Gu Yanxi: From USDT to Libra, analyze the business model of digital stable currency

With the development of blockchain technology and encrypted digital financial products, a major digital financial product that has emerged is digital stable currency. The initial USDT has developed from 2015 to today, and there are nearly 14 billion USDT in circulation in the market. After the emergence of USDT, compliant digital stablecoins have successively appeared in the US market. The representative stablecoins include USDC, PAX, GUSD and so on. The emergence of Libra has pushed the development of digital stablecoins to an unprecedented height. It even facilitates the development of sovereign digital currencies of various central banks around the world. As the market pays more and more attention to digital stable currency, more digital stable currency 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 mortgaged equivalent legal currency. Some digital stablecoin operators are aiming at USDT to strive for a larger and larger circulation. But if we carefully analyze the business model of stable coins, we will find that there is no reasonable business model for the issuance of some digital stable coins. Given that the U.S. market is the most concentrated market for the issuance of compliant digital stablecoins, this article analyzes the business models of these projects with USD stablecoins.

The business process of the US dollar stable currency is: users who want to use the digital dollar stable currency will deposit their US dollars in a designated financial institution with custody qualifications, and then the issuer of the digital dollar stable currency will deliver them to the user based on these US dollars, etc. Value-for-money digital dollar stablecoin. When the user needs to exchange back the U.S. dollars he holds, he returns the digital U.S. dollar stable currency to the custodian. After charging a certain service fee, the issuer of the digital dollar stable currency will return the mortgaged US dollars held by the user to the user. For the issuer of the digital dollar stable currency, the income is the interest generated by the mortgaged US dollar in the custodian institution and the exchange service fee. For a user who needs a digital dollar stable currency, he is giving up his dollar based on the income obtained in other ways to obtain the right to use the digital dollar stable currency. For the digital dollar stablecoin issuer, 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 collateralized USD reaches a certain scale, the issuer of the digital USD stable currency can obtain a certain income.

Another hope of the issuer is to use the digital stable currency to help develop other businesses, and other businesses can obtain better returns. This business model can be understood if we look at the generation of USDT.

The emergence of USDT was because the encrypted digital currency market at that time urgently needed a stable trading mechanism to increase the transaction volume of encrypted digital currencies. Therefore, the main purpose of Tether is to provide such a mechanism, rather than to hope that USDT will generate good profits. Such a business model is logical given Tether's close ties to the cryptocurrency exchange industry. Therefore, 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 premise for a product to survive is that there is sufficient market demand and can generate corresponding income. If the corresponding market demand does not exist, or the demand is insufficient, then this product cannot continue to survive. For operators of compliant US dollar digital stablecoins, the market demand for their digital stablecoins in the application scenarios and the cost to maintain this product determine whether the digital stablecoins can continue. If the business logic is not established, the larger the scale of such a digital stable currency project, the greater the risk and the greater the chance of failure.

Currency products are a fully competitive market. Since the beginning of human economic activity, there has been money. Today, the currency product should be the most developed and efficient of all product categories. When we usually use currency, on the surface, there is no need to pay for the use of this currency. Therefore, in the currency product market, a new form of currency appears, and it is impossible to charge high fees. This situation is especially true in a legal currency circulation area. For the digital dollar stable currency, its value lies in the places where the current form of dollar circulation cannot serve or the service efficiency is not high. For example, users without bank accounts, or users who cannot obtain banking services in remote areas, or application scenarios where payment methods are inconvenient in some usage scenarios. For issuers of digital dollar stablecoins, only in such application scenarios can there be a reasonable business model. Only the digital dollar stable currency issued by it can continue to operate. In this way, users who hold US dollars can also be attracted to mortgage their US dollars to participate in the issuance of digital dollar stable coins.

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 the cost of compliance. That's the kind of work that needs to be done to meet regulatory requirements. The costs in this area should be similar to those of a financial institution of the same type. So taking into account these costs and benefits, a single stablecoin business 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 stable currency issued on Ethereum, the operator does not need to develop an additional underlying clearing and settlement system, and there will be very little work on the payment terminal. In addition, due to the global nature of Ethereum, it can reach a very wide range of users. These advantages are not available in ordinary financial institutions. However, such advantages do not guarantee that such institutions can obtain sufficient income based solely on stablecoins. For the operator of digital stable currency, only in a specific application scenario that can give full play to the advantages of digital stable currency can the continuous operation of this digital stable currency be guaranteed. From another perspective, if a digital stablecoin is introduced to the market as a general-purpose digital currency, then this business model will be difficult to sustain. If this is the case, the larger the stablecoin, the greater its chances of failure.

For Facebook, its 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 digital stable currency that circulates globally. Facebook's social network is on a global scale, so the digital stable currency circulation method has a very strong advantage over the current legal currency circulation method. Although Facebook still needs to cooperate with regulators in different regulatory regions where it operates in order to get its stablecoin approved for use in this regulatory jurisdiction, this cost is completely acceptable compared to the benefits that Facebook can obtain from stablecoins accepted. If users in the Facebook social network start transferring money between each other, then the Facebook network becomes more cohesive to its users. The core competitiveness of Facebook lies in its user network, and a digital stable currency is very conducive to strengthening Facebook's core competitiveness. Therefore, Facebook does not need to consider directly obtaining income on digital stable coins. It can gain benefits by enhancing the cohesion of its social network and more digital financial services in the future.