The Mountain Protocol launches the stablecoin USDM, which gives its users a share of the interest income.
Basically, the calculation is not overly complicated: the providers of stablecoins such as USDT or USDC usually back their tokens with dollars in the bank account or comparable “cash-like” securities.
After central banks raised interest rates last year, loans are becoming more expensive, and so are the costs of financing government spending. Interest rates on government bonds are rising, which means that these extremely boring financial products suddenly become sexy again – also and especially for stablecoin issuers who shift their dollars into government bonds and are suddenly highly profitable.
Tether, the publisher of USDT, currently makes around five billion dollars in profit a year, with an employee base of reportedly barely more than 50 people. Circle, the issuer of the USDC, is likely to have a somewhat smaller roll, but will also be extremely profitable.
The Mountain Dollar USDM is now trying the obvious thing: it passes on this interest to the users. A stablecoin thus returns to the origins of paper money from national debt. It will be less of a dollar token and more of a government bond token, so it is better than a dollar and more of a checking account with good interest.
Mountain advertises giving interest of five percent per year on the dollar tokens by investing them in so-called T-bills – short-term government bonds – and transferring these earnings to the tokens daily. Technically and economically this is easy to implement, but legally it is a bit more hairy. Because what pays interest is potentially a security, and that in turn entails a string of regulatory requirements.
That’s why Mountain is registered in Bermuda, a location known for its “smart regulation,” as Mountain puts it on Twitter. The downside of this is that the USDM tokens are not available to US citizens. There is no small irony in this. The dollar is the currency of the USA, USDM users finance the US government, the US bank JP Morgan manages the reserves. Everyone is allowed to play – except the users. They have to continue using USDT or USDC.
The USDM tokens are compatible with the ERC20 protocol, but are based on the liquid staking tokens on Ethereum, for example the stETH from Lido. Both stETH and USDM have a “rebase” mechanism that increases the number of tokens when interest or staking income is paid out, but keeps the shares of those eligible stable: whoever buys 100 USDM buys 100 shares; after a year he has 105 USDM but still 100 shares.
As an ERC-compatible token, USDM can move freely on the Ethereum blockchain and interact with all DeFi protocols. If things are going well, you can earn additional interest in addition to the five percent if you lend the USDM or put it in a liquidity pool.
As of now, the USDM dollars are not live yet. As far as I can see, there is a closed beta that you can sign up for to mine the tokens on the website. This is initially only possible with USDC stablecoins, while other stablecoins and bank transfers will also be accepted in the future. Until then, USDM will primarily cannibalize USDC, which could have the effect of putting USDC itself under pressure to also pay out interest.