Have you heard of Tether? This relatively obscure firm, which issues the stablecoin USDT and is now based in El Salvador, is projected to have generated over $5 billion in profit for the year 2024, all with a workforce of fewer than 200 employees. In contrast, its American competitor Circle, responsible for the stablecoin USDC and fully compliant with U.S. regulations, reported $1.68 billion in revenue last year and is gearing up for a much-anticipated initial public offering (IPO) valued at $10 billion. These astonishing figures prompt a critical inquiry: how do these companies accumulate billions merely by issuing stablecoins?
To grasp this, we must first clarify what a stablecoin is. A stablecoin is a form of cryptocurrency that aims to maintain a stable value in relation to a specific asset, most frequently the U.S. dollar. For example, both USDT (Tether) and USDC (Circle) are designed to consistently hold a value of one U.S. dollar each. This inherent stability is vital within the cryptocurrency landscape, particularly in light of the often erratic price movements seen in assets like Bitcoin or Ethereum.
As previously discussed, cryptocurrencies facilitate the transfer of value online without reliance on centralized intermediaries. However, this advantage can be undermined by significant price volatility. Consider the scenario of transferring $1 million to a business associate in Japan on a Friday. Since banks in both countries need to be operational to process the transaction, the transfer may be delayed until the following week. Now, envision using Bitcoin: if you purchase 10 Bitcoins at $100,000 each and send them, but the value plummets to $80,000 by the time your partner receives it, they would effectively incur a 20% loss on the intended payment. In business transactions, particularly if the recipient has subsequent payments to make, this level of risk is intolerable. A stablecoin pegged to the dollar mitigates this issue by offering the speed and efficiency of cryptocurrency without the accompanying volatility.
While facilitating international transfers is a significant application, the primary catalyst driving the rapid expansion of stablecoins has been their use in cryptocurrency trading and speculation. Similar to traditional markets where speculators trade commodities like gold, oil, or stocks, the crypto market also has traders aiming to benefit from price fluctuations. Many of these transactions were previously conducted on exchanges such as Binance and Bitfinex—platforms that historically did not permit direct exchanges between cryptocurrencies and fiat currencies. This gap is where stablecoins come into play. Imagine a trader anticipating that Bitcoin, currently valued at $100,000, will rise to $130,000 within a month and subsequently drop to $110,000. They would aim to sell at the peak and repurchase during the downturn. However, converting Bitcoin into other cryptocurrencies like Ethereum or Solana does not eliminate risk, as those assets often move in correlation with Bitcoin. What the trader requires is a stable asset to hold their profits before re-entering the market—a digital dollar—that allows them to secure gains and wait for the optimal time to reinvest.
Stablecoins might seem straightforward, but they have become essential to the modern crypto financial framework. Whether they enable efficient international transactions or offer liquidity and risk management tools for traders, these digital currencies have proven to be vital—and exceptionally lucrative for the companies that create them.
A centralized stablecoin like USDT is issued by Tether, while USDC is produced by Circle. When a customer exchanges dollars for these stablecoins, Tether credits their wallet with a USDT coin, which can be used similarly to Bitcoin. Tether guarantees that customer deposits are safely stored and can be redeemed when customers return for their dollar value. Tether then invests these funds in U.S. Treasuries, earning interest on the capital. With approximately $158 billion worth of Tether in circulation, the company invests the dollars used to purchase these tokens into Treasuries, generating substantial revenue. An interest rate of 4% on $158 billion translates to significant profits, especially for a company with just 150 employees, resulting in an astonishing $40 million profit per employee—the highest rate globally, outpacing even Nvidia’s $2 million per employee. However, this type of stablecoin raises concerns about trust, as users must rely on Tether to genuinely invest their dollars in safe Treasuries and not in risky ventures that could jeopardize customer funds. Nonetheless, does this centralized nature undermine the fundamental principles of cryptocurrencies?
For years, Tether has faced scrutiny from various U.S. regulatory bodies regarding the mingling of customer funds and the potential loss of those assets. There remains no verification process to confirm that Tether actually holds the promised dollars in Treasuries, placing trust in the company’s assurances. While centralized mechanisms offer efficiency and convenience, they also raise questions about transparency and trust. The second type of stablecoin is the crypto-collateralized stablecoin, exemplified by DAI from the Maker Foundation. This stablecoin is backed by cryptocurrencies like Ethereum. Given the volatility of the underlying assets, these stablecoins are over-collateralized. To issue $100 worth of a stablecoin, a user must provide $150 worth of Ethereum to a smart contract, which we have previously discussed. This contract will issue DAI as long as the collateral remains above a certain threshold. If the value of the Ethereum collateral falls, the contract will automatically liquidate it to protect the holder’s position. Users incur a stability fee or interest when they repay loans, and a peg stability module facilitates the exchange of DAI for USDC with minimal price impact. If DAI trades below $1, arbitrageurs will purchase it at a lower price and sell it for USDC, thereby reducing supply and pushing the price back up to $1. However, the downside of collateralized debt position stablecoins lies in their capital inefficiency, while the benefit is that they operate entirely on-chain without intermediaries, aligning with the principles of decentralization.
The third and arguably most ambitious type of stablecoin is the algorithmic stablecoin, which operates without collateral and instead utilizes smart contracts and algorithms to regulate supply and demand, effectively creating coins from nothing. When the price exceeds $1, the protocol mints additional coins; conversely, when it drops below $1, it removes coins from circulation. Although this approach is innovative, it carries significant risks—TerraUSD (UST) is a notable example that experienced a catastrophic failure in 2022, nearly dragging the entire market down with it. Other algorithmic stablecoin projects that have faced similar fates include Basis (2018), Empty Dollar Set (2021), Iron Finance (2021), and Neutrino USD (2023). The TerraUSD coin aimed to maintain its dollar peg through a mint-and-burn mechanism linked to its sister coin LUNA. When $1 worth of UST was minted, an equivalent value of LUNA was burned. This structure was designed to absorb price fluctuations. If UST traded above $1, users could burn LUNA to mint UST, selling it at a profit and increasing UST supply, thereby lowering its price back to $1. Conversely, if UST fell below $1, users could burn UST to reclaim LUNA, selling it at a profit and reducing UST supply, pushing its price back toward $1. This arbitrage mechanism was intended to stabilize the peg. However, in early May 2022, UST began to deviate from its $1 target, dropping to approximately $0.98 due to market volatility and significant withdrawals from Anchor Protocol, Terra’s main decentralized finance application. As confidence waned, users liquidated UST for LUNA, flooding the market with new LUNA tokens, which exacerbated the situation. The hyperinflation of LUNA ensued as its value plummeted, causing a downward spiral where UST redemptions inflated LUNA’s supply, further destabilizing the system. Eventually, UST plummeted to just a few cents, and the collapse of the Terra ecosystem had widespread repercussions, including a significant decline in Bitcoin’s value as the company liquidated its bitcoin treasury worth billions to stabilize LUNA. UST’s stability hinged entirely on market trust and LUNA’s value; once confidence faltered, the arbitrage mechanism transformed from a stabilizing force to a liability, leading to a catastrophic failure.
Each stablecoin category presents trade-offs between decentralization, stability, and trust. Centralized coins offer reliability but necessitate trust in a specific entity. Collateralized models promote greater decentralization but often come with complexities and inefficiencies. Algorithmic coins aspire to achieve full decentralization yet remain largely experimental. What does the future hold for Tether? In 2024, Tether has emerged as the seventh-largest holder of U.S. Treasuries, surpassing nations like Canada, Taiwan, and Norway. Its growth trajectory shows no signs of slowing: the total issuance of USDT reached $45 billion last year, representing a 57% increase year-over-year, with a 13% rise in USDT users in the first quarter of 2025. This trend raises questions about who will support U.S. debt in the future if China ceases its purchases. Individuals in economically unstable countries, such as Argentina or Zimbabwe, have turned to Tether or Bitcoin to safeguard their wealth against rampant local inflation. Cantor Fitzgerald, a leading U.S. treasury dealer, has invested in Tether, with its CEO now serving as the U.S. Secretary of Commerce. This relationship enables Tether to efficiently sell U.S. Treasuries, should customers seek to redeem their dollar deposits. It appears that Tether may soon gain mainstream acceptance in the U.S. The question remains: when will India follow suit, allowing its Reserve Bank to support the creation of Tether-like stablecoins pegged to the Indian Rupee? When will a free market stablecoin, driven by the public, emerge in India, rather than one mandated by the government?
