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Stablecoins: most recent trends and developments

29 January 2021 3 min

Speaking of stablecoins is fairly easy. Ideally, those are issued in 1:1 proportion, and the issuer keeps the at currency balance as collateral. Where is the issuer’s cut, one might ask? Again, all answers are straightforward.

Scenario #1 implies that the issuer charges a fee, however tiny, from everyone willing to emit or burn named stablecoins. For investors there are several options on the table, one is selling the coin on any cryptocurrency exchange, while the other being depositing (and later withdrawing) from the issuing party directly. The latter might be a preferable scenario due to many reasons, most of the legal and/or administrative: client verification, KYC/AML clearance, and similar.

The other scenario suggests that the issuer mints stablecoins for free i.e. charges nothing from its clients but benefits elsewhere. The most obvious resource is balances, or reserves themselves. The issuer can be legally allowed to deposit those and earn interest on funds allocated. Even with current close to zero rates, the market still offers some interest-bearing opportunities.

To run some numbers, let’s have a look at Tether which has most recently hit a $24 billion mark in its total circulation. Assuming an interest of 0.1% is charged and each USDT was issued and redeemed once, an impressive gain (revenue) of $48 million would be received. And once we run an interest accruing scenario, 0.2% annually seems to be a tough assumption even for a risk-free bargain.

If you think long-term and see the market of stablecoins wider than just another financial tool, one may come to realize that a stablecoin of its own may further anchor users to, say, a cryptocurrency exchange. That’s the way Binance took it issuing Binance USD (BUSD) which currently has a circulation of over $1.2 billion. The logic is plain and simple: when the market heads down, investors are eager to hide in USD proxies, so why don’t give them another one, a product of your own financial supermarket, so that all liquidity could stay in-house (and earn interest outside, or support marginal trading on the platform).

What does look surprising in this regard is Gemini. The Winklevoss brothers were very impressive launching their regulated cryptocurrency exchange and, in turn, issuing a dollar-linked coin under the same name. However, two years later the amount in circulation has barely exceeded $60 million, there were ups and downs but the end-mark is still far from impressive. Goldman Sachs’ backed Circle, on the other hand, is playing in the high league these days as its emission is over $5.5 billion.

To wrap this up, it is fair to say that the US Dollar is triumphant again, this time in the digital area. Not only no other global currency is visibly represented in a form of stablecoins, but to make matters stronger, two USD-linked currencies are in the market top-10 or nearby. Effectively, at is representing a significant chunk of crypto already. And, and seems, more to come.