How Do Stablecoins Make Money?

Stablecoins are one of the most used type of crypto assets, with three stablecoins in the top 10 of cryptocurrencies by market cap. Crypto traders take profit in stablecoins, and for remittances they are extremely fast and cheap. Regulators as well tend to be positive towards stablecoins, sometimes considering them a part of the future financial system. But who is on the 'other side of the trade'? In other words, what is stable coin issuers' business model? How do stablecoins make money? That depends on the type of stablecoin.

Stablecoins can be divided into three main camps.

1. Centralized stablecoins that hold fiat collateral off-chain
2. Decentralized stablecoins that hold crypto collateral on-chain
3. Algorithmic stablecoins without collateral but a volatility coin to maintain the peg

Type of stablecoin	Example	Backing	How does it make money?
Centralized, fiat collateralized	USDT, USDC, BUSD	Each stablecoin is backed one-on-one by a dollar or euro, off-chain	Lending on the money market, fees
Decentralized, crypto collateralized	DAI	Over-collateralized by other crypto assets, on-chain	Interest on borrower's stablecoins, fees
Algorithmic, non-collateralized	USDD, (former) UST	Volatility coin	Arbitrage of peg difference

Centralized Stablecoins Make Money (Mostly) by Lending

Centralized stablecoins are called centralized because they have a company behind them, with a board of directors and all. The company operates somewhat like a money market fund (more on that below). The assets that back the stablecoins the company issues are held on the balance sheet or through third parties like banks.