USDT earns a stable profit of 2.5 billion US dollars. LianGuaiyLianGuail sets its sights on stablecoins, a good business opportunity.

LianGuaiyLianGuail Sets Sight on Stablecoin

August 8th is an auspicious day.

Payment giant LianGuaiyLianGuail announced that it has officially launched the LianGuaiyLianGuail USD (PYUSD) stablecoin to promote the use of cryptocurrencies in transfers and payments. This also marks the entry of the first large-scale US financial institution into the stablecoin field.

According to LianGuaiyLianGuail, PYUSD is 100% backed by USD deposits, short-term US Treasury bonds, and similar cash equivalents. It can be exchanged for USD at a 1:1 ratio and is issued by LianGuaixos Trust Company. It is pegged to the US dollar and will gradually be made available to LianGuaiyLianGuail’s customers in the US. As an ERC-20 token issued on the Ethereum blockchain, the token can also be transferred to third-party wallets outside of LianGuaiyLianGuail’s network.

Why are more and more major companies eyeing stablecoins? Is stablecoin really a legitimate and profitable business? In this article, lawyer Hong Lin will discuss this with you.

To help you better understand this business, we will discuss it from the following aspects:

  • Classification and principles of stablecoins

  • Revenue sources and cost structure of stablecoins

  • How profitable is USDT?

It should be noted that the content of this article is for discussion purposes only and does not constitute any investment advice. The cryptocurrency market carries risks, so be cautious when buying.

Classification and Principles of Stablecoins

Stablecoins are a type of cryptocurrency that attempts to maintain a stable value by anchoring it to fiat currencies, commodities, or other cryptocurrencies. The purpose of stablecoins is to address price volatility in the cryptocurrency market and provide a stable, reliable, and convenient means of payment and value storage.

As of May 12, 2023, there are 24,071 cryptocurrencies worldwide with a total market value of 1,170 billion USD. The total market value of stablecoins is approximately 131.8 billion USD, accounting for about 11.84% of the cryptocurrency market share.

▲ Top 9 Stablecoin Market Cap (coingecko)

Based on different stabilizing mechanisms, stablecoins can be classified into three main categories:

  • Collateralized Stablecoins: These stablecoins are issued by collateralizing assets of certain value, which can be fiat currencies, commodities, or other cryptocurrencies. Collateralized stablecoins can be further divided into fiat-collateralized and cryptocurrency-collateralized. Fiat-collateralized stablecoins are issued by depositing fiat currencies into designated bank accounts or custodial institutions, and an equivalent amount of stablecoins is issued at a 1:1 ratio. Examples of this type of stablecoin include USDT, GUSD, and LianGuaiX. Cryptocurrency-collateralized stablecoins are issued by locking cryptocurrencies in smart contracts and issuing stablecoins through over-collateralization. Examples of this type of stablecoin include DAI and sUSD.

  • Algorithmic Stablecoins: These stablecoins maintain price stability by adjusting supply and demand through algorithms, without the need for any collateral assets. Algorithmic stablecoins can be further divided into single-token and multi-token algorithms. Single-token algorithmic stablecoins affect the price by adjusting the supply of each token. When the price is higher than the target price, more tokens are issued, and when the price is lower than the target price, tokens are reduced. Examples of this type of stablecoin include AMPL. Multi-token algorithmic stablecoins achieve price stability by introducing tokens with different functions, typically consisting of stable tokens, equity tokens, and bond tokens. When the price is higher than the target price, the system issues stable tokens to equity token holders, and when the price is lower than the target price, the system repurchases stable tokens from bond token holders. Examples of this type of stablecoin include Basis, ESD, and BAC.

  • Hybrid Stablecoins: These stablecoins combine the characteristics of collateralized and algorithmic stablecoins, with a portion of assets used as collateral and algorithms used to adjust supply and demand. Hybrid stablecoins can be seen as introducing equity tokens and bond tokens based on cryptocurrency-collateralized stablecoins to increase the stability and flexibility of the system. Examples of this type of stablecoin include FRAX.

In the stablecoin market, the top five stablecoins account for over 96% of the market share, namely Tether USDT, USD Coin USDC, Binance USD BUSD, DAI, and TrueUSD TUSD.

▲ Comparison of stablecoin market share (Coinmarketcap)

From the development trends, the stablecoin market will present the following characteristics:

  • Intense competition. In the centralized stablecoin field, USDT and USDC will dominate the market due to their high market share, user base, and partnerships. In the decentralized stablecoin field, DAI and FRAX will continue to lead due to their strong technical advantages, community support, and ecosystem development.

  • Increased regulatory pressure. As the influence of stablecoins continues to expand, governments and regulatory agencies around the world will strengthen their regulation of stablecoins, especially the issuers and operators of centralized stablecoins. This will require stablecoins to provide higher transparency, security, and compliance to avoid financial risks and legal disputes.

  • Continued emergence of innovative models. To respond to market changes and user demands, stablecoins will continually introduce new designs and models to improve their stability, efficiency, and sustainability. For example, some stablecoins will adopt diversified collateral, dynamic adjustment mechanisms, and incentive measures to enhance their resilience, liquidity, and participation.

  • Expanding application scenarios. Stablecoins will play a role in more areas and scenarios, such as cross-border payments, decentralized finance, digital identity, and social impact. This will promote the integration and interaction of stablecoins with other cryptocurrencies, traditional finance, and the real economy.

▲ Comparison of major stablecoins (TokenInsight 20)

Revenue sources and cost structure of stablecoins

Whether a commercial company makes money or not depends on its main revenue sources and cost structure. Different types of stablecoins have different profit models and risk factors. Generally, the revenue sources of stablecoins can be summarized as follows:

  • Collateralized borrowing: This is the main revenue source for fiat-backed stablecoins, which refers to using users’ deposited fiat currency for investment or lending to generate interest income. For example, Tether, the issuer of USDT, claims to use the US dollars deposited by users to purchase low-risk assets such as US Treasury bonds to obtain stable returns.

  • Seigniorage tax: This is the main revenue source for algorithmic stablecoins, which involves charging users a certain percentage of fees during the issuance or redemption of stablecoins. For example, the issuer of Basis charges a seigniorage tax to equity token holders every time stablecoins are minted.

  • Stability fee: This is the main revenue source for cryptocurrency-collateralized stablecoins, which involves charging users a certain percentage of annualized fees as the cost of generating stablecoins. For example, the issuer of DAI charges users a stability fee, which is dynamically adjusted based on market conditions and ultimately distributed to equity token holders.

  • Liquidation penalty: This is a secondary revenue source for cryptocurrency-collateralized stablecoins, which involves charging users a certain percentage of penalties when the value of their collateral assets falls below the liquidation line, as the cost of liquidation. For example, the issuer of DAI charges users a 13% liquidation penalty, which is ultimately distributed to equity token holders.

  • Transaction fees: This is a potential revenue source for all types of stablecoins, which involves charging users a certain percentage of fees when they use stablecoins for transfers or payments. For example, the issuer of USDC charges users a 0.1% transaction fee.

The cost structure of stablecoins mainly includes the following:

  • Compliance cost: This is the main cost of fiat collateralized stablecoins, which refers to the various work that needs to be done to meet the requirements of different regulatory regions. For example, compliant stablecoins such as GUSD and LianGuaiX need to obtain a BitLicense issued by the New York Department of Financial Services (NYDFS) in order to operate in the state of New York.

  • Storage cost: This is the secondary cost of fiat collateralized stablecoins, which refers to the fees required to deposit fiat currency into banks or custodian institutions. For example, non-compliant stablecoins like USDT, due to the inability to use regular banking channels, can only deposit fiat currency into offshore banks or trust companies, incurring higher storage costs.

  • Security cost: This is the main cost of crypto collateralized stablecoins and algorithmic stablecoins, which refers to the various work that needs to be done to ensure system security. For example, projects like DAI and Basis need to implement measures such as code audits, smart contract insurance, and bug bounties, and bear corresponding risks.

How profitable is USDT stablecoin?

With the understanding of the revenue sources and cost structure of stablecoins, let’s take Tether, the issuer of the largest stablecoin by market capitalization, as an example to see how profitable they really are.

▲USDT issuance and circulation diagram

From the above diagram, the issuance and circulation process of USDT can be divided into the following steps:

Step 1: Users deposit US dollars into Tether’s bank account.

Step 2: Tether creates individual Tether accounts for users and adds digital currencies corresponding to their deposited US dollars into the accounts.

Step 3: Users can trade USDT through exchanges or over-the-counter markets.

Step 4: Users return USDT to Tether and redeem fiat currency.

Step 5: Tether destroys USDT and returns the US dollars to users’ bank accounts.

This forms a complete cycle of issuance, trading, circulation, and redemption.

According to the operating data released by Tether for the first quarter of 2023, the issuance of USDT has increased from $66 billion to over $82 billion. With the help of the Federal Reserve’s interest rate hike to combat inflation, Tether has made bold purchases of US government bonds, with the proportion of US bonds in its reserve assets exceeding $53 billion (over 64%), while this proportion was only 2.94% in 2021.

Chart: Tether’s first-quarter reserve assets

Chart: Tether’s reserve assets as of May 2021

The reason for such a huge change is not because Tether is protecting the national market, but because the interest generated by US bonds (5%) is risk-free for Tether. The Federal Reserve pays interest to Tether, but Tether does not have to pay a penny to the holders of USDT. Assuming there is a reserve of $50 billion that can be used to earn this interest rate differential, this operation generates $2.5 billion in revenue. It’s quite a profitable venture.

So, Tether’s net profit in the first quarter was $1.48 billion, more than double that of the fourth quarter of 2022. Can LianGuaiyLianGuail not be jealous of this?

Summary

As Hayek once said, the decentralization of currency can be a profitable business for both nations and individuals. But how can governments with the power to mint coins willingly give up their power and the business opportunities that come with it? Therefore, it is difficult for ordinary commercial companies to engage in “issuing currency,” but governments can still engage in the stablecoin business, where they can benefit from it while others do the work. For the issuers of fiat currency, it is simply an additional outlet for releasing excess liquidity. What’s more important is the ability to maintain the dominance of their own currency in the digital age, a good thing for everyone, isn’t it?

References:

“Why does China need to launch a stablecoin pegged to the renminbi?” https://www.zhihu.com/question/299565723

“Is USDT stable?” https://zhuanlan.zhihu.com/p/384100831

“Stablecoins are a good business” https://blog.csdn.net/blockcoach/article/details/130787720

“Tether reports $1.5 billion net profit for first quarter in latest attestation report” https://www.theblock.co/post/230241/tether-attestation-report-q1-2023

“Analysis of the current situation and regulation of stablecoins worldwide in 2023” https://new.qq.com/rain/a/20230621A0724V00

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