In addition to charging service fees, the issuer also hopes to use digital stablecoins to help develop other high-yield businesses.
Original title: “Analysis of the Business Model of Digital Stable Coins”
Written by: Gu Yanxi, founder of the American Liyan Consulting Company, a researcher and practitioner in the blockchain and encrypted digital asset industry
With the development of blockchain technology and encrypted digital financial products, a major digital financial product that has emerged is digital stable currency. The original USDT has evolved from its appearance in 2015 to today, and nearly 14 billion USD of USDT has been circulating in the market. After the emergence of USDT, compliant digital stablecoins have appeared in the US market. Representative stable currencies include USDC, PAX and GUSD, etc. The emergence of Libra has pushed the development of digital stablecoins to an unprecedented height. It even promoted the development of sovereign digital currencies of various central banks around the world.
As the market pays more and more attention to digital stablecoins, more digital stablecoin projects appear in the market. Most compliant digital stablecoins are based on a single legal currency, and digital stablecoins are issued in a 1:1 manner on the basis of the equivalent legal currency of the mortgage. Some operators of digital stablecoins aim at USDT and strive for increasing circulation. But if we carefully analyze the business model of stablecoins, we will find that the issuance of some digital stablecoins does not have a reasonable business model. Since the US market is the most concentrated issuance market for compliant digital stablecoins, this article uses USD stablecoins to analyze the business models of these projects.
The business process of the US dollar stable currency is: users who wish to use the digital dollar stable currency deposit their US dollars in a designated financial institution with custodial qualifications, and then the issuer of the digital dollar stable currency delivers them to users based on these US dollars, etc. Valuable digital dollar stable currency. When the user needs to exchange back the US dollars he holds, he returns the digital US dollar stablecoin to the custodian. After charging a certain service fee, the digital dollar stable currency issuer returns the US dollar pledged by the user to the user. For the issuer of the digital dollar stable currency, its income is the interest and exchange service fees of the pledged US dollar in the custodian institution. For a user who needs a digital dollar stablecoin, he is giving up his dollar based on other means to obtain the right to use the digital dollar stablecoin. For the issuer of the digital dollar stablecoin, according to this business model, the service fee it charges must not be too high, otherwise there will be no market competitiveness. This business model is a large-scale business model. Only when the mortgaged U.S. dollar reaches a certain scale, the digital dollar stable currency issuer can obtain a certain income.
Another hope of the issuer is to use digital stablecoins to help carry out other businesses, and other businesses can obtain more ideal returns. If we look at the production of USDT, we can understand this business model.
The emergence of USDT was because the encrypted digital currency market urgently needed a stable trading mechanism to increase the trading volume of encrypted digital currency. Therefore, the main purpose of Tether is to provide such a mechanism, rather than expecting USDT to generate good profits. Given Tether’s close connection with the encrypted digital currency trading industry, such a business model is logical. So it can be said that the emergence of the digital stable currency product was not originally for profit. If the initiator of the later digital stable currency does not have a clear understanding of this, it will easily lead to the failure of the digital stable currency project.
The prerequisite for a product to survive is to have sufficient market demand and generate corresponding benefits. If the corresponding market demand does not exist, or the demand is insufficient, then the product cannot continue to survive. For operators of compliant USD digital stablecoins, the market demand for their digital stablecoins and the cost of maintaining this product determine whether the digital stablecoins can continue. If the business logic fails, the larger the scale of such a digital stablecoin project, the greater the risk and the greater the probability of failure.
Currency products are a fully competitive market. Since the beginning of human economic activities, there has been currency. Today, the currency product should be the most developed and efficient of all product categories. When we usually use currency, on the surface, we don’t need to pay for using this currency. Therefore, in the currency product market, it is impossible to charge high fees when a new currency form appears. This situation is especially true in a legal currency circulation area. For digital dollar stablecoins, its value lies in areas where the current form of dollar circulation cannot be served or where the service efficiency is not high. For example, users who do not have a bank account, or users who cannot obtain banking services in remote areas, or in some scenarios where payment methods are inconvenient. For issuers of digital dollar stablecoins, only in such application scenarios can there be a reasonable business model. The digital dollar stablecoin issued by it is likely to continue to operate. In this way, users who hold U.S. dollars can be attracted to pledge their U.S. dollars to participate in the issuance of digital dollar stablecoins.
In terms of operating costs, in addition to the usual costs required for business operations, such as operation and maintenance costs and marketing costs, etc., a very important cost of this business is compliance costs. This is the work that needs to be done in order to meet regulatory requirements. The cost in this respect should be similar to the cost of the same type of financial institution. So if you calculate these costs and benefits, the stable currency business alone is actually not attractive.
The competitive advantage of digital stable currency is its underlying clearing and settlement system and corresponding supporting facilities. For example, for the digital stablecoin issued on Ethereum, the operator does not need to develop an additional underlying clearing and settlement system at all, and there will be very little work on payment terminals. In addition, due to the global nature of Ethereum, the range of users it can reach is very wide. These advantages are not available in ordinary financial institutions. However, some of these advantages do not guarantee that such institutions can obtain sufficient income based on stable coins alone. For the operators of digital stablecoins, only in a specific application scenario that can give full play to the advantages of digital stablecoins can the continuous operation of this digital stablecoin be guaranteed. From another perspective, if a digital stable currency is introduced to the market as a universal digital currency, then this business model will be difficult to sustain. If this is the case, the larger the scale of the stablecoin, the greater the probability of its failure.
For Facebook, the purpose of developing a digital stable currency is by no means just to provide a universal digital currency. It is able to provide services to users of its social network through this global digital stablecoin. Facebook’s social network is on a global scale, so the digital stable currency circulation method has very strong advantages over the current legal currency circulation method. Although Facebook still needs to cooperate with the regulatory agencies in different regulatory regions in which it operates, so that its stablecoin can be approved for use in this regulatory jurisdiction, the cost is completely comparable to the benefits that Facebook can use the stablecoin to obtain Accepted. If users in the Facebook social network start to transfer money between each other, then the Facebook network will be more cohesive to its users. The core competitiveness of Facebook lies in its user network. A digital stable currency is very helpful to strengthen Facebook’s core competitiveness. Therefore, Facebook does not need to consider directly obtaining revenue on digital stablecoins. It can gain revenue by enhancing the cohesion of its social network and more digital financial services in the future.
