5 ms·

Why you’d issue a branded stablecoin

35 points by krrishd 1y ago

hahahacorn 1y ago
Seems like a really inefficient way to do points… my CC company gives me 3 points and I eventually redeem them for USD. Is that not the L1 L2 network stuff, but just far less efficient than a DB write?
- salomonk_mur 1y ago
  The story of literally all blockchain-based solutions.
  - kikimora 1y ago
    Imagine you do it with PG - add a column “money”, put some numbers into it and issue a ToS guaranteeing money in your db 1-to-1 exchange to USD. Because now you store money amount in your db and can manipulate them at will you have to be a bank. Good luck with that.
- krrishd 1y ago
  From the consumer perspective totally - but those credit card points come from the interchange the issuer makes from issuing the card / your card txns (ie. as a proportion of your _spend_ using the card). The sort of rewards you get for storing your business's cash at eg. Mercury, or using a wallet like Cash App - have to come from yield generated by the actual cash deposits, which is the sort of program that is much harder to operate / requires close ongoing partnership with partner banks / etc. If I'm eg. Mercury, storing the dollars you (business) deposit into my platform in a "branded" stablecoin will get me the same rewards - bc it's backed 1:1 by eg. a money-market fund at Blackrock - for much less of the operational burden, _because_ I'm not participating in a stored value program at an actual bank. The alternative today is that Mercury does store it at a bank, does have to maintain a "stored value" program with that bank, and the yields are standard bank interest (rather than eg. MMF). Moreover - through Bridge, I can withdraw fiat USD and deposit fiat USD into that "branded stablecoin", and it's just an in-app balance in the fintech app - so the fact that it's a stablecoin doesn't change my experience at all other than in conferring standard rewards. If you look at how eg. Stripe Stablecoin Account labels the balance, it just calls it "Digital dollars" - so it's not much more than a backend implementation detail, really.
dzink 1y ago
(For those of us who remember what runs on a bank with your savings in it feel like) What if any protection is there, that you will be able to withdraw your money when a massive dunk in Bitcoin crashes a bunch of major holders and you want your savings back?
- krrishd 1y ago
  It's a good question - Stripe's Stablecoin Account documentation is good reference here (they denominate balances in USDB, one of these "custom stablecoins" from Bridge): https://docs.stripe.com/crypto/stablecoin-financial-accounts#considerations https://docs.stripe.com/crypto/stablecoin-financial-accounts... "It’s always backed one-to-one by the equivalent value of US dollars held in cash and short-duration money market funds at BlackRock." So while there are other (potentially novel) sorts of counterparty risks - the backing is definitely more robust than (and pretty much entirely decoupled from) Bitcoin/the rest of the crypto sphere, and is closer to dropping funds off in a Fidelity money market. Another good (early - 2023) read on this topic: "There are now two types of PayPal dollars, and one is better than the other " https://www.moneyness.ca/2023/09/there-are-now-two-types-of-paypal.html?m=1 https://www.moneyness.ca/2023/09/there-are-now-two-types-of-...
  - oblio 1y ago
    Fairly sure money market funds have risks and carry interest (interest = risk). People found that out the hard way in 2008.
    - krrishd 1y ago
      Indeed, and good call out; one likely source of the "novel" counterparty risk I allude to (though really not even novel - "different" is probably the more reasonable word).
    - kikimora 1y ago
      This is correct and addressed with diversification. Is money is spread across multiple safe instruments your chances to get in trouble is minimal. If you do get in trouble then your exposure is small too.
muzani 1y ago
I'm not sure if I'm missing the point here, but stablecoins could be exchanged for something of value at a fixed price. The USD used to be this - you could exchange it for gold. But it was more convenient to give paper money than exchange gold. A Big Mac may cost $5 now, $10 in the future. But I would like a Big Mac Coin that lets me exchange it for one Big Mac in any time in the future. It has value as long as McDonald's exist and is willing to accept the coins, which is better than you can say of most crypto. It may be a different sized burger, it may have somewhat different ingredients. Even our "classic coke" is nothing like the original coke. But this is what I'd expect from branded stablecoins.
- krrishd 1y ago
  I think you have a much cooler, futuristic vision of a "branded stablecoin" than what I'm talking about :) Almost like a more practical/feasible version of the "flatcoin" concept Balaji Srinivasan (of Coinbase/a16z/etc) had a while ago: https://x.com/balajis/status/1422993084002934788 https://x.com/balajis/status/1422993084002934788. Frankly also my initial source of disappointment when I found out what this _actually_ is. But yeah - in the case of this post / Bridge's offering, "branded" stablecoins are still redeemable for 1 USD, the only point of the "branding" is who is entitled to the yield and for how much "program management" around the stored value (relative to eg. a "stored value" program at a partner bank).
- petesergeant 1y ago
  So, a future?
  - beAbU 1y ago
    Futures have an expiry date, dont they?
  - muzani 1y ago
    Aren't futures all backed by some financial entity? The first problem is it's a third party. That party may go bankrupt. Plus, it's probably in another country. McDonald's is in all the countries. It's also best when it's backed by the company honoring it. If Ronald Bank decides that they're one day no longer in partnership with McDonald's, they might choose to swap it with Whoppers, which are not quite equivalent, but that's a flexibility that some people might want to have. I don't want a thousand Big Macs worth of futures though. I just want maybe 10. Or a hundred. If I'm broke or get labeled a terrorist or refugee, I can trade one for food. If say, any McDonald's accepts them, they'd be more liquid than USDC. Plus McDonald's has plans lasting for decades. My futures may no longer be valid in 6 years.
ArtTimeInvestor 1y ago
This is how I understand the uprising of stablecoins, let me know if I am wrong: One of the best businesses is to offer this service: Give me your money, I'll give it back to you later. Because then you can lend out that money to someone who offers this service: Give me your money, I'll give it back to you later. Plus some interest. You now have a business which, at almost no cost, generates money. The interest offered by the latter service. Doing so is regulated. You need to jump through a lot of hoops and you are very limited in whom you can lend out your customers' money to. But you can design the same type of business with stablecoins. By offering: Hello! I have two offerings: 1: I sell someNiceCoin for a dollar. 2: I buy someNiceCoin for a dollar. For your customer it is the same. They give you money and get it back later. But now you are not a "money holder". You are a trader. A trader of some coin you invented. You don't need to jump through so many hoops and you can lend out the money you earn from selling someNiceCoin to services with higher yields.
- krrishd 1y ago
  I think this is somewhat reasonable, but with plenty of asterisks / not the "arbitrage" this would imply. There is still a "real", regulated money-holder in the loop - it's just Bridge (the manager of the cash reserves backing the coin - and licensed money transmitter etc etc). Or in the case of USDC - Circle, the "money-holder" / manager of reserves (also has tons of licensed / is very regulated). And the ETH network (where the coin itself sits) for much of the tech / logistics of making that held-money usable. In fact - because neither Bridge nor Circle are banks, they can't do the fractional reserve that banks do, and are only allowed to do the 1:1 backed thing, with super regulated entities like BlackRock. "you can lend out the money you earn from selling someNiceCoin to services with higher yields" is strictly not true - they _cannot_ lend the money out, they have to store the money in ways that the end-consumers could do themselves, directly. In that frame - the "efficiency" for you as a fintech is that instead of having to work with a bank on a "stored value" program, you can just work with Bridge and Circle, whose technological primitives are leaps / bounds ahead of the bank, but more importantly - who are much more flexible to work with than the median "partner bank", because they are not banks. The whole "partner bank" ecosystem only really even scales because there are API providers like Increase.com / Unit.co etc to wrap them.
haikupoems 1y ago
I think the difference is that there is still a maintenance of stored value, but that stored value is now able to earn more yield than what you would by depositing it at a bank. In both the cases described in the article - using Unit or Bridge - you pass on the work of stored value to someone else. But Unit doesn't earn as much by being the stored value as Bridge would because Bridge is invested into T bills / MMFs. Hence, Mercury coin is better than running a bank using Unit. Is that fair to say?
- krrishd 1y ago
  This is a great question, I actually don't even think it's strictly a matter of "more" yield. To dig into your example a bit deeper, there are a few general differences with an (eg.) Unit vs. Bridge. - With a BaaS like unit, you're often actually forming a partnership _not just_ with Unit (a software provider), but the partner banks Unit works with. More specifically, you're operating two sorts of programs with the partner bank: programs around "money transmission" (_moving_ money on behalf of customers) and around "stored value" (_storing_ money on behalf of customers). Each of these programs tends to be pretty involved - as is having to be in a three-party agreement etc, working with an old-school bank, under legacy banking constructs, etc. - With Bridge: Bridge is your single partner. Bridge _itself_ has partner banks for the sake of both banking + money movement, but when you store customer funds as stablecoins in a crypto "wallet" Bridge spins up, it is operationally different than if you were to store them as fiat in a customer-specific bank account you opened at Bridge's partner bank, under a classic FBO/DDA program. The partner bank Bridge using is more involved in the money _transmission_ piece, when you want to receive customer funds in as fiat, or push customer funds out as fiat - but the funds being stablecoin at rest would seem to reduce the burden here. So yes that might result in some cost-saving, but it's also just (vaguely) _easier_ to do from a technical/operational POV. (Some of the details above may be wrong / vary by provider / etc - but having worked with both of these sorts of providers at some length, this is my "felt" difference and high-level understanding).

35 points by krrishd 1y ago

Seems like a really inefficient way to do points… my CC company gives me 3 points and I eventually redeem them for USD. Is that not the L1 L2 network stuff, but just far less efficient than a DB write?

salomonk_mur 1y ago
The story of literally all blockchain-based solutions.
- kikimora 1y ago
  Imagine you do it with PG - add a column “money”, put some numbers into it and issue a ToS guaranteeing money in your db 1-to-1 exchange to USD. Because now you store money amount in your db and can manipulate them at will you have to be a bank. Good luck with that.
krrishd 1y ago
From the consumer perspective totally - but those credit card points come from the interchange the issuer makes from issuing the card / your card txns (ie. as a proportion of your _spend_ using the card). The sort of rewards you get for storing your business's cash at eg. Mercury, or using a wallet like Cash App - have to come from yield generated by the actual cash deposits, which is the sort of program that is much harder to operate / requires close ongoing partnership with partner banks / etc. If I'm eg. Mercury, storing the dollars you (business) deposit into my platform in a "branded" stablecoin will get me the same rewards - bc it's backed 1:1 by eg. a money-market fund at Blackrock - for much less of the operational burden, _because_ I'm not participating in a stored value program at an actual bank. The alternative today is that Mercury does store it at a bank, does have to maintain a "stored value" program with that bank, and the yields are standard bank interest (rather than eg. MMF). Moreover - through Bridge, I can withdraw fiat USD and deposit fiat USD into that "branded stablecoin", and it's just an in-app balance in the fintech app - so the fact that it's a stablecoin doesn't change my experience at all other than in conferring standard rewards. If you look at how eg. Stripe Stablecoin Account labels the balance, it just calls it "Digital dollars" - so it's not much more than a backend implementation detail, really.

dzink 1y ago

(For those of us who remember what runs on a bank with your savings in it feel like) What if any protection is there, that you will be able to withdraw your money when a massive dunk in Bitcoin crashes a bunch of major holders and you want your savings back?

krrishd 1y ago
It's a good question - Stripe's Stablecoin Account documentation is good reference here (they denominate balances in USDB, one of these "custom stablecoins" from Bridge): https://docs.stripe.com/crypto/stablecoin-financial-accounts#considerations https://docs.stripe.com/crypto/stablecoin-financial-accounts... "It’s always backed one-to-one by the equivalent value of US dollars held in cash and short-duration money market funds at BlackRock." So while there are other (potentially novel) sorts of counterparty risks - the backing is definitely more robust than (and pretty much entirely decoupled from) Bitcoin/the rest of the crypto sphere, and is closer to dropping funds off in a Fidelity money market. Another good (early - 2023) read on this topic: "There are now two types of PayPal dollars, and one is better than the other " https://www.moneyness.ca/2023/09/there-are-now-two-types-of-paypal.html?m=1 https://www.moneyness.ca/2023/09/there-are-now-two-types-of-...
- oblio 1y ago
  Fairly sure money market funds have risks and carry interest (interest = risk). People found that out the hard way in 2008.
  - krrishd 1y ago
    Indeed, and good call out; one likely source of the "novel" counterparty risk I allude to (though really not even novel - "different" is probably the more reasonable word).
  - kikimora 1y ago
    This is correct and addressed with diversification. Is money is spread across multiple safe instruments your chances to get in trouble is minimal. If you do get in trouble then your exposure is small too.

muzani 1y ago

I'm not sure if I'm missing the point here, but stablecoins could be exchanged for something of value at a fixed price. The USD used to be this - you could exchange it for gold. But it was more convenient to give paper money than exchange gold. A Big Mac may cost $5 now, $10 in the future. But I would like a Big Mac Coin that lets me exchange it for one Big Mac in any time in the future. It has value as long as McDonald's exist and is willing to accept the coins, which is better than you can say of most crypto. It may be a different sized burger, it may have somewhat different ingredients. Even our "classic coke" is nothing like the original coke. But this is what I'd expect from branded stablecoins.

krrishd 1y ago
I think you have a much cooler, futuristic vision of a "branded stablecoin" than what I'm talking about :) Almost like a more practical/feasible version of the "flatcoin" concept Balaji Srinivasan (of Coinbase/a16z/etc) had a while ago: https://x.com/balajis/status/1422993084002934788 https://x.com/balajis/status/1422993084002934788. Frankly also my initial source of disappointment when I found out what this _actually_ is. But yeah - in the case of this post / Bridge's offering, "branded" stablecoins are still redeemable for 1 USD, the only point of the "branding" is who is entitled to the yield and for how much "program management" around the stored value (relative to eg. a "stored value" program at a partner bank).
petesergeant 1y ago
So, a future?
- beAbU 1y ago
  Futures have an expiry date, dont they?
- muzani 1y ago
  Aren't futures all backed by some financial entity? The first problem is it's a third party. That party may go bankrupt. Plus, it's probably in another country. McDonald's is in all the countries. It's also best when it's backed by the company honoring it. If Ronald Bank decides that they're one day no longer in partnership with McDonald's, they might choose to swap it with Whoppers, which are not quite equivalent, but that's a flexibility that some people might want to have. I don't want a thousand Big Macs worth of futures though. I just want maybe 10. Or a hundred. If I'm broke or get labeled a terrorist or refugee, I can trade one for food. If say, any McDonald's accepts them, they'd be more liquid than USDC. Plus McDonald's has plans lasting for decades. My futures may no longer be valid in 6 years.

ArtTimeInvestor 1y ago

This is how I understand the uprising of stablecoins, let me know if I am wrong: One of the best businesses is to offer this service: Give me your money, I'll give it back to you later. Because then you can lend out that money to someone who offers this service: Give me your money, I'll give it back to you later. Plus some interest. You now have a business which, at almost no cost, generates money. The interest offered by the latter service. Doing so is regulated. You need to jump through a lot of hoops and you are very limited in whom you can lend out your customers' money to. But you can design the same type of business with stablecoins. By offering: Hello! I have two offerings: 1: I sell someNiceCoin for a dollar. 2: I buy someNiceCoin for a dollar. For your customer it is the same. They give you money and get it back later. But now you are not a "money holder". You are a trader. A trader of some coin you invented. You don't need to jump through so many hoops and you can lend out the money you earn from selling someNiceCoin to services with higher yields.

krrishd 1y ago
I think this is somewhat reasonable, but with plenty of asterisks / not the "arbitrage" this would imply. There is still a "real", regulated money-holder in the loop - it's just Bridge (the manager of the cash reserves backing the coin - and licensed money transmitter etc etc). Or in the case of USDC - Circle, the "money-holder" / manager of reserves (also has tons of licensed / is very regulated). And the ETH network (where the coin itself sits) for much of the tech / logistics of making that held-money usable. In fact - because neither Bridge nor Circle are banks, they can't do the fractional reserve that banks do, and are only allowed to do the 1:1 backed thing, with super regulated entities like BlackRock. "you can lend out the money you earn from selling someNiceCoin to services with higher yields" is strictly not true - they _cannot_ lend the money out, they have to store the money in ways that the end-consumers could do themselves, directly. In that frame - the "efficiency" for you as a fintech is that instead of having to work with a bank on a "stored value" program, you can just work with Bridge and Circle, whose technological primitives are leaps / bounds ahead of the bank, but more importantly - who are much more flexible to work with than the median "partner bank", because they are not banks. The whole "partner bank" ecosystem only really even scales because there are API providers like Increase.com / Unit.co etc to wrap them.

haikupoems 1y ago

I think the difference is that there is still a maintenance of stored value, but that stored value is now able to earn more yield than what you would by depositing it at a bank. In both the cases described in the article - using Unit or Bridge - you pass on the work of stored value to someone else. But Unit doesn't earn as much by being the stored value as Bridge would because Bridge is invested into T bills / MMFs. Hence, Mercury coin is better than running a bank using Unit. Is that fair to say?

krrishd 1y ago
This is a great question, I actually don't even think it's strictly a matter of "more" yield. To dig into your example a bit deeper, there are a few general differences with an (eg.) Unit vs. Bridge. - With a BaaS like unit, you're often actually forming a partnership _not just_ with Unit (a software provider), but the partner banks Unit works with. More specifically, you're operating two sorts of programs with the partner bank: programs around "money transmission" (_moving_ money on behalf of customers) and around "stored value" (_storing_ money on behalf of customers). Each of these programs tends to be pretty involved - as is having to be in a three-party agreement etc, working with an old-school bank, under legacy banking constructs, etc. - With Bridge: Bridge is your single partner. Bridge _itself_ has partner banks for the sake of both banking + money movement, but when you store customer funds as stablecoins in a crypto "wallet" Bridge spins up, it is operationally different than if you were to store them as fiat in a customer-specific bank account you opened at Bridge's partner bank, under a classic FBO/DDA program. The partner bank Bridge using is more involved in the money _transmission_ piece, when you want to receive customer funds in as fiat, or push customer funds out as fiat - but the funds being stablecoin at rest would seem to reduce the burden here. So yes that might result in some cost-saving, but it's also just (vaguely) _easier_ to do from a technical/operational POV. (Some of the details above may be wrong / vary by provider / etc - but having worked with both of these sorts of providers at some length, this is my "felt" difference and high-level understanding).