Author: Vishal Kankani, Head of Multicoin Capital Investment Team; Translation: Golden Finance xiaozou
On June 6, 2024, Multicoin Capital is proud to announce that Multicoin Capital led an $8 million Series A round in Mountain Protocol, the issuer of USDM. USDM is a permissionless, yield-generating stablecoin fully backed by U.S. Treasuries. Other investors included Castle Island Ventures, Coinbase Ventures, and others.
Stablecoins are one of the largest target markets in the crypto space. To maximize market share, we believe stablecoins should:
Earn basic income by default;
Assets that hold the same sovereign risk as the underlying fiat currency;
There is at least 1:1 backing of such assets — not just a tokenized trading strategy;
Holding the assets backing stablecoins in a bankruptcy remote structure;
is carefully regulated in a good jurisdiction;
Able to be freely transferred on-chain like standard ERC20 and SPL tokens (no transfer restrictions);
Atuto-rebasing mechanism ensures a smooth user experience (when you open your wallet every day, you have more tokens than the previous day due to accumulated interest).
Stablecoins have been around for about a decade. However, USDM is the first stablecoin to meet all of the above requirements. Today, USDM is available on Ethereum, Polygon, Arbitrum, Optimism, and Base, and plans to expand to other networks soon, including Solana. It has been audited by Open Zeppelin and is regulated by the Bermuda Monetary Authority.
1. Yield is the ultimate position
Stablecoins are supposed to be boring. They are not supposed to be volatile. Banking crises are not supposed to affect stablecoins. Stablecoins are supposed to be so boring that the media forgets they exist.
It is unlikely that a stablecoin will make more sense than what USDC and USDT bring us. Trust in the issuer is table stakes. Having a clear bankruptcy remote structure is critical, and this is a clear difference between USDM and these existing stablecoins. USDM is fully backed by US Treasuries, making it safer than other fractional stablecoins or multi-asset stablecoins.
Aside from trust, we believe there is only one killer feature that can compete with the liquidity and brand recognition provided by USDC and USDT: yield. Specifically, auto-rebasing of yield accumulation (i.e., users do not need to do anything to accumulate and claim their yield). Yield-bearing stablecoins are the future of crypto-native life deposits.
Of the approximately $160 billion in stablecoins in circulation, over 95% are in USD-denominated stablecoins. At the time of writing, short-term U.S. Treasury bills yield approximately 5%, but these stablecoin issuers do not share these returns with their users. Assuming a 5% interest rate, this equates to approximately $8 billion per year that could potentially be shared with stablecoin users. We expect this number to grow by an order of magnitude as stablecoins continue to grow, ultimately exceeding $1 trillion in circulation in the coming years.
Mountain Protocol’s USDM is a stablecoin that works just like USDC or pyUSD, meaning it is also backed by short-term US Treasuries (note that USDT is not fully backed by US Treasuries). However, unlike USDC or pyUSD, USDM is natively yielding, allowing users to earn daily yield through an auto-rebasing mechanism without taking on any additional risk assumptions. “Rebasing” means that users can earn more USDM simply by holding their stablecoins in their wallet without staking, lending, or doing anything else. If they hold a balance, the amount of stablecoins in their wallet will increase as they earn yield. Every day when a user opens their wallet, they will see more USDM tokens than the day before due to the accumulation of interest. USDM currently has an annualized yield of 5% AYP.
The current leading stablecoins do not share the reserve yields they generate with their users. This outcome is not surprising given the current lucrative business model and lack of competition. If they shared 90% or so of the yields, then the revenue would immediately be reduced by about 10 times. We see a similar story in the Bitcoin ETF space, where GBTC still charges 1.5% fees, while BlackRock’s Bitcoin ETF—IBIT—only charges 0.25%. It is therefore not surprising that IBIT recently surpassed GBTC in AUM. At least for GBTC, some holders are sitting on huge capital gains, which may disincentivize them to redeem. For stablecoins, the reason for not sharing yields is even weaker, as stablecoin holders do not have capital gains to protect by locking in high-fee products.
USDM aims to be the safest yield-earning stablecoin on-chain. While there are many other yield-earning stablecoins on the market, their yield sources require riskier strategies (secured lending, basis trading, unsecured lending, etc.), and we believe that these tokens will never become safe enough to be considered a trusted and secure stablecoin, let alone a ubiquitous global currency. Other stablecoins backed by US Treasury bonds choose to be regulated in newer, less mature jurisdictions, which introduces another risk.
Mountain Protocol’s business model is straightforward. It earns money by maintaining a “net interest margin,” which is calculated by tracking the difference between the yield generated by U.S. Treasury assets and the yield passed on to users in the form of USDM yields. We believe that stablecoin issuers should be compensated fairly for their work, but also believe that current issuers are overcompensated and have little incentive to change the status quo.
2. Prudent supervision is a moat
If you believe, as we do, that stablecoins will become the dominant settlement currency of the future, then it logically follows that stablecoins will become systemic money for the global financial system. Therefore, regulators will want to ensure that stablecoins do not fail.
Mountain Protocol is prudentially regulated by the Bermuda Monetary Authority, arguably the best regulator of yield-based stablecoins today. USDT and USDC are the current market leaders, accounting for about 90% of the circulating supply of stablecoins, but they are not prudentially regulated by the Bermuda Monetary Authority. Unlike securities regulation, which focuses on information disclosure, prudential regulators go a step further and proactively manage risk to ensure that these systemically important products do not fail. Prudential regulation requires banks, payment companies, insurance companies, and other financial institutions to measure and manage risks in different situations, hold sufficient capital and liquidity as required by stress testing, and develop feasible recovery and resolution plans. Obtaining prudential regulation is a very important task that takes about 12-24 months to complete and requires a lot of maintenance work, including finance, risk, compliance, governance, network external audits, regulatory reporting, detailed governance processes, and more.
After working closely with regulators, Mountain Protocol received authorization from the Bermuda Monetary Authority to issue USDM under the regulatory framework. Bermuda is experienced in regulating large and complex institutional products such as reinsurance (approximately $300 billion in size) and is also considered one of the best jurisdictions for the trust and private wealth management industry (market size exceeds $1 trillion). Bermuda is a leader in issuing insurance-linked securities (ILS), notably the Bermuda Stock Exchange (BSX) has 785 listed issuers and $38.4 billion in outstanding market capitalization, accounting for approximately 92% of the global ILS market share. More importantly, Bermuda is becoming a leader in digital asset and fintech regulation. In addition, Bermuda has a robust court system that follows common law, allowing USDM holders to trust a proven jurisdiction. Mountain Protocol is not alone, most institutional players in the space are moving or have moved to Bermuda, most notably Coinbase's International Exchange.
Mountain Protocol has been working towards obtaining these licenses over the past 18 months. This head start gives them the opportunity to build liquidity and brand recognition to become a leader in the yield-generating stablecoin category.
3. Reasons for being optimistic about USDM
Trust and security are prerequisites for a widely used stablecoin. However, the most critical feature is revenue sharing. The market is profit-seeking, and the stablecoin that earns the most for users without taking on additional risk assumptions will become the king.
As stablecoins proliferate, we are optimistic that USDM will become a market leader and scale to billions of users for the following reasons:
(1) USDM has an auto-rebase mechanism, which is the only way to scale stablecoins to billions of users (safest user experience). Anything else is a hassle for users and makes them not want to sign up.
(2) USDM also has the ability to abstract multi-chain complexity, allowing users to hold USDM in any trading venue.
(3) We believe that holding USDM is actually the same risk as holding U.S. Treasuries. As more and more high-yield stablecoins emerge, the source of U.S. dollar returns must have the same sovereign risk as the U.S. dollar, otherwise users will bear risks that are completely different from what they think.
(4) The USDM has the strongest regulatory moat today. As stablecoin laws and regulations are developed in the coming years, trusted regulation will become increasingly important. Most stablecoin laws around the world treat stablecoins as digital currencies, thereby imposing prudent regulation on stablecoin issuers, including MiCA (Europe), VARA (Dubai), MAS (Singapore), and of course BMA (Bermuda). Most bills in the U.S. Congress also follow this principle. The USDM is clearly ahead in this regard.
4. Low-hanging fruit
Today, USDM is used by money managers to keep their stablecoin assets safe and earn yield. More and more companies are likely to hold more and more stablecoins on their balance sheets. With trillions of dollars sitting in corporate bonds, this is a huge opportunity. It is no surprise that Mountain Protocol has managed to attract sophisticated risk-averse buyers to buy and hold. Additionally, there is a clear global demand for USD from people living in countries with high inflation and/or unstable regimes to protect against a loss of purchasing power. If you are a fintech company providing USD exposure in these regions, then USDM makes a lot of sense as it only requires users to hold USDM in their wallets and they don’t have to do anything else to earn the yield.
In addition to money management and dollar savings, another obvious use case for the USDM is derivatives collateral. The derivatives market is worth several hundred trillion dollars in notional size—no exaggeration. Those seeking leverage need to provide collateral, which is stored with counterparties and worth billions of dollars. In this sense, it is obvious that traders should provide collateral that can generate returns. In the traditional financial world, US Treasuries are a good form of collateral with a very limited discount. Therefore, a well-regulated, trustworthy, liquid, high-yield stablecoin with a bankruptcy-remote structure is a complete no-brainer for derivatives collateral, and derivatives exchanges should take note of this. This is the USDM.
We are excited to support Martin, an Argentinian who truly understands the global importance of stablecoins, and Matias, who has a history of building secure and scalable crypto technologies, and their team. The company also has a stellar advisory board including Matt Homer (Partner at XYZ Department, former Executive Deputy Superintendent of the New York Department of Financial Services, and a fintech veteran), Jeff Baron (COO of Coinbase International), Nic Carter (Partner at Castle Island Ventures), and Firas Habach (Head of Compliance at Sygnum Bank).
