If you have been in the crypto-sphere for a long time, you know the rapid fluctuations that cryptocurrencies often face. Unsurprisingly, they are often criticized for this same reason. This is also one of the main reasons why 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 was developed. They are linked to a financial asset like the US dollar, and due to this characteristic, their long term the value remains intact.
Now, if you are a crypto fanatic, this knowledge is not enough for you. If you want to get into the intricacies of the system and know exactly how stablecoins make money, especially one of the most popular – Tether (USDT), then read on to quench your thirst!
Stable Coins – General Model
Each company’s earning potential and method associated with stablecoin tends to vary. It all depends on whether it is a centralized or decentralized system.
To be clear, centralized and stablecoins are those that hold their reserve assets off-chain. These reserve assets are controlled by a government authority or financial institution. If, however, a stablecoin is backed by a huge amount of non-crypto assets, chances are it is a centralized off-chain stabelocin. These stablecoins include Tether, USDC, and Gemini Dollar.
Centralized vs Decentralized
Centralized stablecoins tend to gain monetary benefits in various ways. One of the primary ways stablecoin companies make money is through lending and short-term investing. These companies take part of the reserve assets and lend them to others with interest. These hinge on the likelihood of many stablecoin holders asking for collateral at once. The method is similar to banks lending to their customers with savings accounts.
Decentralized stablecoins are stablecoins that tend to keep their reserve assets on-chain through cryptocurrencies and smart contracts. The process allows for transparency that centralized stablecoins do not. These stablecoins also use smart contracts that eliminate the need for a third party. Moreover, to add to their zest, decentralized stablecoins also provide an additional cryptocurrency and the pegged stablecoin that allows for governance and revenue sharing.
Tether – Business Model
Tether (USDT) is a stablecoin that is pegged to the USD through which Tether price stay fixed. Tether earns money through various sources such as fees, loans, and investments. Stablecoins like ether are mostly involved in trading through cryptocurrency exchanges. Tether itself is available on all well-known exchanges around the world.
One of Tether’s main sources of revenue is through fees for charging deposits or withdrawals and verifying the accounts it uses. Verification is required for depositing and withdrawing cash with Tether. The company charges $150 to each customer who wants to verify their account.
Apart from this, Tether also raises funds by providing loans to other companies and institutions, which then pay interest. In October 2021, Tether loaned $1 billion to Celsius Network, a cryptocurrency ledger. The ledger company was paying 5-6% interest every year.
Another method by which Tether generates income is by investing in other businesses and participating in their growth. Investing in the crypto ecosystem is a strategy employed by some major exchanges. Tether makes money from these investments by participating in the company’s profits or selling its shares for a much better price than they bought.
Funding of StableCoins
Stablecoins are funded by their users. A stablecoin is formulated when a user locks collateral to mint it with a stablecoin.
Stablecoin Future Prospects
A large majority of stablecoins are expected to remain the same going forward and into 2022 and even beyond. The value predictions for Tether are much higher, with its stakes held by some of the most prestigious companies and exchanges in the world.
However, some stablecoins have recently been the subject of controversy as to whether they actually hold this type of financial asset. Users are encouraged to thoroughly research their investments in this manner and form. Safe crypto-ing!