Stablecoin-Focused Networks: An Emerging Trend

The recent deployment of Layer 1 networks by entities such as Stripe and Circle signifies a significant shift towards using stablecoins for blockchain transactions, rather than cryptocurrencies like Bitcoin or Ethereum. This innovation addresses the volatility concerns faced by financial institutions and promises to streamline the process of making payments over blockchains.

Reducing Volatility

For example, a company such as American Express faces significant hurdles when sending a payment on platforms like Solana. The volatility in cryptocurrency prices—Solana’s price might jump from $200 to $100 within a day—has deterred many financial institutions from adopting blockchain transactions. By employing stablecoins instead of volatile tokens, these networks offer a more stable and predictable environment for financial operations.

The absence of volatility is crucial for maintaining balance sheets,” noted Joel Hugentobler, Cryptocurrency Analyst at Javelin Strategy & Research and the report’s lead author. Companies that handle large volumes of transactions daily—hundreds of billions per day—benefit greatly from this stability.”

Addressing Network Capacity Challenges

The current public blockchain networks, such as Solana and Ethereum, are also grappling with capacity issues. Solana’s anticipated Firedancer upgrade aimed to significantly increase its throughput to a million transactions per second but has not materialized on time. This limits their practical utility for high-frequency financial transactions.

Hugentobler emphasized: During periods of network congestion, especially when volatility is high, current networks like Ethereum or Bitcoin fail to meet the demands of financial institutions. The need for platforms that offer both high throughput and stablecoin support has become evident.”

Overcoming Other Issues

Further challenges include compliance issues, such as know-your-customer (KYC) regulations, and the inability to reverse transactions once they are completed. For instance, if a payment is sent to an incorrect address, there’s no straightforward mechanism for retrieval or correction.

Hugentobler elaborated: While stablecoin-focused networks can be designed with hybrid characteristics that offer some privacy options, these solutions still require extensive developer work and robust compliance tools.”

These new Layer 1s aim to enhance not only the throughput but also provide additional functionalities from the outset. Tempo, Stripe’s entry into this domain, is designed to tackle these issues while ensuring high transaction rates.

Early Adoption and Engagement

Financial institutions that adopt Layer 1 networks early can gain a deeper understanding of their operational dynamics. Hugentobler suggests that companies should get involved directly, either by using the networks or setting up nodes to validate transactions.

Engaging with developer communities is also crucial as it signals robust security and better execution on throughput. Companies should consider these communities when evaluating new Layer 1s for use in their operations.

In conclusion, early engagement can provide companies with significant benefits, including a voice in network development and regulatory compliance. Hugentobler advised: Companies need to have skin in the game by actively participating in the ecosystem.”