Retail Investor Predicament: The Difficulties of Participating in the Stablecoin Business

Those who make money don't want to go public, and those who go public may not make money. 'Profit' is actually unrelated to retail investors.

Written by: Alex Liu, Foresight News

House edge - exchange; banks without interest - stablecoins. The analogy may not be entirely appropriate, but it sufficiently reflects how lucrative the business models are in the two hottest sectors of the cryptocurrency industry. The competition in the exchange sector is fierce, and structural opportunities are hard to find, while the new round of speculation targeting stablecoins seems to have just begun.

Recently, USDC issuer Circle became the first public company to list a stablecoin, attracting capital interest with a closing price on the first day reaching three times the IPO price, and a market capitalization exceeding $20 billion; behind it, the stablecoin payment chain Plasma, shadowed by Tether, raised $500 million in minutes, with some even willing to pay over $10,000 in ETH network fees to deposit more than $10 million.

Circle Stock CRCL Price

Why is it said that stablecoins are a good business? Even so, can retail investors participate? This article aims to briefly analyze the current mainstream stablecoin operating models and profit levels, pointing out the situation of "those who make money do not want to go public, and those who go public may not distribute profits" and the dilemmas faced by retail investors in this sector, as well as exploring potential solutions.

Is stablecoin a good business?

To start with the conclusion, whether stablecoins are a good business depends on different players. Currently, the most profitable player is Tether, the issuer of Tether USDT.

The analogy of "non-interest-paying banks" to all stablecoins is actually inappropriate, and there are interest-bearing stablecoins such as sUSDe, sUSDS, sfrxUSD, and scrvUSD in the industry, and the proceeds go back to depositors. But as far as the specific player Tether is concerned, it is even more excessive than the "bank that does not pay interest" - not only does it not pay interest, but it even has to pay a 0.1% redemption fee to redeem USDT for USD (to withdraw money), and the redemption fee is capped at $1,000.

Unlike banks, stablecoins have a variety of revenue sources. The bank's main income is to lend money to borrowers, earning the interest rate difference between lending interest and paying depositors interest on deposits. If the borrower is unable to repay, there is also the possibility of bad debt losses. Mainstream stablecoin issuers such as Tether obtain risk-free returns by purchasing fiat cash as U.S. Treasury bonds (T-Bills), which eliminates the risk of bad debts and is a better profit model than "non-interest-paying banks".

Stablecoin protocols like Ethena are more like complex fund management platforms, primarily profiting from the funding rates obtained through the spot staking of crypto assets and perpetual contract hedging, which correspondingly increases risk. Stablecoins launched by protocols such as Curve, Sky, and Aave mainly profit from lending interest, which also carries corresponding risks. While part or all of the interest returning to depositors in interest-bearing stablecoins is certainly beneficial for users who deposit funds, it reduces the profitability of the underlying business model.

Net profit and number of employees of some companies

In this way, only in and out, the low-risk Tether is completely "lying down to make money". As shown in the chart above, Tether's 24-year profit is $13 billion, more than financial giants such as Morgan Stanley and Goldman Sachs, and its 100 employees are only a few hundredths of the latter, reflecting a very high human efficiency ratio. Binance, a crypto exchange with similar levels of profitability, with more than 5,000 employees worldwide, is similarly lagging behind in terms of human efficiency. Changpeng Zhao recently admitted on X that Binance is "far less efficient" compared to Tether. The reason for this is that Tether only needs to concentrate on its core and lucrative USDT business, and at the same time, USDT itself has a first-mover effect and network effect, and the market demand for it continues to expand, and it can expand naturally without spending too much marketing effort. Crypto exchanges, on the other hand, have complex and fierce competition, requiring new coins, customer maintenance, marketing activities, etc., which consume a lot of manpower and capital costs.

Tether's USDT is really a good business. Circle is the "number two player" in the stablecoin space, and its USDC now has a market value of over 60 billion dollars, reaching nearly 40% of Tether's USDT. It should also be a "money printer", right?

The answer is negative, at least for the time being.

According to Circle's financial report, its net profit for 2024 is only $155 million (while Tether is in the tens of billions). This is because Circle has over $1 billion in distribution costs, and most of the gross profit is shared with partners like Coinbase and Binance to promote the adoption of USDC. For example, the profits generated by USDC on the Coinbase exchange belong entirely to Coinbase (Coinbase distributes the earnings as interest to users), and Coinbase can also receive half of the profits generated by USDC outside of the exchange.

Circle Financial Report Table

In the face of competition from rivals (whether it's USDT, which does not compete with USDC on compliance, or PYUSD, FDUSD, and others seeking compliance), Circle's distribution costs are likely to remain high for a long time in order to maintain its adoption advantage. In summary, Circle is a company full of potential, but it is currently struggling in a fiercely competitive environment and has not yet achieved profitability.

the dilemma of retail investors

From the above, it is clear that Tether, the "number one player" in the stablecoin sector, is undoubtedly a very worthwhile investment business, but the reality is that retail investors simply cannot get exposure.

Tether's CEO Paolo Ardoino tweeted on X, "If Tether goes public, the company's market value will reach $515 billion, surpassing Costco and Coca-Cola to become the 19th largest company in the world," and commented, "We currently have no IPO plans." Given Tether's profitability, there is absolutely no need to introduce external funding. If you obtained exclusive operating rights for a Macau casino, you would probably prefer to operate it independently rather than bringing in partners.

So, in the stablecoin sector, the most profitable ones do not want to go public.

So should retail investors consider investing in the listed "Player 2" Circle? Few investors can buy CRCL at an IPO price of about $30, and what is in front of most retail investors is actually a CRCL with a market value of $100 million in net profit and a price-to-earnings ratio of more than 100 million. Buying stocks with such a high P/E ratio is usually a "future" and carries considerable risks.

Moreover, as a high P/E ratio "internet technology company" that is in a phase of rapid development, not paying dividends for a long time is the norm. Being its shareholder does not mean you can "make money while lying down."

Those who make money do not want to go public, and those who go public may not make money; "profits" are actually unrelated to retail investors. Faced with the highly profitable track, it is difficult to find openings, which is the dilemma of retail investors.

Usual's attempt

What retail investors need may be the Usual model.

Usual is a controversial stablecoin protocol that previously caused significant user losses due to its USD0++ "decoupling," severely damaging the community's trust in the project. However, the mechanism design of the Usual protocol itself has its highlights; it has made valuable attempts in the distribution mechanism and token economics design.

The usual stablecoin issued is called USD0, and each USD0 is backed by 1 dollar worth of RWA (Real World Assets). The RWA here actually refers to stablecoins like USYC and M that earn income from U.S. Treasury Bills (T-Bills), issued by licensed compliant RWA issuers such as Hashnote.

Simply holding USD0 will not generate any interest, while the yields from the underlying RWA assets are captured by the protocol. Similar to Tether, this is a good business.

But Usual is not Tether after all. USDT has the first-mover advantage and network effects, creating real use cases that support demand - trading on exchanges, acting as a shadow dollar for payment mediums in Southeast Asia, Africa, etc. Why would everyone voluntarily hold USD0 which earns no interest?

Another role in the Usual ecosystem, USD0++, comes in handy. The correct name for USD0++ is Liquidity Enhanced Treasury Bond, but it has USD in its code, which can easily be misunderstood as a stablecoin. Users can stake USD0 to USD0++, and every 1 USD0++ can be redeemed for 1 USD0 at maturity after 4 years (i.e., 2028). It is not difficult to understand that the value of USD0++ should be less than 1 USD0 before the 4-year expiry, and gradually approach it over time.

This is the model of government bonds. I buy a 1-year government bond with a face value of 110 for 100 yuan. When it matures, I exchange the bond for 110 yuan, thus locking in a 10% annualized return at the time of purchase. Similarly, government bonds get closer to their par value as their redemption date approaches.

During the rapid development phase of the protocol, Usual exchanged USD0 and USD0++ at a 1:1 ratio, unintentionally deepening the misunderstanding that USD0++ is a stablecoin, bearing direct responsibility for the damage caused by the subsequent "de-pegging" of USD0++. It cannot be said to be a stablecoin if it is not one, but the holders did indeed incur losses.

Staking USD0 to get USD0++, the user has submitted the returns of this capital for the next 4 years. So why would users do this? Usual provides USUAL tokens as "enhanced yield" at a rate higher than normal government bond yields for USD0++. Previously, during high price levels, the annualized rate exceeded 100%, and it is currently still around 10%.

Usual ecosystem token yield

This requires the USUAL token to have value, but what empowerment does the USUAL token provide? The USD0 underlying government bond yield captured by the protocol will be proportionally distributed to USUAL stakers (holders of USUALx) every week, and USUAL stakers will also be able to earn USUAL token emissions. Currently, Usual's TVL (Total Value Locked) is approximately 630 million USD, with about 520,000 USD0 allocated to USUAL stakers weekly (approximately 50% APY).

In short, without the Usual protocol, if I buy government bonds with US dollars, I receive bond yields; with the Usual protocol, I hold USD0, and the underlying US dollars are used to buy government bonds, but there is no interest. Staking USD0 for USD0++ can yield USUAL tokens, and staking USUAL earns the underlying bond interest.

The value of USUAL tokens comes from the right to the returns of depositor funds, which is a "self-mining" flywheel game completely revolving around TVL. Theoretically, if TVL increases, the weekly profit dividends will increase, driving up the price of USUAL tokens and attracting higher TVL with greater USD0++ returns. However, the flywheel can also reverse - a drop in token price can lead to a decrease in USD0++ returns, reducing TVL and causing a further decline in the dividends of USUAL tokens, which can trigger a further drop in token price.

This model relies heavily on token emissions for sustenance. 90% of the USUAL tokens will be released over 4 years through airdrops and as profits from USD0++ tokens. The remaining 10% of the total token supply is owned by the team and investors. So what happens when the tokens are fully released? After 4 years, all USD0++ tokens will expire, and there will be no need for further emissions of USUAL tokens.

What the Usual team needs to do is establish a real-world use case for USD0 in this well-regulated 4-year window where competitors have not yet fully entered the market, and use token-incentivized gameplay to spin the flywheel and accumulate considerable TVL benefits and network effects. **After 4 years, Usual reverts to Tether's model, except that its profits are distributed to the stakers of the USUAL token. **

This is actually a chip distribution period lasting 4 years.

What are the advantages of such exploration? Why do retail investors need what may be the Usual model?

Usual allows retail investors to gain exposure to Tether model profits through the USUAL token. Saving, staking, and trading can earn you USUAL tokens, which lower the investment threshold for the income rights behind Tether model stablecoins. The token flywheel mechanism gives retail investors the chance to acquire chips at a low cost -- USUAL tokens obtained at a lower TVL may appreciate significantly after the protocol grows. If you choose to play "mine for yourself", simply deposit funds without purchasing USUAL tokens, the worst outcome is just losing interest.

The stablecoin sector is clearly on the rise, and the failure of Luna is still fresh in our minds. Will retail investors be able to share in this opportunity? Or will this lucrative market ultimately still fall into the hands of giants like Wall Street? We will be fortunate to witness this together in the coming years.

Related Disclosure: The author of this article is involved in the USUAL ecosystem.