If you have been in the crypto-sphere for a long time, you know about the rapid fluctuations that cryptocurrencies often face. Not surprisingly, they often get criticised for this very reason as well. It is one of the primary reasons as well, that the majority of stakeholders and potential investors do not invest in crypto.
In order to avoid the general volatility associated with cryptocurrencies like Ethereum and Bitcoin, Stabelecoin were developed. They are linked to a financial asset like the US Dollar, and due to this feature, their long term value remains intact.
Now, If you are a crypto-fanatic, then this knowledge is not enough for you. If you want to get into the system’s complexities and learn exactly how stablecoins make money, especially one of the most popular ones- Tether (USDT), then read on to quench your thirst!
Stable Coins – General Model
Every company’s earning potential and method associated with stablecoin tend to vary. It all depends on whether it is a centralised system or a decentralised one.
To be clear, centralised, stable coins are the ones that hold their reserve assets off-chain. These reserve assets are controlled by a governmental authority or a financial institution. If, however, a stablecoin is backed by a huge amount of non-crypto assets, then the chances are it is an off-chain centralised stabelocin. These stablecoins include Tether, USDC and Gemini Dollar.
Centralized vs Decentralised
Centralised stablecoins tend to earn monetary benefits in a variety of manners. One of the significant ways stablecoin companies make money is through short-term lending and investing. These companies take out a portion of the reserve assets and lend these to others for interest. These are dependent on the unlikelihood that many stablecoin holders would ask for collaterals at once. The method is similar to banks’ lending to their customers with saving accounts.
Decentralised stable coins are stablecoins that tend to hold their reserve assets on-chain through cryptocurrencies and smart contracts. The process allows for transparency that centralised stablecoins do not allow. These stablecoins also use smart contracts that eliminate the need for a third party. Moreover, to add to their zest, decentralised stablecoins also provide an additional cryptocurrency and the pegged stable cryptocurrency that allows for governance and revenue sharing.
Tether – Business Model
Tether (USDT) is a stable coin that is pegged to USD through which Tether price remains stable. Tether makes money through various sources like fees, loans and investments. Stablecoins like ether are primarily involved in trading through cryptocurrency exchanges. Tether itself is available on every well-known exchange throughout the globe.
One major source of revenue for Tether is the charging fees for deposits or withdrawals and account verification that it uses. Verification is needed for deposit and withdrawal of cash with Tether. The company charges $150 to every customer who wants to verify their account.
Apart from that, Tether also raises money by issuing loans to other businesses and institutions, which then pay interest. In October 2021, Tether loaned $1 billion to Celsius Network, a cryptocurrency ledger. The ledger company paid 5 to 6 percent interest every year.
Another method through which Tether makes revenue is through investments in other businesses and participation in their growth. Investing within the crypto ecosystem is a strategy employed by some major exchanges. Tether makes money from these investments by participating in the firm’s profit or selling its shares for a far better price than they purchased.
Funding of StableCoins
Stablecoins are funded by their users. A stablecoin is formulated when a user locks up the collateral to mint it with a stablecoin.
Stablecoin Outlook for future
A vast majority of stablecoins are expected to stay the same in the future and in 2022 and even beyond. The value predictions for Tether are much higher, with its stakes being held by some of the most top-notch companies and exchanges around the globe.
However, some stablecoins have recently faced controversies about whether they really do hold that kind of financial assets. Users are advised to thoroughly research their investments in this manner and form. Safe crypto-ing!