ARK Invest: Why is OUSD difficult to replace USDT and USDC?

Author: Lorenzo Valente, Research Director at ARK Invest

Compiled by: Jiahua, ChainCatcher

The launch of OUSD has caused a stir on Twitter. Many now believe that @circle is in dire straits, as an alliance of 150 companies spanning payments, fintech, banking, crypto infrastructure, and consumer technology will crush competitors and launch a stablecoin that can rival USDC and even USDT.

I previously tweeted explaining why people have seriously overestimated this project and why the alliance structure is difficult to stand out in any market (let alone one that has already formed a duopoly). In this short article, I want to focus on one thing: the true network effects of stablecoins. Rather than repeating previous arguments, I will illustrate the issue with a specific case that everyone seems to overlook, as I believe the liquidity moat of USDT and USDC is severely underestimated and misunderstood.

The network effect of stablecoins is not built by a long list of partner logos. It is composed of liquidity, usage habits, collateral acceptance, integration level, brand recognition, market depth, settlement flow, and the psychology of "not wanting to disrupt the existing operating system."

This is also why I believe @tether and @circle are both severely misunderstood.

First, an obvious fact: OUSD will comply with the GENIUS Act's regulatory requirements, which means it cannot directly share profits with users. This is not news, but many people are accusing Circle of not distributing profits to stablecoin holders, as if OUSD could actually do that. The opposite is true: in the entire market, Circle is likely the issuer that shares the highest proportion of profits with platform providers (and thus benefits users).

This is important because many people speak as if OUSD will create a brand new profit product for end users. But that is not the case. Its model is not "directly paying stablecoin holders," but rather "sharing reserve income with the platforms and businesses that distribute and use this stablecoin."

This is an important distinction.

The strongest argument I currently see in support of OUSD is that alliance members will have a strong incentive to deeply integrate OUSD into their businesses due to the ability to earn revenue sharing from the architecture. Without knowing the specific details, let's assume the economic model is similar to alliances we've seen before: the operating company Open Standard charges a management fee of 25 basis points, and each participant retains all net interest margin (NIM) generated from their OUSD holdings on their platform, network, or protocol.

On paper, anyone would immediately sign this deal. But this completely overlooks a fact: these companies are already accumulating value through other means, and often, their core businesses rely precisely on the liquidity and network effects of USDT, USDC, other stablecoins, or even fiat currency itself.

Only when chasing net interest margins does not jeopardize a much larger source of income does the net interest margin of stablecoin reserves become attractive.

That is the key point.

Binance as the Best Case

@binance is the largest exchange in the industry by a wide margin. It originally had its own branded stablecoin BUSD, with a supply that once approached $23 billion, until February 2023, when the New York State Department of Financial Services (NYDFS) ordered the issuer Paxos to shut down the product.

Looking at the three major exchanges in Asia, we can see three clear cases. Currently, @binance holds about $45 billion in USDT, @Bybit_Official about $4 billion, and @okx about $9 billion. Binance has always been, and still is, Tether's stronghold and ace asset. USDT remains the most liquid pricing currency in the world's largest exchanges. Today, whether buying large amounts of BTC, ETH, SOL, or opening and closing contract positions, USDT continues to dominate as the pricing currency in the offshore exchange ecosystem. Binance has played a crucial role in this. USDT is deeply embedded in the deepest order books, the most active trading pairs, the most active derivatives markets, and the daily operations of the most important market makers and traders.

That is the true network effect.

Now many might wonder: Why is CZ so naive? Why doesn't he call Paolo and Giancarlo to ask for a share of even a large portion of USDT profits? Binance clearly knows it holds significant bargaining chips.

The reason is quite simple: from the perspective of revenue and enterprise value, Binance's true ace asset is its trading business, which is precisely supported by the liquidity of USDT.

Doing the Math

Let's roughly calculate why CZ's choice not to chase net interest margins or replace USDT with a "more aligned with its interests" stablecoin is actually a completely rational decision. The following rough estimates are based on on-chain data and some assumptions, not definitive information.

We break it down from the bottom up:

Derivatives (core engine). Binance's global crypto derivatives trading volume accounts for about 40%, averaging $40 billion to $50 billion daily, which annualizes to about $10 trillion to $15 trillion over a cycle. After deducting VIP discounts and BNB rebates, the comprehensive maker/taker fee rate is about 5 basis points. Just this alone generates around $5 billion in revenue.

Spot. Daily average is about $8 billion to $10 billion, annualizing to about $3 trillion, with a comprehensive fee rate of about 15 basis points (far lower than Coinbase's retail rates because Binance's customer base is primarily VIPs and often runs zero-fee promotions). This contributes another approximately $5 billion.

Other businesses. Interest margins from wealth management and lending, margin interest, Launchpool and listing revenues, Binance Pay, staking commissions, plus "idle funds": Binance customers have about $46 billion in stablecoins sitting in their accounts. Although Binance won't directly invest this money like a brokerage, the corporate fund pool management and interest-bearing products around this portion of funds are not insignificant in the current interest rate environment. Adding in related revenues from the BNB ecosystem, conservatively estimating this part could contribute another $5 billion to $7 billion.

Keep in mind, these are just bear market figures. Very conservatively estimated, Binance's revenue in a bear market is close to $17 billion to $20 billion, and in a bull market, it could approach $25 billion. With such scale and quality of business, the valuation is likely to exceed $200 billion.

So why isn't CZ in a hurry to replace USDT or negotiate better profit-sharing terms with the Tether team?

Because the reason Binance is what it is today, and why it can keep over 300 million users coming back, is fundamentally because it is the most liquid trading venue on Earth. Let's clarify the price of the transaction Binance truly wants to make.

Binance has $45 billion in USDT on its platform. Assuming it reaches an agreement with OUSD to receive 90% of the profit share. Based on an average treasury bond yield of 3.8%, that would be about $1.55 billion a year. It sounds tempting, but when you really do the math, you will find that for this potential $1.55 billion in revenue, risking shaking up a $25 billion revenue engine is something only a madman would do.

The glue that holds Binance's trading empire together is USDT. There is no incentive in the world that could make CZ reconsider which stablecoin to deeply integrate into his business.

This is not just theoretical, as someone has actually tried it. Over a year ago, it was reported that Circle paid Binance a one-time fee of $60 million, plus ongoing monthly incentives tied to USDC holdings. Even so, the supply of USDC on the Binance platform has hardly changed, remaining around $5 billion.

People seriously underestimate the network effects these stablecoins bring to the companies that hold them. In most cases, the potential profits are simply not enough to make companies risk shaking up their core revenue engines.

For an exchange, stablecoins are not just cash. They are pricing assets, collateral assets, risk management assets, working capital assets, and the accounting unit for millions of traders. Changing this underlying asset is not a zero-cost endeavor.

Not All Alliance Members Have Aligned Interests

One last point: the OUSD alliance gathers companies of vastly different natures. They profit from stablecoins in different ways.

They can be roughly divided into two types of models.

The first type is the "asset scale monetization" model. These companies and protocols rely on idle funds, deposits, or idle capital, and reserve income is directly relevant to them. Lending protocols, wallets, new banks, or exchanges that hold large amounts of customer funds may be very concerned about the net interest margin corresponding to stablecoin supply.

The second type is the "turnover monetization" model. These companies are payment networks, processors, remittance companies, and commercial platforms that monetize through transaction flow rather than idle funds. For them, stablecoins are more like a "track" rather than an asset on the balance sheet. Compared to reserve income, they care more about reliability, cost, compliance, speed, coverage, and user experience.

@aave and @WesternUnion can bring completely different things to OUSD.

A DeFi protocol can help create supply by making OUSD a collateral asset or a liquidity venue with yields. A payment company, on the other hand, is more likely to facilitate the rapid circulation of OUSD within its system, quickly burning it at the end. This circulation is valuable for transaction volume but is entirely different from creating sustainable supply.

This is why the alliance structure's actual influence is much weaker than it appears. Members may all like the idea of sharing profits, but their interests are not aligned. Some members will create supply, while others will only create turnover. Some will deeply integrate, while others will just test the waters. Once the news hype fades, some members may not do anything at all.

From a balanced perspective, it is hard to believe that all members will push OUSD with the same intensity. Some will diligently work on implementing it, while others will just reap the benefits.

This is the classic dilemma of the alliance model.

Conclusion

OUSD is not insignificant. It is one of the most interesting stablecoin experiments we have seen so far, and its economic model is clearly aimed at the reserve income advantages of existing giants.

But the market has overestimated the speed at which the shared profit model can break existing liquidity barriers.

The outcome of stablecoins is not determined by press releases. It relies on long-term, repeated, high-trust usage accumulation in places where real funds flow.

This is also why USDT remains so powerful, why USDC can maintain resilience and grow rapidly, and why despite the impressive alliance behind OUSD, the road ahead is still much more challenging than the market currently perceives.

The real question is not whether OUSD can provide better economic conditions for partners.

The real question is whether these economic benefits are worth the risk for partners to disrupt the existing businesses that have already been built around other currencies or stablecoins.

In many cases, the answer will be: not worth it.