Written by: Kaori, Sharon, BlockBeats

Edited by: Jack, BlockBeats

Since the beginning of this year, the discussion about stablecoins in the cryptocurrency market seems to have broken the circle. After OpenAI founder Sam Altman announced the creation of Worldcoin, the cryptocurrency industry accelerated its breakthrough into a wider mainstream vision; and the payment giant PayPal announced the issuance of the stablecoin PYUSD, which stirred up the muddy waters of the stablecoin market.

And on September 11, there was another player in the stablecoin track. According to public information, Mountain Protocol, the issuer of the US dollar stablecoin USDM, announced the completion of its seed round of financing, led by Castle Island Ventures co-founder Nic Carter, and participated by Coinbase Ventures, Nansen CEO Alex Svanevik, New Form Capital, Daedalus, OpenZeppelin CEO Demi Brener and others. It is reported that USDM has not yet been officially released.

It’s 2023, and new players are still pouring into the stablecoin track. What is the charm of Mountain Protocol that attracts the attention of investment institutions including Coinbase Ventures? What is the difference of USDM stablecoin? BlockBeats will explain the doorway behind Mountain Protocol in detail.

USDM with APY 5%

The current stablecoin track is mainly divided into three categories: centralized stablecoins, algorithmic stablecoins, and decentralized stablecoins. Mountain Protocol’s USDM token is an algorithmic stablecoin based on ERC20. The total token supply and the holder’s token balance can be adjusted through smart contracts to keep the USDM price near a target price.

USDM is collateralized by short-term U.S. Treasury bonds (T-Bills) with an average maturity of no more than 3 months or less. The difference is that USDM provides rewards to users every day in the form of rediscounts, with an annualized rate of 5% at present. If a user buys 100 USDM when the rewardMultiplier (which is the sum of daily rediscounts and the accumulated income for the user) is 1.00, the user will receive 100 shares of USDM. If the average APY for the year remains unchanged at 5%, the user will now have 105 USDM.

Image source: Mountain Protocol official document

The rediscount mechanism is very similar to Lido Finance's stETH. However, USDM has known integration challenges. In order to solve this problem and make USDM holders fully compatible with DeFi without giving up rewards, the Mountain Protocol team will build a wrapper on USDM called wUSDM.

Circle CEO Jeremy Allaire once stated that 70% of USDC adoption comes from outside the United States because people just want to denominate their savings in US dollars. The Mountain Protocol team seems to be aware of this, that USDM is targeting markets outside the United States.

Digital asset protocol licensed by BMA

Mountain Protocol is a digital asset protocol licensed by the Bermuda Monetary Authority (BMA). This BMA has been frequently mentioned in the field of cryptocurrency law this year. Coinbase obtained the regulatory license from the Bermuda Monetary Authority on May 2 to launch an international trading platform. Bitget trading platform also followed suit and said it was applying for a crypto business license in Bermuda to improve its compliance level in the global market. Why did Mountain Protocol also choose Bermuda?

Martin Carrica, co-founder of Mountain Protocol, is from Argentina. The extremely unstable local currency market made Martin interested in Bitcoin very early. He then worked as a consultant at McKinsey and founded Nalu, a financial technology industry service provider, to launch IEO checking account services. The reason why he began to enter the field of stablecoins is that he realized that in emerging markets, such as Latin America, Africa and Asia, there are relatively few ways to obtain U.S. debt returns.

But building a stablecoin that retains the core values of existing stablecoins while providing returns, providing permissionless functions and connecting to the traditional financial system requires licensing and regulation.

The United States did not provide this opportunity for Mountain Protocol. So they began looking for overseas opportunities. After visiting Europe and some Pacific island countries, the Mountain team discovered that Bermuda passed a crypto regulation called the "Digital Asset Business Act" a few years ago. This act is very strict in approving companies. The application for compliance projects requires the team's qualifications review, business assessment, and must have a senior representative and an independent director locally, and KYC is also required.

Bermuda is an island that makes a living from financial services, and its Financial Action Task Force (FATF) ranks higher than the United States. Also because of its well-known financial business such as reinsurance, more and more crypto institutions favor it. Therefore, choosing Bermuda is the first step for Mountain Protocol to comply with regulations and the first stop for its exploration in the crypto world.

Is USDM the second USDC selected by Coinbase?

In addition to the name of Nic Carter, the father of smart contracts and co-founder of Castle Island Ventures, the most eye-catching one in the Mountain Protocol seed round financing list is Coinbase Ventures.

Since the SEC filed a lawsuit against Coinbase, several states have quickly joined the crackdown on Coinbase's trading and staking services. Coinbase's trading volume in the second quarter of 2023 fell 37% from the previous quarter, and trading revenue also declined, and was surpassed by the "subscription and service" revenue source for the first time.

Among the interest income (interest income) with the largest share of "subscription and service", $151 million came from USDC held by Coinbase, accounting for 75% of total revenue. John Todaro, an analyst at Needham & Company, believes that Coinbase's USDC interest income has benefited greatly from the revenue-sharing agreement reached with Circle on the USDC stablecoin reserve. Although the decline in USDC's market value has led to a decline in Coinbase's interest income, the gains generated by the Fed's interest rate hike can offset part of the losses.

Related reading: "Coinbase, which is supported by US debt, is still on the road to survival"

The decline in trading volume has brought huge revenue pressure to Coinbase, which means that Coinbase needs to actively find other sources of income, rather than just relying on the ups and downs and fluctuations of the crypto market. In August this year, Coinbase invested in Circle, and now it has invested in a new stablecoin, which is related to Coinbase's adjustment of its revenue strategy.

Image source: Coinbase official website

Coinbase CEO Brian Armstrong recently shared his 10 most interesting ideas in the crypto field, among which Mountain Protocol was mentioned in the RWA track. He said, "Fiat currency stablecoins like USDC, which are backed at a 1:1 ratio, are the earliest real-world assets implemented on the chain. We believe that over time, many forms of assets can and will be implemented on open, permissionless blockchain networks, creating new financial infrastructure with programmability, composability, global 24/7 liquidity, and trust-minimized settlement."

Related reading: "A brief analysis of the top ten areas of concern to the founder of Coinbase: on-chain reputation, on-chain advertising, RWA, etc."

Although it is not clear whether Coinbase has reached a revenue agreement with Mountain Protocol, if USDM earns large profits through treasury bonds in the future, Coinbase will also get a share.

The end of the stablecoin market has not yet arrived

Not only large trading platforms cannot do without stablecoins, but Mountain Protocol is also entering the stablecoin market at this time, targeting those third world markets that have to use US dollars but cannot easily obtain US dollars. Stablecoins are no longer a financial instrument controlled only by traders, but have become an indispensable DeFi super application.

In 2022, the amount of stablecoins settled on the chain exceeded $11 trillion, dwarfing the transaction volume processed by PayPal ($1.4 trillion), almost catching up with Visa ($11.6 trillion), and reaching 14% of the transaction volume settled by the US Automated Clearing House (ACH) and more than 1% of the transaction volume settled by the US Federal Reserve Wire Transfer System (Fedwire).

Related reading: Global stablecoin users have created the fifth largest bank in the United States

Approximately 5 million blockchain addresses send stablecoins each week, a number that provides a very rough proxy indicator for global users who regularly interact with stablecoins. Stablecoin usage has decoupled from trading volume on cryptocurrency trading platforms, suggesting that a large amount of stablecoin trading volume may be driven by non-trading/speculative activity.

The supply of stablecoins has increased from less than $3 billion five years ago to more than $125 billion today (over $160 billion at its peak), and has shown strong risk resistance. Compared with the total crypto market value, the stablecoin market value has fallen by about 24% from its peak, while the total crypto market value has fallen by about 57%. This shows that stablecoins have strong risk resistance and are still rising despite black swan events, and are still in the early stages of global adoption. Backed by Coinbase, the launch of USDM will stir up the stablecoin market. We will wait and see how.

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