As the first income-generating stablecoin in the cryptocurrency market, USDM undoubtedly has certain innovativeness and experimental significance. Through the rebase mechanism, it may solve the problem of stablecoin holders not being able to earn income. However, as a new project, USDM needs to constantly withstand market testing in terms of liquidity and user recognition.
As a newcomer in the stablecoin field, the stablecoin USDM released by Mountain Protocol has recently attracted attention. What are the outstanding features worth looking forward to?
Recently, Castle Island Ventures, a well-known venture capital firm in the field of cryptocurrency assets, announced its lead investment in Mountain Protocol’s seed round financing. Other investors include Coinbase Ventures, New Form Capital, Daedalus Angels, etc.
In the overall environment of the bear market, Mountain Protocol, as a newcomer in the stablecoin field, has recently attracted attention. What are the outstanding features worth looking forward to?
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Background: Expanding Stablecoin Market + Rising US Treasury Yields
Among various applications of cryptocurrency assets, stablecoins are undoubtedly one of the biggest success stories. As of 2022, the total market value of stablecoins worldwide has exceeded $120 billion. Stablecoins provide global users with a relatively stable payment and value storage tool.
Mainstream stablecoins, such as Tether’s USDT and Circle’s USDC, are pegged to the US dollar at a ratio of 1:1. This makes them more suitable as payment instruments rather than investment or storage tools. On the other hand, US Treasury bonds and other fixed-income assets can provide stable investment returns for holders.
Recently, the Federal Reserve has continued to raise interest rates, leading to a significant increase in US Treasury yields. The yield of short-term Treasury bonds has reached about 5%. This provides an opportunity for local US investors to directly invest in US Treasury bonds and earn stable income. However, for most global investors, there are still certain barriers to direct investment in US Treasury bonds.
If there is a stablecoin that can pass on the income of US Treasury bonds, then these global investors can simply hold this stablecoin to enjoy risk-free US dollar income.
This is exactly the problem that the newly launched stablecoin issuer Mountain Protocol aims to solve. The USDM stablecoin it introduced is designed to provide global users with a stablecoin option that can earn US Treasury bond income through the rebase mechanism. Whether this can be achieved or not needs further understanding of the product operation mechanism of USDM.
Product Introduction: USDM, Operation Platform, and Compliance
Mountain Protocol’s product can be divided into two parts: the USDM token and the Mountain Protocol platform.
USDM Token:
USDM is a stablecoin issued on the Ethereum blockchain using the ERC20 standard. It is pegged to the US dollar at a ratio of 1:1. The full name of USDM is Mountain Dollar, and it is issued and destroyed by Mountain Protocol.
The collateral behind USDM consists of short-term US Treasury Bills (T-Bills) with an average term of less than 3 months or shorter. US Treasury Bills are considered the safest US dollar-denominated assets.
Specifically, the collateral can consist of any of the following instruments:
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Treasury Bills or soon-to-mature Treasury Bills.
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Money market funds invested in short-term US Treasury Bills.
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Repurchase agreements (repos) collateralized by US Treasury Bills.
What sets USDM apart from other stablecoins is its rebase mechanism. Mountain Protocol adjusts the total supply of USDM based on the yield of US Treasury Bills. Specifically, this is achieved by changing the value of the rewardMultiplier variable.
The rewardMultiplier is similar to the accrued interest on traditional Treasury Bills. It increases daily in a compounding manner, adding to the daily accrued interest. When the rewardMultiplier increases, the balance of USDM held by users’ accounts also increases.
The rewardMultiplier variable is updated daily around 12:00 PM UTC. The rewardMultiplier starts at 1 and increases daily through the addRewardMultiplier function.
For example, if the rewardMultiplier increases from 1.00 to 1.05, it indicates a 5% yield on US Treasury Bills for that year. So, if a user holds 100 USDM, they will receive 105 USDM through the rebase mechanism, realizing profit transfer.
Mountain Protocol Platform:
The Mountain Protocol platform allows users to purchase and redeem USDM. On the platform, users need to complete KYC verification to obtain an account. They can then choose to buy USDM using US dollars or other stablecoins.
The platform provides two interfaces for users: a web portal and an API interface. Users can choose to operate through the web portal or integrate the API into their own trading system.
Once USDM is in the user’s Ethereum wallet, it can be freely transferred. If a user wants to redeem USDM, they need to transfer the tokens back to the address provided by Mountain Protocol and submit a redemption request through the platform. The platform will return equivalent US dollar assets upon receipt.
Note that this protocol does not provide services to users within the United States. Logging in with a US IP address will prompt restrictions.
For end users, the user experience of USDM is similar to other stablecoins. It is primarily divided into primary users and secondary users. Primary users need to operate on the Mountain Protocol platform after completing KYC verification, while secondary users can freely use USDM in wallets and exchanges. USDM can be freely used as a means of payment and transaction.
Security and Regulation
It should be noted that USDM is issued by Mountain Protocol Limited. The company has obtained a digital asset business license issued by the Bermuda Monetary Authority (BMA), allowing it to issue and redeem USDM. The company commits to providing 1:1 US dollar support when token holders request redemption. Therefore, USDM has a redemption mechanism similar to other stablecoins.
As for why choose Bermuda, the author speculates that it is paving the way for the legalization of its global financial business.
Bermuda is one of the jurisdictions that is more friendly and open to the regulation of digital assets. In 2018, Bermuda passed the Digital Asset Business Act, providing a clearer compliance path for digital asset companies;
The Bermuda Monetary Authority has approved and regulated multiple digital asset companies, including Circle, Tether, Coinbase, etc., all of which have been issued licenses by it. This reflects the experience of the Bermuda Monetary Authority in regulating digital assets. Obtaining a regulatory license from the Bermuda Monetary Authority can enhance the compliance and user trust of Mountain Protocol. Compared to operating without a license, this move can to some extent reduce regulatory risks and pressures.
However, Bermuda is ultimately an offshore financial center, and its regulatory strength may be more relaxed compared to the United States, the European Union, and other places. Therefore, obtaining a Bermuda license for Mountain Protocol does not mean that it has reached the highest global regulatory standards. Users still need to carefully evaluate it.
In addition, Mountain Protocol’s main partners include:
Each party plays a different role in the operation of Mountain Protocol to ensure compliance and security to the greatest extent possible. According to public information on Github, OpenZeppelin has issued an audit report on its contracts.
At the same time, the company will have a licensed accounting firm publish a reserve proof every month to provide users with transparency about the existence and composition of the “USDM reserve”. The proof will be available on the company’s website after 30 days of operation.
Advantages and Limitations
From the above public information, the following advantages of Mountain Protocol can be summarized:
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It provides a way for global users to obtain USD income. Through the rebase mechanism, USDM can pass on the income from US Treasury bonds to anyone holding its tokens. This lowers the threshold for obtaining US bond income.
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USDM has a payment license issued by the Bermuda Monetary Authority, ensuring regulatory compliance. This reduces user compliance concerns.
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Mountain Protocol has publicly released the smart contract code for USDM and has undergone third-party security audits, which to some extent guarantees code security.
However, Mountain Protocol also has some limitations:
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USDM is currently only available to institutional investors and is not yet open to individuals. This restricts its market size.
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USDM relies on secondary market liquidity. If secondary market trading is not active, users may have difficulty redeeming USDM at a 1:1 ratio.
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As a relatively centralized institution, Mountain Protocol still needs to establish user trust through regulation and transparency.
Future Impact: Stablecoin “Income Battle”?
The emergence of USDM indicates that one of the directions for the development of stablecoins is towards providing returns. This provides new options for users who want to earn income by holding stable assets.
Compared to existing stablecoins such as USDT and USDC, USDM’s main competitive advantage is its rebase mechanism. This may prompt other stablecoin issuers to consider incorporating similar mechanisms into their products. If all stablecoins offer holding rewards, it may trigger a “yield war” and drive the development of this niche market.
Of course, as a new project, USDM still lags far behind established stablecoins in terms of market size and liquidity. To gain a larger market share, it still needs to continue building user trust through regulatory compliance and product optimization.
For investors and users, USDM provides a new option to earn stable dollar income. However, due to its relatively centralized operation mode, users need to weigh the risks and returns. Cautious users can hold only a certain proportion of USDM instead of replacing all existing stablecoins.
As the first yield-bearing stablecoin in the cryptocurrency market, USDM undoubtedly has some innovation and experimental significance. It has the potential to solve the problem of not earning income from holding stablecoins through the rebase mechanism. But as a new project, USDM needs to continuously undergo market testing in terms of liquidity and user acceptance.
Overall, USDM provides new ideas for the development of stablecoins and brings users new choices to earn income.
Let us wait and see if USDM can become the new favorite in the stablecoin market.
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