Stablecoins remains one of the more popular crypto-assets out on the market. Pegged to a reserve like fiat currency, commodities, or a basket of cryptocurrencies, stablecoins offer volatility free prices with the speed and security of cryptocurrencies. Crypto holders can purchase stablecoins on general virtual currency exchanges or specialized platforms like Gold Exchange.
These crypto-assets maintain stability through collateralization or smart contract mechanisms that automatically reduce or increase supply depending on market conditions.
In contrast to other cryptocurrencies like Bitcoin or Ethereum, many stablecoins are issued by a central authority that maintains the reserve asset. Some argue this process makes stablecoins too centralized – and point out how the virtual currency world should be focused on decentralization. Others claim a central authority is needed to ensure there is enough of the reserve asset to properly back each coin.
As stablecoin prices rarely (if ever) fluctuate, many wonder how their issuing authorities make money and sustain operations. Keep reading to learn a few different ways stablecoin companies bring in money.
Attracting Attention To Lure Investors In
Stablecoin companies have many bills to pay. They have to fork over cash to ensure the development team is properly compensated. As a result, some entities that issue stablecoins use the crypto asset as a tool to entice investors to fund other lucrative products and projects.
Token COO Todd Clyde remarked how his company, which maintains its own stablecoin, received venture capital attention due to the potential profit of cross-border payment services.
A financial system (the cryptocurrency world) that can offer lower fees and faster processing times than banks is an enticing opportunity for potential investors. As a result, some stablecoin companies simply utilize their coin to provide added value to other work and raise awareness for future investment, helping the entity raise money.
Basecoin (associated with Basis Protocol) has raised tens of millions of dollars from venture capital (VC) investors. Some of these investors see a stablecoin like Basecoin as a good fiat on-ramp to help cryptocurrency banks boost trade volume and activity.
Fees On Issuance And Redemption
Some stablecoin companies, like Tether, levy fees for issuing and redeeming their coins. Fees can become lucrative as stablecoins are seen as a key ‘on-ramp’ for those new to the cryptocurrency world. The asset is perceived as a safe way for investors to expose their portfolios to cryptocurrencies, meaning revenue from fees can rapidly rise as demand increases.
However, stablecoin companies often are careful with their fee structure to promote arbitrage opportunities by keeping the spread between the coin price and collateral higher than the fee.
Capitalizing On Short-Term Lending Opportunities
Stablecoin companies also maintain the option to invest a portion of base collateral in the money market and treasury funds. This strategy can prove much more lucrative than charging fees, as one-month treasury rates have maintained a 1.24% long term average. A few years ago, rates jumped over 2%, a far cry from 2021 numbers where the rate is below 1%.
While making money based on the interest on reserve assets is a possible strategy, complexities with the banking situations of some stablecoins can make it challenging to do so.
Carrying out market-making activities on exchanges is another strategy for stablecoin companies to make money. Profit can be made based on the bid/ask spread and exchange volume.
These factors vary based on the exchange and current trade volume. This process is not as financially lucrative as other options. Still, it can serve as a way to make a small amount of money while carrying out necessary processes to keep a stable coin ecosystem running smoothly.
The Popularity Of Stablecoins Only Grows
The number of stable coins only grows as crypto holders turn towards the asset to protect portfolios and hedge against inflation. Currently, fiat-backed coins dominate the market as people are comfortable with currencies like the U.S. Dollar and British Pound.
However, speculation is that the growth of dApps and decentralized exchanges will lead to the rise of crypto-native stablecoins that will eclipse fiat-backed options in popularity. Crypto-native coins like Dai offer value-sharing opportunities and protection against censorship that are not found with fiat-backed options.
Overall, stablecoin companies function as money creators and now represent a competition between creative teams who can capitalize on the upside and create ‘useful’ cash for global populations to take advantage of.
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