Author: Jonah Burian , Investor at Blockchain Capital
Compiled by: Felix, PANews
Abstract: In a three-way game, users may actually be the ultimate beneficiaries and ultimately reap the majority of the benefits.
In recent years, behind the huge profits earned by stablecoin issuers, the competition for profits among issuers, application layers, and users has intensified. An investor from Blockchain Capital has published an article revealing the evolution of stablecoin profit distribution mechanisms and business logic. Details are as follows.
Stablecoin issuers possess one of the most profitable business models on Earth, making them a target of intense competition. At Blockchain Capital, we witnessed firsthand the three-way tug-of-war between issuers, application layers, and users vying for profits.
We've invested in some major publishers (such as Tether, Circle, and Paxos) and several apps trying to get a piece of the pie (such as Aave, Phantom, Polymarket, and RedotPay). Here are our observations.
Publishers made a fortune
Users send fiat currency to issuers, who then mint digital dollars on the blockchain. Behind the scenes, issuers invest this fiat currency in cash or cash equivalents, earning a risk-free interest rate. That's the whole business. In contrast, banks take your deposits and must lend them out, manage credit risk, and maintain their branches; insurance companies collect premiums but ultimately must pay out claims. Stablecoin issuers, on the other hand, essentially only hold government bonds, generating cash flow without the complexity or risk involved.
Issuer revenue grows with the assets under management, while operating costs remain largely constant: it's practically a pure, unrestricted cash flow machine. Tether reports a team of approximately 300 people and projects profits of $10 billion by 2025. This is arguably one of the best business models ever.
But huge profits inevitably attract covetous eyes.
The app also wants a piece of the pie.
Most users never deal directly with issuers; they access stablecoins through applications like Phantom, which control user relationships.
Large exchanges, DeFi protocols, and well-known wallets wield significant bargaining power over issuers. They can designate default stablecoins and integrate or abandon them through unilateral product decisions, exerting considerable control over fund flows. If billions of dollars worth of stablecoins remain within an app, that app can demand that issuers share in the floating yield. The logic is simple: we are distributing your assets and anchoring user behavior, so you must share the profits, or else redirect users to a competitor's stablecoin.
This has already happened. The most typical example is the relationship between Coinbase and Circle. Initially, Coinbase was the primary distribution engine for USDC and negotiated a profit-sharing agreement. It was reported that Coinbase received 100% of the interest income generated by USDC on its platform and 50% of the interest income generated by USDC outside its platform. Applications, both within and outside their investment portfolios, are now increasingly adopting this strategy, actively seeking their own share of the profits.
Create your own branded stablecoin: Bypass the issuer
Applications can also try launching their own branded stablecoins or "wrappers," completely bypassing the issuer. Instead of directly directing users to USDC or USDT, they offer a USD balance backed by a combination of stablecoins and short-term notes. In this case, the distributor is effectively partly involved in the issuance process. Aave's GHO stablecoin is one example.
However, applications often lack the resources or licenses needed to build a complete issuance infrastructure. Therefore, they opt for "Issuer-as-a-Service" white-label solutions. Paxos is currently a leading white-label provider, powering PayPal's PYUSD. This allows PayPal to profit from floating interest rates without needing to negotiate with large issuers.
Issuer leverage
Applications do not have complete control over the issuer. Mature stablecoins like USDC and USDT possess strong network effects. They are the reserve assets for the entire DeFi space and the base pairs for most trading pairs. Branded stablecoins may be less appealing to users than other stablecoins due to lower liquidity and integration.
Furthermore, white-label stablecoins don't strive for "neutrality" like USDT. A company competing with PayPal at the application layer might be reluctant to accept PYUSD because doing so would be funding a competitor. The same situation likely influenced Circle's early development; exchanges like Binance might have been hesitant to fully promote USDC early on due to its close relationship with rival Coinbase, which is why Binance defaulted to supporting USDT. Today, USDT's trading volume on Binance is approximately five times that of USDC.
User demand for floating returns
In developed markets, users' expectations of returns put pressure on publishers and applications. When the risk-free interest rate is around 4%, US users naturally ask why their digital dollars aren't yielding any returns. When one wallet offers returns while competitors don't, users flock to the former.
If this expectation becomes the norm, the application layer will face a dilemma. To remain competitive, we anticipate that applications may have to return a portion of their revenue to users, forcing them to negotiate more aggressively with issuers. If an application cannot secure a share, it will struggle to pay interest to users without incurring losses. As more and more products use "stablecoin balance rewards" as a selling point, the model where "all revenue remains with the underlying issuer" will become unsustainable.
However, this pressure is not universal. In many overseas markets, the core value of dollar-denominated stablecoins lies in combating local inflation and foreign exchange controls, rather than pursuing returns. A user struggling to avoid their assets shrinking by half annually might not be too concerned about earning 4% interest. For global issuers with high penetration in these regions, the demand for returns is not as urgent as in the US market. We believe this dynamic may benefit Tether, given its largest overseas user base.
in conclusion
In short, user expectations and issuer profits put application-layer applications in a dilemma. They are caught between users who expect to gain returns and issuers who want to retain profits. Stablecoin architectures are evolving rapidly, and profit distribution remains a game. My guess is that users may ultimately benefit from this game and reap the majority of the rewards.
Related reading: Stablecoin yield guide: Which of the 8 types is the best?
