to use it over other stablecoins. PoR increases consumer confidence in tokenized assets by providing up-to-date information on their mark-to-market value onchain.
4. Secure Minting: Cryptographic guarantees can ensure new stablecoins minted are fully backed by reserves, offering a superior minting mechanism for stablecoin issuers. This mechanism helps ensure that users no longer have to rely on trust or take an issuer’s word that sufficient collateral backing is available for the stablecoin. Instead, they can verify the stablecoin’s backing through onchain cryptographic guarantees, and stablecoin issuers can leverage a mechanism helping to ensure that no unbacked stablecoins can be minted.
Enabled by the combination of Chainlink PoR and Automation, malicious minting can be prevented with a circuit breaker that halts or pauses certain activity in the event of unforeseen or unusual circumstances. Chainlink PoR can be used to trigger a circuit breaker that automatically prevents the stablecoin issuer solution from minting additional stablecoins when unusual activity is detected, such as collateral value falling below a given threshold. Additionally, other onchain applications can use these same PoR feeds to create circuit breakers for their own protocol, which helps prevent malicious minting and mitigates the risk of accepting the stablecoin, ultimately leading to an increase in demand for the stablecoin as collateral. PoR feeds can be used to trigger a circuit breaker that prohibits the minting of more stablecoins if it determines that the collateral fell below a certain threshold.
5. Unify Cross-Chain Liquidity: Banks, asset managers, and onchain protocols are recognizing that liquidity will be fragmented across potentially thousands of different onchain environments. As the universal blockchain interoperability standard, Chainlink Cross-Chain Interoperability Protocol (CCIP) can unify liquidity across both the bank chain and the public chain ecosystems to enable a single Internet of Contracts where stablecoins and tokenized assets can seamlessly move with demand and liquidity across the unified onchain finance economy.
Backed by the Risk Management Network, a separate, independent network that continually monitors and validates the behavior of the primary CCIP network, CCIP is the only cross-chain solution to achieve the fifth and highest level of cross-chain security. CCIP also supports Programmable Token Transfers, which enable stablecoins and instructions (tokens and messages) to be sent to a receiving cross-chain smart contract in a single transaction. This unlocks a wide range of advanced use cases for DeFi and capital markets.
ANZ demonstrated how CCIP can enable their customers to purchase a tokenized asset through their portal in a single transaction—even if it was available on a different chain and denominated in a different currency. In the background, CCIP helped convert the stablecoin backed by a local currency (NZ$DC) to another stablecoin (A$DC), transfer the stablecoin from the source to the destination chain, purchase the tokenized asset, and send it back to the customer’s wallet on the source chain. CCIP abstracts away all of the complexity of advanced financial transactions that would otherwise take days, require manual input from multiple parties, and expose the buyer to counterparty risks.
6. Create a Unified Golden Record: Maintaining a unified golden record in the multi-chain economy requires not only offchain data on the initial chain and cross-chain connectivity but continued access to real-world information regardless of which chain the stablecoin is transferred to. The Chainlink platform can uniquely solve this problem because it provides complementary data and cross-chain services while maintaining the high-security guarantees required by banks and other institutions. CCIP gives stablecoin issuers and holders the assurance that a stablecoin’s golden onchain record will continue to be updated. Chainlink securely delivers key data points about stablecoins onchain across each and every onchain environment a stablecoin is transferred to.
7. Future-Proof Your Stablecoin: The onchain economy is continuously evolving, with new networks launching frequently. With a single CCIP integration, underpinned by Chainlink’s blockchain-agnostic platform, stablecoin issuers can seamlessly reach many chains using their existing backend infrastructure. This safeguards against vendor lock-in and obsolescence and enables issuers to mint stablecoins on new chains quickly and easily as they emerge. New protocols across new and existing chains can easily list them using an industry-standard Data Feed.
The combination of Chainlink Data Feeds and CCIP offers a dual advantage for stablecoins—it enables the stablecoin to seamlessly expand across the multi-chain ecosystem while providing it with the secure market data needed to be used across DeFi protocols on those chains.
Another key advantage is the composability benefit stemming from combining multiple integrations on the Chainlink platform—if a stablecoin uses a Chainlink service, integrating additional services introduces little-to-no additional trust assumptions. Through a single platform, stablecoin issuers can make their onchain asset more secure, programmable, liquid, and transparent.
The Gateway to Adoption For Stablecoin Issuers
Secure oracle infrastructure is the onchain entry point for stablecoin issuers, providing them with the services needed to make their stablecoins programmable and overcome the key challenges of adoption, such as attracting liquidity and remaining compliant across various regulatory environments. Critically, Chainlink enables these capabilities, and many more, while maintaining the high level of security required by financial markets. Major market infrastructure providers and institutional banks such as Swift, DTCC, ANZ, and many others have collaborated with Chainlink to successfully demonstrate real-world use cases, including how financial institutions can use existing infrastructure and messaging standards to interact with tokenized assets across any blockchain.
These are just a few of the reasons that Stablecoin Standard, the industry body for stablecoin issuers, is collaborating with Chainlink Labs. A core component of this alliance will be to collaborate with industry leaders and to provide guidance and best practices for stablecoins and stablecoin issuers.
“Chainlink Labs will help us support stablecoin adoption and ensure best practices for stablecoin issuers around the globe.”—Christian Walker, Co-Founder, Stablecoin Standard
