How do companies behind stable-coins make money?


#1

With the advent of investments in crypto, it seems that many different companies are trying to build stable-coins.

Types of stable-coins -
Stable coin backed by dollars in bank: Tether, TrueUSD etc.
Crypto collateralised: DAI, Basis (for arguments sake lets assume its still active)
There are other types too, however lets keep our discussion limited to these models.

Lets assume these companies/tokens solve the aim of pegging themselves to a dollar. So, they have demand from investors in many different crypto exchanges as there are not many exchanges with Fiat on-ramps.

  1. Now, how do these stable-coin companies make money? Basis raised > $100 million - why are VCs interested in investing in stable-coin companies?

  2. Facebook also seems to be getting into stable coin based remittances. How does that work out? Will they charge people money to transfer money on WhatsApp? Don’t they already have a free feature for payments on the Messenger app?

Wanted your thoughts on both these questions. If someone has friends in Facebook, or any idea about it, this will make an interesting discussion.


#2
  1. My guess is they’ll make money by admin fees, and likely performance fees, like whenever they outpace the dollar they pocket the difference. Also there’s gotta be some appeal to just just being stable, for example in a falling market even 0% interest is winning.

  2. Well Facebook is the king of the ad-dollar. If they were to continue to offer money transfers for free and at low cost to them, they could make inroads into the crowd that uses cash app and similar apps, and this gives them further bargaining power to their advertisers, as they use their ever expanding reach to bring ad dollars in.


#3

So, in a sense, they become banks? So, for VCs would it make sense to own equity in such companies or tokens? So, would the Basis investment be an equity investment?

I understand that is the appeal for individuals to get these tokens. The reason why a company would make such a token was the bigger doubt. Is admin fees the only answer?

Is it just being indispensable? I think there might be more to it. This article shows what Facebook has planned - https://www.bloomberg.com/news/articles/2018-12-21/facebook-is-said-to-develop-stablecoin-for-whatsapp-transfers . I somehow feel this would be more into monetising the WhatsApp crowd. Since, WhatsApp won’t support ads, I wanted to understand how remittances might help? Would it be that Facebook will take fees in between, however it will be highly negligible compared to Western Union?


#4

There’s the arbitrage and hedging appeal to stable coins, and this goes beyond individuals and into many risk management efforts.

Plus for Facebook, if they can continue to increase user engagement, they can show how spending ad dollars with them will get increased visibility by the consumer. They can charge more.


#5

They can make money in various ways

  1. on the peg reserve: making AAA placements
  2. on the issuance to buyers of Stable coins. for services rendered (availability, support, priority,…)
  3. algorithmic margin: when there is more demand for their Stable coin which will be worth more than the peg
  4. on services plugged to those SC: lending…and so on

#6

For Basis, I have actually done some research before and understood why VCs are interested in investing in their project.

Basis is a non-collateralized stablecoin and has 3 types of tokens:

  1. Basecoin - stablecoin pegged 1:1 USD
  2. Bond Token - similar to a bond contract
  3. Share Token - similar to a stock share that pays “dividends” (VCs invest in Share Token expecting they will receive “dividends” from basecoin’s algorithmic operation)

Basis claimed itself to be an algorithmic central bank. It uses demand and supply mechanism to keep the Basecoin stable, with the help of bond token to control elastic supply of Basecoin.

How central bank works (simplified overview):

  • If a central bank wants to increase money supply, it buys government bonds with its printed money such that money flows into the market.
  • If a central bank wants to decrease money supply, it sells government bonds and pockets the monetary payment such that the money is removed from the economic system.

Basis operates the same way central bank does. The following graphs may explain better:


Early VCs invested in Basis sharetoken because they will be paid “dividends” (When the demand for Basecoin far exceeds the supply, new Basecoins are created as supply to stabilize the price, and Bond Token & Sharetoken holder pockets the new supply)

If total coin supply continues to expand due to increasing market adoption after Basecoin launched, sharetoken holders may potentially quickly recover their initial investment cost. From then on, sharetoken holders will enjoy all the upside of the system without being punished like bondholders when crisis emerges. Even eventually if the Basecoin mechanism fails, share token holders will bear no cost if they have recovered their investment cost earlier on. (Of course, this project has a lot of other risks and they were shut down already because of regulatory constraints?)


#7

Sounds like a ponzi scheme to me. :stuck_out_tongue:


#8

Thanks for the insights. Seems interesting and a bit prone to regulations. No wonder it was shut down.


#9

Could you explain what AAA means?

Would work the other way around also, right? When the Stable coin is worth less than the peg. Something similar to what Basis made. It has been elaborated on a post below.

So, basically, Stable coins companies would try to make their stable coin used the most, they will then build tertiary services around it? Seems, they are looking for a US dollar equivalent in the crypto world :slight_smile:


#10

Amazing how popular these Stablecoins are, I can see the appeal, it’s nice being able to trade fiat for crypto without relying on an exchange.

Source: https://coinlib.io/global-crypto-charts?theme=dark#global_crypto_flow


#11

In simple terms: safe garanteed low risk placements (eg govt bonds)