The Mountain Protocol has unveiled a groundbreaking stablecoin called USDM, designed to reward its users with a portion of the interest income generated by the platform.
In essence, the concept behind this novel stablecoin is rather straightforward. Traditional stablecoins likeUSDT and USDC are typically backed by assets like dollars in bank accounts or similar cash-like securities. However, following recent interest rate hikes by central banks, borrowing costs and government spending have surged. Consequently, interest rates on government bonds have also risen, transforming these formerly mundane financial instruments into attractive options. This newfound appeal extends to stablecoin issuers who have strategically allocated their dollars into government bonds, reaping significant profits as a result.
For instance, Tether, the publisher of USDT, currently boasts an annual profit of approximately five billion dollars, despite having a workforce of reportedly just over 50 individuals. Similarly, Circle, the issuer of USDC, is also positioned for substantial profitability.
The Mountain Protocol’s USDM has taken a refreshing approach: it passes on the accrued interest to its users. This transforms the stablecoin from merely representing the value of the dollar into something akin to a government bond token, offering greater value than a standard dollar and functioning more like a high-yield savings account.
Mountain has boldly declared a five percent annual interest rate on USDM by investing the stablecoins in T-bills, short-term government bonds. The interest earnings are then transferred to the tokens on a daily basis. While the technical and economic aspects of this operation are relatively straightforward, the legal implications are more complex. Paying interest on an asset potentially categorizes it as a security, triggering a series of regulatory requirements.
To navigate these regulatory waters, Mountain has chosen to register its operations in Bermuda, a jurisdiction known for its “smart regulation,” as the company proudly states on Twitter. However, there’s a catch: USDM tokens are not available to U.S. citizens. This irony is not lost, as the dollar is the nation’s currency, USDM users effectively fund the U.S. government, and JP Morgan manages the reserves. Everyone gets a seat at the table except the very users driving the ecosystem, who must continue to use USDT or USDC for their stablecoin needs.
USDM tokens are ERC20-compatible, but their foundation is rooted in liquid staking tokens on Ethereum, such as stETH from Lido. Both stETH and USDM employ a “rebase” mechanism that increases the token count when interest or staking income is distributed, while maintaining the ownership share. In simpler terms, someone who initially acquires 100 USDM still holds 100 shares; after a year, they possess 105 USDM but retain 100 shares.
Being ERC-compatible allows USDM to freely move within the Ethereum blockchain, enabling interaction with various DeFi protocols. In favorable conditions, users might even earn extra interest by lending or participating in liquidity pools.
As of now, USDM is not yet live. A closed beta phase is underway, and users can register on the website to mine the tokens, initially limited to USDC stablecoins. The future roadmap includes acceptance of other stablecoins and bank transfers. This development could potentially exert pressure on USDC to consider interest payouts of its own, making for an intriguing evolution in the stablecoin landscape.