The history of blockchain technology is made up of projects that don’t actually require a public, permissionless blockchain. Bitcoin, which is still the biggest player in blockchain, requires it, but a lot of other projects really don’t.
Consider, the explosion of Ethereum-based stablecoins that we saw last year. Gemini and Paxos issued their new alternatives to Tether’s US dollar-tracking token, both of which received the blessing of New York’s Department of Financial Services. Circle and Coinbase also issued USD Coin, a stablecoin based on the CENTRE standard.
But is issuing these stablecoins on public blockchains the best approach? Is a public, permissionless blockchain actually necessary? Let’s take a closer look at what stablecoins supposedly gain from the use of public blockchains and whether there may be more practical options available to issuers.
(Note: we’re only talking about fiat tokens backed by currency held in bank accounts in this article. Algorithmic stablecoins could be a different story).
Where does trust come from?
One of the main selling points of 2018’s new stablecoins is that they are routinely audited by top firms.
This is in direct contrast to Tether. The company behind the USDT token has yet to get a credible, full audit published that would discredit the conspiracy theories about their banking practices (although a recent investigation by Bloomberg turned out in Tether’s favor). Some of the marketing materials from new stablecoins explicitly cite this contrast.
But what does the importance of these audits imply? If a stablecoin user must trust an auditing firm to trust the coin, then what utility does the transparency of a public blockchain actually provide? Sure, a user can see how many tokens exist for a particular stablecoin on the blockchain. But that data is meaningless if there isn’t enough money in the bank accounts that provide the backing for these on-chain IOUs.
The financial transparency section of the homepage for Circle and Coinbase’s joint USD Coin offering does not even mention tracking the issuance of tokens on the blockchain. It only talks about regulated financial institutions and auditors. It seems pretty clear that these stablecoins will live and die on the trustworthiness of their audits. So does a trustless blockchain add value?
These stablecoins can’t be used without permission
While crypto assets are generally seen as valuable for their apolitical, permissionless nature, those obviously aren’t features of regulated stablecoins. If you look at the fine print for any of the recent stablecoin offerings, they all mention things like using blacklists to prevent activity that they (or regulators) don’t like.
Even Tether has shown its ability to alter the ledger of USDT by blacklisting an address in reaction to a USD$30 million hack.
So just as stablecoins are not trustless, they are also not permissionless. Which again begs the question: why the need for a public blockchain at all?
“Permissioned blockchains” may make sense here
It’s possible that a federated blockchain, such as Blockstream’s Liquid sidechain offering or a permissioned fork of Ethereum, makes the most sense when issuing fiat-backed stablecoins. Indeed, Crypto Garage recently announced the testing of a Japanese yen stablecoin on Liquid.
Since these stablecoins aren’t going to be trustless or permissionless anyway, there’s little benefit to paying the additional costs that come with the use of decentralized, permissionless blockchains.
Public blockchains like Bitcoin and Ethereum cost more than a blockchain controlled by a federation of signatories because on a federated blockchain there is less of a need to keep the resource requirements of operating a full node low enough for nearly anyone to verify the complete history of events.
Additionally, data related to past transactions can be routinely discarded on these permissioned blockchains because it’s controlled by a selected group of notaries anyway. The state of the ledger is up to them. This means that in contrast to traditional public chains, the resource requirements of running a full node on a “permissioned” chain can be quite low.
In reality, stablecoin offerings don’t gain much from using “blockchains” that have more than two nodes. The only people who need to run nodes are the issuer and the auditor because, as explained previously, trust is already placed in the auditor in terms of verifying the supply and the issuer is able to censor transactions at the click of a button. Whether a blockchain is used or not, there is no way to remove the trust that users must have in these two parties as long as the token’s value is derived from dollars, euros, or some other fiat currency held in a bank account.