Stablecoin Limits Exposed: Ledger Tech Slows Data Validation

While the crypto community buzzes about potential use cases, a critical look reveals structural challenges that might be insurmountable without a fundamental overhaul. Are stablecoins truly ready for prime time, or are they destined to remain a niche solution?

At the heart of the issue lies the distributed ledger, the foundation upon which most stablecoins are built. While decentralization offers security and transparency, it also introduces significant inefficiencies. Imagine a global network of “miners” each maintaining a copy of every transaction – a system, as described by some, that can be “grossly inefficient” compared to centralized payment systems.

Consider the TRON network, for instance, with its ledger exceeding two gigabytes. The sheer volume of data, coupled with the geographical distribution of nodes, inevitably slows down data validation. This latency undermines the potential for stablecoins to be used in everyday transactions, especially in economies that already boast efficient retail payment infrastructure.

One area where stablecoins show promise is in transnational retail transactions, particularly for migrants’ remittances. Sending money home can be expensive and slow through traditional channels. Stablecoins offer a potentially faster and cheaper alternative. However, even here, the impact may be limited.

While remittances represent a significant flow of capital to many developing economies – estimated at around $700 billion annually – this is still a relatively small fraction of the global economy. Furthermore, recipients often face the added cost of converting stablecoins into local currency or cash dollars, negating some of the initial benefits.

Perhaps stablecoins are better suited for wholesale payments, where transaction volumes are lower and amounts are larger? Not so fast. While the “instantaneousness” of settlement might seem less critical, other challenges emerge. Blockchain transactions, while not anonymous, are “pseudonymous.” All transactions are visible, but wallet owners are identified by a string of alphanumeric characters.

This creates a privacy dilemma. To receive payment, a business must share its wallet address with the customer, opening the door to surveillance of all future transactions. Competitors could potentially gain access to sensitive business information, a risk many companies are unwilling to take. Criminals can circumvent this by using a series of new wallets, but legitimate businesses risk raising red flags with such behavior.

Ultimately, the obstacles hindering the widespread adoption of stablecoins are structural and deeply ingrained in the technology itself. Overcoming these limitations would require a fundamental transformation of how stablecoins operate. As Daniel Gros, Director of the Institute for European Policymaking at Bocconi University, argues, when these limitations become apparent to businesses, consumers, and financial investors, the current hype surrounding stablecoins will likely subside.

The future of stablecoins hinges on innovation and adaptation. Can developers find ways to improve data validation speeds, enhance privacy, and address the other structural challenges? Only time will tell whether stablecoins can truly live up to their potential or remain a technologically interesting, but ultimately limited, solution. Europe’s ‘strategic response’ to the Genius Act must be to remain calm. For feedback, please contact Trust project.