**Stablecoin Wars: Tether’s Dominance and PayPal’s Entry into the Market**
*Stablecoins: Empowering the Crypto Economy*
If Tether’s stablecoin USDT were a country, it would be the 20th-largest holder of American government debt, on par with Germany. Tether is a global force and has become the reserve asset of the crypto economy. It’s worth discussing the irony that Tether, a technology designed to eliminate middlemen from financial transactions, has made the US dollar the first killer app of Web3.
**Tether’s Dominance and Growing Market**
Tether has long been the dominant player in the stablecoin market and has only increased in dominance in recent years. It currently accounts for 68% of the global supply of stablecoins, up from 50% in January. Its market value is larger now than during the peak of the 2021 bull market.
**PayPal Enters the Stablecoin Market**
Adding to the competition, PayPal recently announced the launch of its own stablecoin, PYUSD. Similar to USDT and Circle-owned USDC, PYUSD will be backed by dollar-for-dollar short-term U.S. government debt and cash. Stablecoins have proven to be highly profitable for Tether, so it’s no surprise that PayPal and others are entering the market. PayPal is looking for ways to diversify and capitalize on higher-margin opportunities amid increasing competition in the payments sector.
**Tether’s Lucrative Business Model**
Tether’s profitability lies in the simple fact that USDT is minted against deposited money. The token is widely used as an alternative to U.S. dollars for transactions and as a store of value. Tether invests the deposited funds in government securities, often yielding 5% or more. As USDT holders do not earn interest, the yields earned on Tether’s investments translate into almost pure profit. This model, known as the net interest margin (NIM), is different from traditional banking as Tether only lends to the risk-free U.S. government and users do not expect a return.
**The Future of Stablecoins: Introducing Interest-Bearing Stablecoins**
As USDT continues to grow, it raises questions about the potential for users to seek returns on their holdings. For instance, in countries with unstable currencies or underdeveloped financial sectors like Nigeria, many people hold USDT as a U.S. dollar savings instrument. Could a competitor launch an interest-bearing stablecoin that passes through interest from government securities to holders?
This proposed product, which we’ll call USDI, would offer holders the underlying yields on securities simply by holding it in their chosen wallet. To prevent the duration mismatch that led to the downfall of Silicon Valley Bank, USDI could offer higher yields to holders willing to lock their assets in a smart contract for a specified period. USDI could become highly profitable while also maintaining reserve funds and passing interest payments to holders.
**Challenges and Potential Regulatory Hurdles**
Critics argue that USDI is a solution in search of a problem since individuals can already hold money in banks, buy treasuries, or invest in money-market funds. However, billions of people worldwide would appreciate the opportunity to store value in U.S. dollars while earning a risk-free return on government securities. Regulatory issues also pose a significant hurdle for stablecoin issuers, as offering interest to holders would subject them to extensive regulation. Tether could potentially pay out interest itself, leveraging its network effects to maintain a competitive advantage.
**Embracing the Future of Stablecoins**
The stablecoin wars are heating up, with PayPal’s entry into the market. In the economic frontier of Web3, anything is possible, and even companies like PayPal recognize the potential. For those interested in shaping the future, it’s crucial to closely monitor the developments in stablecoin innovation.
*About the Author*
Alex Tapscott, the author of Web3: Charting the Internet’s Next Economic and Cultural Frontier, provides valuable insights into the stablecoin landscape. The views expressed in this article are solely his and do not reflect the opinions or beliefs of Fortune.