Learning | What are the businesses of stablecoin (2)

Right to transaction fees:

The fees for on-chain transactions are paid proportionally to holders of volatility coins. Volatility coins can also be used as collateral to support stablecoins. Given the potential volatility of the collateral base, stablecoins will be issued on an over-collateralized basis. Volatility coins represent a percentage of future transaction costs, and their value can be modeled accordingly. This relates the strength of the stabilization mechanism to economic activity on the Internet. The transaction volume on the chain is often at least an order of magnitude greater than the market value of the stablecoin (USDT's speed is ~ 44, calculated using coinmetrics' adjusted transaction volume), which indicates that fees related to transaction volume can generate considerable value, suitable for volatility coin holding Someone.

Havven is the only real-time example of using this model and charges a 0.15% fee on on-chain transactions and pays HAV holders. Given a stablecoin market value of $ 10B and a speed of 44, the value of transactions on the chain will reach $ 440B that year, and HAV holders will receive $ 660 million in revenue. As a benchmark, at a peak market value of about $ 3B, Tether's daily on-chain transaction volume is about $ 300 million-equivalent to about 110B per year. Obviously, transaction fees can bring high profits, but this strategy brings avoidable costs to users, which may hurt the cost of widespread adoption.

Mortgage interest:

The Maker system issues stablecoins as collateralized debt positions (CDP) with an annual interest rate of approximately 2.5%. The fluctuating coin in the system is MKR, which has multiple value capture mechanisms, one of which is to obtain part of the economic benefits indirectly from CDP owners. This part is called the "stability fee" and will change when the multi-collateral Dai is introduced. Interest is paid in MKR and subsequently destroyed. Similar to stock repurchases, stock repurchases should be reflected in the appreciation of MKR token prices. The outstanding debt is the market value of the stable currency (DAI), which means that MKR holders can roughly expect the annual fee income to be equivalent to a certain percentage of the DAI market value. Given the $ 10B DAI market value and 0.5% return to MKR holders, MKR holders should expect to indirectly receive $ 50 million through MKR combustion. Please note that if the CDP collateral is insufficient, MKR holders will also be penalized for dilution, as far as I know this has not happened, but may cause severe market collapse. It may be appropriate to model this risk as a reduction in real interest rates.

Collateral claim:

The reserve system sells both stablecoins and stocks of mortgage assets (tokenized bonds, properties, commodities). Mortgage assets can be redeemed at any time in exchange for stablecoins or stocks. The trick here is that stablecoins represent statutory claims, and the appreciation of mortgage assets will eventually be paid to shareholders as dividends. The system will initially be over-collateralized due to shareholder contributions, but as the supply of stablecoins increases, the mortgage rate will tend to 1: 1 over time. If the value of the collateral appreciates during this period, the value of the stablecoin's collateral assets will be less than the value it paid, and the difference will be paid to shareholders.

For example, suppose 10 shares and 10 stablecoins are acquired in exchange for 1 GoldCoin. The collateral base will consist of 20 GoldCoins with a collateral ratio of 1: 1. Now suppose the value of GoldCoin doubles. The collateral ratio is now 2: 1, and each stablecoin holder can only redeem 0.5 gold coins with the legal amount of gold. The system can now pay half of the collateral 10 GoldCoin to shareholders to return a 1: 1 ratio (each shareholder gets a dividend of 1 GoldCoin). This is actually a leveraged investment in mortgage assets, where the amount of leverage is determined by the ratio of stablecoin to stock. Therefore, in order to profit from stocks here, the underlying mortgage assets need to appreciate and issue a large amount of stablecoins.


Volatile coins give owners the right to manage changes to system parameters and protocols in the future. In Maker, MKR holders will be responsible for voting on key risk parameters that affect the solvency of the system and proposals for agreement upgrades. This is the least specific value acquisition mechanism because quantifying the value of governance is extremely challenging. Obviously, if the network promotes meaningful economic activity, changes in the protocol level can have a significant impact on network participants. Therefore, network participants have economic interests to protect their own interests-volatile coins with voting rights may obtain part of the value of this benefit.

A potential mental model for estimating the value of a given governance token: If you switch to a suboptimal network, how much will your business value decrease? This should be the upper limit of the price that companies are willing to pay to protect their interests through the governance process. The lower limit may be the minimum amount that ordinary stakeholders can contribute and still get the services they need.

To avoid positioning them as directly competing products, I want to distinguish between fiat support and market opportunities for cryptocurrency native / decentralized stablecoins. Fiat-backed stablecoins serve as the entry point and banking API for the legacy financial system to interact with crypto finance, while decentralized stablecoins will serve encrypted local applications such as DEX, decentralized financial products and dApp . At the risk of stating clearly and untrusted smart contract execution, one cannot rely on tokens that can be frozen. Independent of major external dependencies (ignoring the current Oracle for now), crypto-backed stablecoins can be more easily and reliably integrated into emerging infrastructures for programmable currencies and smart contracts.

Most likely, we have hardly ever covered the potential value capture mechanism of crypto-backed stablecoins and their associated volatile coins. Among them, the tangible rights of fees or interest payments are the easiest to value, and the value of unique instruments of leverage and governance is more difficult to quantify. Although a volatility coin introduces conceptual challenges around valuation and adoption, it also has a unique purpose missing from the legal support model: consistent incentives among stakeholders. The idea that cryptocurrency-backed stablecoin systems borrow from Bitcoin is that they can motivate communities to evangelize to a network by sharing the benefits of the community. Ultimately, this may enhance the network impact of crypto-backed stablecoins beyond what is possible in the legal support model.


Algorithmic stablecoins are a more experimental variant of decentralized stablecoins, which can regulate supply to stabilize prices without any collateral. They are designed to stabilize prices in a way that can be both encrypted and cost-effective, which is theoretically easier to expand than systems supported by encryption. Like cryptocurrencies-backed stablecoins, they often have volatile coins that can capitalize the system early and ultimately align stakeholders. So far, algorithmic stablecoins are the most profitable category because they accept capital inflows without providing redemption, which turns almost all funds paid to the system into a coinage tax. The following are the main value acquisition mechanisms that have been proposed.

Mint shares:

The basic idea behind coinage shares (first proposed. Proposed by Robert Sams in 2014) will have two types of users, stablecoin users and coinage shareholders (volatility coin holders). When the demand for stablecoins increases, new stablecoins will be issued to offset demand and maintain price stability. The new stablecoin is distributed to the mint shareholders in proportion to the proportion of shares held. When demand decreases and prices fall, the stock is sold in exchange for stablecoins, which are then consumed from supply. A potential investment strategy may include buying shares every time they are sold to avoid dilution. The result will be a fixed percentage of all future stablecoin issuances. Therefore, if the market value of the stablecoin grows to $ 10B, the mint shareholders will get $ 10B. Carbon is most similar to the original concept of cast iron shares.

The foundation is different from the minted stock model by introducing a third type of tokens, bonds, which are sold to burn stablecoins and pay fixed income. According to the bond queue, bonds in Basis are repaid before stocks and are given a 5-year maturity date to increase demand when needed in the future. This means that when the system needs to burn stablecoins, bondholders will become the first funds, and shareholders will eventually be the last line of defense. The limited supply of these stocks suggests that if no other buyers show up, shareholders will have the incentive to pledge capital by buying bonds to support the system, because after bondholders are repaid, they will seize all the upside.

The shard also deviates from the coinage tax share model by combining stablecoins with volatility coins, that is, issuing new stablecoins directly to existing stablecoin holders. As a result, as the system adds new stablecoins and deletes them, the user's wallet balance will change. The stablecoins in the Fragments system are both a store of value and a unit of account, because they increase purchasing power as the system develops, but are denominated in fiat currencies. With Fragments, both users and investors have the same tokens, which can more closely adjust their interests in the long run.

Floating rate deposits:

Another way to increase supply is to create an algorithmic central bank that expands the money supply through floating interest rates. In the Feron system, users deposit stablecoins into smart contracts that pay interest. During a period of low demand, interest rates will increase, driving more deposits, which will reduce the speed and increase prices; when demand is strong, interest rates will decrease, the speed will increase, and prices will fall. In this model, an investment strategy may be strategically allocated to deposit contracts at high interest rates. Timely suppliers add disproportionate new supplies, creating quite interesting new assets for traders.

In the two algorithmic strategies we are considering, all supply increases are paid in full to holders of volatile coins (whether split into bonds / stocks or used in combination with stablecoins). This is in stark contrast to other models we have studied, which capture 2.2% or less market cap growth, although it is worth noting that if the coin market cap model wins a major global share, the final market cap growth will converge To some extent as low as GDP growth. However, in the period of high growth, the algorithmic stablecoin system obviously has the greatest value acquisition potential.

Since it is difficult to maintain a strong fixed exchange rate of the system without redemption, some of these algorithmic models will not produce a real stablecoin, but will instead create assets designed to reduce their price volatility. Neither Fragments nor Feron explicitly changed the supply in real time, but chose to change the supply slowly over time-stabilizing. Arguably, this puts them in a separate category ("low volatility coins"), but I included them in the algorithm category because their value acquisition mechanism is similar in scale to the coin share model. However, this has a very significant impact on target markets, as these targets are more of a value store than a medium of exchange. Therefore, in the short to medium term, these currencies cannot compete directly with other stablecoins.

Compared with Basis, the biggest advantage of dollar-linked algorithmic systems like Basis is their capital efficiency and increased profit potential. Capital efficiency should make it easier for the system to respond to sudden increases in demand, while sharing profits with many stakeholders who should be motivated to support and promote the development of the ecosystem. However, these benefits come at the cost of growth or belief. Whether the benefits outweigh the costs is not immediately obvious, and profitability comes at the expense of the possibility of collapse during the Black Swan incident. This trade-off may have an adverse effect on algorithmic stablecoins in the broader decentralized stablecoin opportunity, because when it comes to "stable" cryptocurrencies, the market should tend to avoid risks.

in conclusion

The stablecoin is producing money, turning it into a competition for profit, in order to compete for those who can create the best form. With the huge opportunity to create more useful funds for the world, stablecoins are proliferating with a variety of mechanisms to capture upside. From an investment perspective, this has quickly become a crowded space, with many untested, new and experimental ideas coming to fruition.

Each category of stablecoin differs in the way it acquires value. In terms of legal support, the acquisition of sustainable value does not exceed the upper limit of the market value of the stablecoin. In terms of cryptocurrency support, some value capture mechanisms are similar to the value capture mechanisms of statutory support systems, but the design space is opened up and allows new concepts such as governance tokens, where the potential upside is unknown. Within the algorithm category, the value acquisition mechanism has the highest near-term upside due to the elimination of redemption rights. This helps explain why, although accounting for only 23% of all stablecoin systems, the algorithmic project has so far raised 50% of the $ 350 million in funds allocated to stablecoins.

The most interesting development in the stablecoin business model is the introduction of volatility coins into cryptocurrency native / decentralized stablecoins. Volatile coins can share the value surplus created by the currency more widely. For the first time in history, coinage can be distributed to as wide a group of users as all currency users. This could have a profound impact on the future of the currency, and we are very much in the unknown.

In terms of competition, I hope the models backed by fiat will dominate in the short term-they are the conceptual cousins ​​of fiat that we are already satisfied with. Over time, with the development of the open financial system, DEX has gained market share and dApps have been adopted. I suspect that cryptocurrency-based stablecoins will gradually surpass fiat currency support with the advantages of censorship and resistance and value sharing. Stablecoin, and Maker's Dai is currently leading the way. But in order to get there, a stablecoin backed by law will be a vital entry point.