This article explores how major stablecoins like USDT and USDC generate billions in revenue by investing reserves in US Treasury bonds—profits tightly linked to Federal Reserve interest rates. Should rates drop to zero, their earnings could plummet.
The Shift Toward Stability in Cryptocurrency
Initially, Bitcoin was envisioned as an alternative to traditional money—a decentralized, borderless, censorship-resistant currency. However, its extreme volatility, evolution into a speculative asset, and high blockchain transaction costs made it impractical for daily payments or stable value storage.
This limitation fueled the rise of stablecoins, designed to maintain fixed values (typically pegged to the dollar) and offer transaction stability unmatched by Bitcoin.
What Are Stablecoins?
A stablecoin is a cryptocurrency that stabilizes its value by pegging it to an external asset like fiat currency or commodities. Examples:
- USDT (Tether) and USDC (USD Coin): 1:1 dollar-pegged
- PAXG (Pax Gold): Backed by physical gold
Regulatory approaches vary globally:
– US: State-level rules, pending federal legislation
– EU: Strict reserve/audit mandates under MiCA
– Asia: Mixed strategies (Singapore/Hong Kong regulate reserves; Japan allows bank-issued stablecoins; China bans them)
Why Are Stablecoins Issued?
Beyond providing reliable digital dollars, stablecoins represent a lucrative business model. Tether pioneered this in 2014 with USDT:
- Users deposit $1 to mint 1 USDT
- Reserves are invested in short-term instruments like Treasury bills
- Profits from interest accrue to the issuer
Key Insight: Stablecoin revenues hinge on central bank rates. High rates = high profits; near-zero rates = earnings collapse.
Types of Stablecoins and Their Revenue Models
1. Fiat-Backed Stablecoins (e.g., USDT, USDC)
- Mechanism: 1:1 reserves in cash/Treasuries
- Revenue: Interest from reserves
- Risks:
- Regulatory crackdowns (e.g., MiCA banning USDT in Europe)
- Bank runs (e.g., USDC’s 2023 depeg during SVB collapse)
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2. Commodity-Backed Stablecoins (e.g., PAXG, XAUT)
- Mechanism: Pegged to gold/oil; redeemable for physical assets
- Revenue: Minting/redemption fees (e.g., 0.25% for XAUT gold redemptions)
- Risks: Commodity price volatility
3. Crypto-Backed Stablecoins (e.g., DAI, HONEY)
- Mechanism: Overcollateralized with crypto assets
- Revenue:
- Loan interest
- Liquidation fees
- Risks: Crypto market crashes triggering mass liquidations
4. Treasury-Backed Stablecoins (e.g., USDY, USYC)
- Mechanism: Backed by short-term US Treasuries
- Revenue: Interest distributed to holders
- Risks: Regulatory uncertainty (often target non-US users)
5. Algorithmic Stablecoins (e.g., USDe)
- Mechanism: Delta-neutral hedging (e.g., ETH + short futures)
- Revenue:
- Funding rate arbitrage
- Staking rewards
- Risks: Negative funding rates or derivative counterparty failures
Interest Rates: The Make-or-Break Factor
Correlation Analysis
| Stablecoin | Interest Rate Correlation (R) | Key Dependency |
|---|---|---|
| USDT | 0.937 | 80% in T-bills |
| USDC | 0.889 | 75% in T-bills |
| SKY | 0.937 | 65% RWAs |
| USDe | 0.256 | Crypto markets |
Scenario: Rates Fall to 0%
– USDT/USDC: Earnings evaporate; USDT’s $7B buffer allows 70+ years of operations
– SKY: 2.9–6.3 years of runway via DeFi fees/asset sales
– USDe: Thrives if crypto leverage increases (higher funding rates)
FAQs
Q: Can stablecoins survive without interest income?
A: Yes, but models diverge. USDe’s crypto-native revenue may outperform; USDT’s reserves provide decades of runway.
Q: Why does USDe have low rate correlation?
A: It profits from crypto derivatives, not T-bills.
Q: What’s the biggest risk to fiat-backed stablecoins?
A: Regulatory bans or mass redemptions causing depegs.
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Conclusion
- Most Vulnerable: USDC (high costs, low diversification)
- Resilient: USDT (massive reserves), SKY (DeFi income)
- Winner in 0% World: USDe (market-driven earnings)
Future Outlook: Issuers like Circle and Tether are diversifying into blockchain infra (e.g., Cortex, Plasma) to reduce rate dependence. Circle’s IPO may signal a pivot toward services beyond Treasury yields.
Stablecoins’ long-term viability will hinge on adaptability—whether through hybrid models, crypto-native revenue, or regulatory partnerships.
For those navigating this space, the message is clear: Diversify or risk obsolescence when the next rate cycle turns.