Content is reviewed by trusted editors and experienced industry experts to maintain excellent editorial standards.
- A recent report recognized Chainlink’s Proof of Reserve as a benchmark for improving stablecoin management.
- PoR is a Chainlink service that provides real-time on-chain verification that off-chain or cross-chain truly backs up your tokens.
The Chainlink team recently highlighted on X that Imperial College London’s new stablecoin report, ‘Mind the Gap: How Stablecoins Can Secure the UK’s Financial Future’, published on September 18th, identifies Chainlink’s Proof of Reserve (PoR) as a key technology for enhancing the security and transparency of stablecoins.
The report begins with the following observations:
As of today, the UK economy, which is home to a financial center that accounts for approximately 3.5% of global GDP, 11% of the financial technology sector, and drives 40% of global foreign exchange trading volume, is the only major market that has not yet introduced a stablecoin policy framework.
Stablecoins already boast a global market capitalization of over $280 billion, and currently the majority are products backed by the US dollar. This advantage not only drives demand for U.S. government bonds, but also strengthens the dollar’s global influence, with forecasts suggesting the market could grow to $2 trillion by 2030.
Currently, a small number of stablecoins overwhelmingly dominate the market. The top 10 companies account for nearly 95% of the total market capitalization, with Tether (USDT) and USD Coin leading the charge, together accounting for around 83%.
chain link proof of reserve
Stablecoins are digital assets pegged to fiat currencies such as USD, GBP, or EUR. Its value depends on confidence that the issuer actually holds the reserves that are claimed to back the coin.
The risks investors are exposed to when working with stablecoins include lack of collateral, non-transparency of audits that are regular rather than real-time, and mismanagement and fraud.
Proof of Reserve is a cryptographic mechanism that allows issuers to prove on-chain that they have sufficient reserves to back their stablecoins. Stablecoins rely heavily on user trust. By providing verifiable evidence of underlying assets, you no longer have to blindly trust the issuer. Therefore, anyone can independently audit the certification.
In an environment where issuers may face risks of mismanagement or fraud, PoR provides tamper-proof evidence that reserve balances truly exist. As explained in the study,
Traditional payments can be canceled in certain circumstances, but this is generally not seen as a threat to financial stability. Traditional payments, such as card transactions, may be reversed in the event of fraud, error, or dispute.
By comparison, PoR helps provide clarity and assurance in systems with limited reversibility. result? A standardized, auditable framework that allows regulators to view compliance without the need for invasive manual audits.
Examples of stablecoins that use Chainlink’s Proof of Reserve include TrueUSD (TUSD), Poundtoken (GBPT), Pax Dollar (USDP), and PAX Gold (PAXG).
Mark Raines highlighted that applying proof of reserve to complex financial reserves can address some major challenges. Synchronizing reservation data between on-chain and off-chain systems in real time is technically challenging, especially at scale.
Complexity increases when reserves span multiple asset classes and blockchain networks, making it important to maintain a single, consistent picture of their status.
In these cases, assessing a reliable net asset value (NAV) is more important than tracking the value of individual assets. This typically requires independent verification by an auditor or fund administrator to accurately assess market value.
Raines emphasizes that third-party verification of reserves is essential to ensure transparency and maintain token holder trust, and that is what PoR provides.
