Original title: How Stablecoins Profit From US Debt Interest Rates
Original author: @threesigmaxyz
Original translation: zhouzhou, BlockBeats
Editors Note: This article explores how stablecoins like USDT and USDC generate billions of dollars in revenue by investing reserves in U.S. Treasuries, with revenue closely tied to the Federal Reserve interest rate. If interest rates fall to zero, their profitability could plummet. As USDC demonstrated in the 2023 Silicon Valley Bank incident, fiat-backed stablecoins face regulatory challenges and decoupling risks, while algorithmic stablecoins like USDe rely on crypto-native yields, which makes them less sensitive to interest rate changes. Tethers $20 billion in equity ensures a decades-long runway, but Circles $1.68 billion in 2024 revenue and limited liquidity make it vulnerable with only 18-25 months of sustainability.
The following is the original content (for easier reading and understanding, the original content has been reorganized):
Cryptocurrency’s shift toward stability
Initially, Bitcoin was seen as an alternative to traditional currencies, a decentralized, borderless, censorship-resistant form of money. However, due to its high volatility (violent price swings), its gradual evolution into a speculative asset and a store of value, and the high transaction costs of blockchain, it is no longer suitable as an everyday payment tool or a stable store of value.
This limitation has led to the rise of stablecoins, which are designed to maintain a fixed value, usually pegged to the U.S. dollar, providing transaction stability and efficiency that Bitcoin cannot achieve.
The development of the crypto ecosystem reflects a pragmatic shift. Although Bitcoin was originally intended to replace traditional currencies, the need for stability has led to the widespread use of stablecoins (usually backed by traditional assets) as the backbone of the entire ecosystem.
These stablecoins act as a bridge between the real-world traditional financial market and the crypto ecosystem, which, on the one hand, promotes the popularity and application of cryptocurrencies, and on the other hand, raises questions about the decentralized ideals of cryptocurrencies. For example, stablecoins such as Tether (USDT) and USD Coin (USDC) are issued by centralized institutions, and their reserve assets are stored in traditional banks, which is considered to be a compromise between ideals and reality.
Stablecoin adoption has grown significantly over the years. In 2017, their total market capitalization was less than $3 billion, and by March 2025, it had grown to about $228 billion. Stablecoins now account for about 8.57% of the entire crypto market and are an important tool for transactions, cross-border payments, and hedging during market turmoil.
This growth trend highlights the role of stablecoins as a key bridge between traditional financial markets and the crypto world. A chart from Coinglass clearly shows the trend of steady and substantial growth in the total market value of major stablecoins from the beginning of 2019 to date.
What are stablecoins?
A stablecoin is a cryptocurrency that aims to keep its value stable by pegging its price to some external asset, such as a fiat currency or commodity. For example, Tether (USDT) and USD Coin (USDC) are both stablecoins pegged 1:1 to the U.S. dollar. The goal of stablecoins is to provide the advantages of digital currencies (such as fast, borderless transactions on the blockchain) without the price risk of Bitcoins wild fluctuations.
Stablecoins strive to maintain price stability by holding reserve assets or adopting other mechanisms, making them more suitable as daily trading tools or means of storing value in the crypto market. In fact, most mainstream stablecoins achieve price stability through a collateral mechanism, that is, each stablecoin issued must be supported by an equivalent amount of reserve assets.
To ensure the stability and credibility of stablecoins, clear regulation is needed. At present, the United States has not yet introduced comprehensive federal legislation, relying mainly on state-level rules and some proposals that are still under consideration; the European Union has implemented strict reserve and audit requirements through the MiCA framework; Asia has shown a variety of regulatory strategies: Singapore and Hong Kong have strict reserve requirements, Japan allows banks to issue stablecoins, and China basically bans stablecoin-related activities. These differences reflect the trade-offs between innovation and stability in various places.
Despite the lack of a globally unified regulatory framework, the use and popularity of stablecoins continues to grow steadily year by year.
Why are they issued?
As mentioned earlier, the original purpose of stablecoins was to provide users with a reliable digital asset for payment or as a store of value pegged to major global currencies (especially the US dollar). However, their issuance was not for the public good, but rather a highly profitable business opportunity, and Tether was the first company to discover and exploit this opportunity.
Tether launched USDT in 2014, becoming the first stablecoin and creating an extremely profitable business model, especially from the perspective of profit per capita, making it one of the most successful projects in history. Its business logic is very simple: Tether issues 1 USDT for every 1 USD it receives, and destroys the corresponding number of USDT when users redeem USD. The USD received is invested in safe short-term financial instruments (such as US Treasury bonds), and the resulting income belongs to Tether.
Understanding how stablecoins make money is the key to grasping the economic logic behind them.
Although the business model of stablecoins seems very simple, Tether cannot control its main source of income, which is the interest rate set by central banks (especially the Federal Reserve). When interest rates are high, Tether can make considerable profits; but when interest rates are low, profitability drops significantly.
Currently, the high interest rate environment is very favorable for Tether. But what will happen if interest rates fall again in the future, or even approach zero? Will algorithmic stablecoins also be affected by interest rate fluctuations? Which type of stablecoins may perform better in such an economic environment? This article will further explore these issues and analyze how the stablecoin business model can adapt to the changing macroeconomic environment.
2. Types of Stablecoins
Before analyzing the performance of stablecoins under different economic conditions, it is critical to understand the operating mechanisms of different types of stablecoins. Although the common goal of all stablecoins is to maintain a stable value pegged to real-world assets, each stablecoin reacts differently to changes in interest rates and the overall market environment. Below we will introduce several major types of stablecoins, their mechanisms, and how they react to different economic changes.
Fiat-backed Stablecoins
Fiat-backed stablecoins are currently the most well-known and widely used type of stablecoins. In essence, they are the “tokenization” of the U.S. dollar in a centralized manner.
Their operating mechanism is very simple: every time a user deposits $1, the issuer will mint a corresponding stablecoin; when the user redeems the dollars, the issuer destroys the corresponding tokens and returns the same amount of dollars.
The profit model of fiat-backed stablecoins is mainly hidden behind the scenes. Issuers invest users deposits in various short-term and safe financial instruments, such as government bonds, secured loans, cash equivalents, and sometimes more volatile assets, such as cryptocurrencies (such as Bitcoin) or precious metals. The income generated by these investments constitutes the main source of income for the issuer.
However, high returns also come with considerable risks. One of the main challenges that persists is compliance. Governments in many countries have conducted strict scrutiny on fiat-backed stablecoins on the grounds that they are essentially equivalent to issuing digital currencies and therefore must comply with strict financial regulatory requirements.
While most stablecoin issuers have successfully responded to regulatory pressures without experiencing serious business disruptions, major challenges still occur from time to time. A notable example is Europe’s MiCA (Markets in Crypto Assets) regulation, which recently banned USDT (Tether) from circulating in certain markets due to non-compliance with its strict regulatory requirements.
Another major risk is depegging. Stablecoin issuers typically invest a large amount of their reserve assets in various investment vehicles. If a large number of users apply to redeem their tokens at the same time, the issuer may have to sell these assets quickly, which may result in huge losses. This situation may trigger a chain reaction similar to a bank run, making it difficult for the issuer to maintain the peg between the token and the US dollar, and may even lead to bankruptcy.
The most prominent case occurred in March 2023, involving USDC (issued by Circle). At the time, Silicon Valley Bank (SVB) collapsed, and rumors quickly spread that Circle had a large amount of reserves stored at SVB, causing market concerns about Circles liquidity and whether USDC could maintain its peg. These panics caused USDC to temporarily depeg. This incident highlighted the risks when stablecoin reserves are stored in centralized banks. Fortunately, Circle resolved the problem within a few days, restored market confidence, and re-stabilized USDCs peg.
The two main fiat-backed stablecoins on the market are USDT (Tether) and USDC (Circle).
Commodity-backed stablecoins are an innovative category in the stablecoin ecosystem. They issue corresponding digital tokens backed by tangible physical assets (usually precious metals such as gold and silver, or commodities such as oil and real estate) as collateral.
The operating mechanism of this type of stablecoin is similar to that of fiat-backed stablecoins: for every unit of physical commodity deposited, the issuer mints a token of equivalent value. Users can usually redeem these tokens for the physical commodity itself, or for cash of equivalent value, at which point the corresponding tokens will be destroyed.
The issuers main source of income comes from the minting (creation) and redemption (destruction) fees of the token. For example, Pax Gold (PAXG) charges a small fee for processing the creation and destruction of tokens, although Paxos currently does not charge storage fees for the gold it holds. In addition, the issuer may also make a profit by providing services for the trading and exchange of tokens with US dollars or physical commodities.
Similarly, Tether Gold (XAUT) also generates revenue from fees associated with redemption and delivery. If users redeem XAUT tokens for physical gold bars or exchange gold for cash through Tether, they will be charged related fees. For example, during the redemption process, a fee of 25 basis points (0.25%) will be charged based on the gold price, and if physical delivery is selected, shipping costs will also be paid. If users choose to sell the redeemed gold bars in the Swiss market, they will be charged an additional 25 basis points.
However, such stablecoins are also subject to risks, especially the volatility of commodity prices themselves, which may affect the stability of the token. In addition, compliance issues are also a major challenge. Commodity-backed stablecoins are usually subject to strict regulatory requirements and must have transparent and secure custody arrangements.
The more successful commodity-backed stablecoins on the market currently include Paxos Pax Gold (PAXG) and Tethers Tether Gold (XAUT), both of which are backed by gold reserves and provide investors with convenient exposure to digital commodities.
In summary, commodity-backed stablecoins connect traditional commodity investments with digital finance, providing investors with stability and exposure to physical assets while also emphasizing regulatory compliance and transparency.
Crypto-asset-backed stablecoins are an important category in the stablecoin system, which use cryptocurrencies as collateral to maintain a stable value pegged to a fiat currency (usually the U.S. dollar). Unlike fiat or commodity-backed stablecoins, these tokens rely on smart contract technology to build a transparent and automated system.
The basic mechanism is that users lock crypto assets (usually overcollateralized) in smart contracts to mint stablecoins. The overcollateralized design can buffer the price fluctuations of crypto assets and ensure that stablecoins can maintain their set anchor value. When users redeem stablecoins, they return an equivalent amount of stablecoins, and the system destroys the tokens to release the originally collateralized crypto assets.
The profit model of crypto-backed stablecoins mainly includes:
Charge interest to users who lend stablecoins;
Liquidation fees are charged to users whose collateral assets are below the liquidation line;
The governance mechanism rewards set within the protocol are used to incentivize coin holders and liquidity providers.
DAI (now called USDs) is a representative example. It is issued by MakerDAO (now renamed SKY), which is mainly collateralized by crypto assets in the Ethereum ecosystem. MakerDAOs revenue sources include charging stability fees (interest) to users who lend USDs, and charging penalties when liquidation is triggered. These fees jointly support the stable operation and sustainable development of the protocol.
Another example is the HONEY stablecoin issued by Berachain, which currently uses USDC and pYUSD as collateral assets. HONEYs revenue sources include redemption fees: when users redeem HONEY and retrieve their collateral assets (USDC or pYUSD), Berachain will charge a 0.05% fee.
Although these stablecoins are classified as crypto-asset-backed, in reality most of them are like wrapped stablecoins backed by fiat currencies, such as USDC. Although the original goal was to rely entirely on native crypto assets as collateral to maintain stability, in practice, it is still very difficult to achieve true stability without relying on fiat stablecoins.
Of course, there are inherent risks in such assets. For example, the price volatility of the underlying crypto assets may bring significant challenges - such as triggering large-scale liquidations when the price drops sharply, which may break the anchor mechanism of the stablecoin. In addition, smart contract vulnerabilities or protocol attacks will also seriously threaten the stability of the entire system.
In summary, crypto-backed stablecoins such as USDs and HONEY play an important role in providing decentralized, transparent and innovative financial solutions. However, despite being crypto-collateralized in name, they often rely heavily on fiat stablecoins in reality, which requires more complete risk management mechanisms to maintain their resilience and credibility.
Treasury-backed stablecoins are a type of stablecoin that is backed by government bonds (especially U.S. Treasury bonds). These stablecoins are usually pegged to the U.S. dollar. While providing value stability, they can also provide passive income to holders through the interest income of the underlying Treasury bonds. Therefore, they are more like an investment token with income, combining the stability and financial management properties of traditional stablecoins.
For example, Ondos USDY (Dollar Yield Token) is described as a tokenized note backed by short-term U.S. Treasuries and bank demand deposits. Its goal is to provide non-U.S. individual and institutional investors with the convenience of stablecoins while providing high-quality returns denominated in U.S. dollars. After investors purchase USDY, the funds are used to purchase U.S. Treasuries and partially deposited in banks, and the interest generated is distributed proportionally to token holders. USDY is a bearing asset, which means that it will passively appreciate as the interest on the underlying assets is generated, and the value of the token increases over time.
Another example is Hashnotes USYC (US Dollar Yield Coin), which is the on-chain representation of Hashnotes Short-Term Yield Fund (SDYF), investing in short-term US Treasuries and participating in the repo and reverse repo markets. USYCs return level is linked to the short-term risk-free rate, while combining the speed, transparency and combination advantages of blockchain, while minimizing protocol, custody, regulatory and credit risks. Users can exchange USYC for USDC or PYUSD on the same day (T+ 0) or the next day (T+ 1), directly minted on the chain, and the process is atomic and instant. Like USDY, USYC is also a yield asset that passively accumulates returns through the interest generated by the underlying assets.
Although these stablecoins have the dual advantages of stability and profitability, they also have some risks:
Regulatory risk: Since such assets are usually targeted at non-U.S. users to avoid U.S. regulatory requirements, future policy changes may bring uncertainty;
Custody risk: The issuer needs to properly manage and hold the underlying assets;
Liquidity risk: When the market fluctuates drastically, users’ redemption requests may be restricted;
Counterparty risk: Especially in repurchase agreements, losses may result if the counterparty defaults;
Macroeconomic risks: such as changes in interest rates, may affect the overall level of returns.
This type of token is often classified into a rapidly growing new category: “Treasury-backed crypto assets.”
Algorithmic stablecoins are a type of stablecoin that relies on economic mechanisms and market incentives rather than being completely collateralized by traditional assets such as fiat currencies or government bonds to maintain stable value. Such models usually maintain an anchor exchange rate (such as a peg to the US dollar) through supply and demand adjustment mechanisms, but often face challenges in extreme market environments. The fundamental problem is that it is highly dependent on continued market confidence and an effective incentive structure, which are prone to failure during severe stress.
USDe, issued by Ethena, is a new type of quasi-algorithmic stablecoin that uses a hybrid model. It maintains stability through a Delta neutral hedging mechanism, which holds crypto assets such as BTC and ETH as collateral while establishing an equal amount of short positions in the derivatives market to hedge against price fluctuations of the underlying assets, thereby maintaining a stable anchor with the US dollar. USDe achieves full 1:1 collateralization, which is more capital efficient than an over-collateralized model. In addition, Ethena also includes highly liquid stablecoins such as USDC and USDT in its reserves to enhance liquidity and the efficiency of hedging strategies.
Despite various innovations, algorithmic stablecoins still face significant risks: market instability, extreme volatility or liquidity crises may interfere with their mechanisms for maintaining anchors. Moreover, reliance on derivatives brings counterparty risk and execution risk, making the system vulnerable to external shocks.
While new models like the USDe attempt to mitigate these issues through structured hedging and diversified reserves, their long-term stability still depends on overall liquidity conditions and the ability to maintain effective operations in adverse market conditions.
3. Current mainstream stablecoins
When it comes to stablecoins, USDT and USDC are undoubtedly the dominant forces in the market. As the centralized liquidity pillars, they occupy a core position in the crypto market. They have similar structures: they are issued by centralized entities, fully backed by fiat currency reserves, and are widely integrated in major exchanges and financial platforms.
USDT is issued by Tether and has the largest market share. It is known for its deep liquidity and wide adoption, especially in high-frequency trading environments. USDC is issued by Circle and is positioned as a more compliant and transparent option, and is more favored by institutions and companies seeking a regulatory-friendly environment. Although the two differ slightly in details, their core functions are the same: to provide a stable and reliable digital dollar to support the operation of the entire crypto ecosystem.
In contrast, there are USDS, DAI, and USDe, which represent decentralized forces corresponding to fiat-backed stablecoins, although their degree of decentralization varies. DAI and USDS essentially come from the same system - MakerDAO (now renamed Sky). Among them, USDS is an evolved version of DAI and a key part of Skys long-term plan.
DAI has historically been more decentralized, relying on excess crypto asset collateral to maintain its peg; USDS, on the other hand, reflects Makers trend towards a more structured and strategic direction, focusing on efficiency first rather than pure decentralization.
At the same time, USDe is also an important decentralized stablecoin competitor, but it takes a completely different path. Unlike the over-collateralization and governance mechanism of the Maker model, USDe introduces a revenue-generating structure, using its collateral assets to bring additional income to coin holders.
USDT
USDT naturally becomes the dominant force when discussing stablecoins, playing an important role as a centralized liquidity pillar in the crypto market. USDT, issued by Tether, has the largest market share and is known for its deep liquidity and widespread adoption, especially in high-frequency trading environments. It provides a stable and trustworthy digital dollar that supports the operation of the crypto ecosystem and becomes the main medium for trading pairs, arbitrage opportunities, and cross-exchange liquidity provision. Its wide acceptance consolidates its role in the centralized and decentralized financial fields.
Tethers revenue is primarily derived from the management of its vast reserve assets, which provide collateral for every USDT token issued. These reserve assets primarily consist of cash equivalents such as U.S. Treasuries, commercial paper, short-term deposits, money market instruments, and corporate bonds. By strategically allocating these reserves, Tether is able to accumulate interest and investment income, making an important contribution to its revenue.
In addition, Tether occasionally engages in short-term lending and other financial instruments, further diversifying and enhancing its revenue streams. Tether also earns additional revenue through token issuance, redemption processes, and transaction fees on various blockchain platforms.
Below is its most recent reserve report, which clearly shows that over 80% of its reserves consist of cash, cash equivalents, and other short-term deposits, of which about 80% is invested exclusively in Treasury securities.
Essentially, Tethers revenue is primarily dependent on interest rates set by central banks, especially the U.S. Federal Reserve System, as the appreciation of most of its reserve assets is directly tied to these rates. Higher interest rates can significantly increase the returns Tether earns on its reserves, while lower interest rates can significantly reduce its revenue potential.
Importantly, unlike some other stablecoins, all revenue generated by Tether is retained by the issuer itself and is not distributed to USDT token holders. This is different from yield-based stablecoins, which distribute returns directly to holders, highlighting a key difference in the stablecoin business model.
Historical revenue trends
Historically, Tethers revenue trajectory has been closely tied to global interest rate trends. During the period of low interest rates from 2019 to early 2022, Tethers revenue growth was relatively modest, mainly due to its reliance on a conservative investment strategy with limited returns.
However, starting in mid-2022, as major central banks aggressively raised interest rates to combat inflation, Tethers revenue grew significantly. From June 2022 to early 2025, monthly revenue increased almost tenfold, highlighting the high sensitivity of Tethers revenue stream to macroeconomic changes and monetary policy decisions. This trend demonstrates the effectiveness of Tethers revenue model in an environment of rising interest rates.
Nevertheless, revenue is not entirely dependent on interest rates. Even in the case of falling interest rates, Tether may still achieve revenue growth as long as the supply of USDT increases significantly. A larger supply means more assets under management, which can make up for lower yields and thus maintain or even increase overall revenue.
USDC
USDC, issued by Circle, is one of the most trusted centralized stablecoins on the market. Known for its compliance and transparency, it is widely used in decentralized finance, institutional payments, and cross-chain applications. Its presence on multiple blockchains enhances its composability and ecosystem coverage.
A key feature of USDC is Circle’s strict reserve structure and public disclosure. As of January 31, 2025, USDC has a circulation of more than $53.2 billion and is fully backed by $53.28 billion in reserves, which are certified by an independent accounting firm. These reserve funds are divided into the following parts:
Circle Reserve Fund: A government money market fund that holds $47.26 billion in U.S. Treasuries and repurchase agreements.
Segregated Bank Accounts: Holds an additional $6.02 billion in deposits with regulated financial institutions.
Circle earns revenue by managing these reserve assets, relying primarily on interest income from U.S. Treasuries and overnight lending arrangements. Although structurally similar to Tethers model, Circle differentiates itself through its funding structure, representing 100% of the reserve fund interests on behalf of USDC holders. This not only provides clearer regulatory separation, but may also make future product integrations more flexible.
Unlike decentralized alternatives, USDC does not distribute revenue directly to users. Instead, revenue belongs to the issuer, which prioritizes simplicity, compliance, and capital preservation.
Historical revenue trends
Circles revenue trajectory is closely tied to the overall interest rate environment, as its conservative investment strategy focuses primarily on short-term government debt.
In 2022, Circles revenues grew steadily as the U.S. Federal Reserve raised interest rates, reaching a peak of $146.5 million in March 2023. However, later that year, pressure from competing stablecoins, blockchain reliability issues (particularly on Solana), and reputational fluctuations associated with banking partners led to a gradual decline in revenues. By the end of 2023, monthly revenues had fallen to less than $90 million.
In 2024, with the reduction of redemptions, the recovery of cryptocurrency activities and the continued high interest rate environment, Circles revenue began to recover, and revenue rebounded to $126 million in August, ending the year with strong momentum. In February 2025, Circle set a record for the highest monthly revenue, reaching $163.7 million.
This trend highlights the resilience of USDC and the close relationship between stablecoin revenue models and monetary policy. Circle’s continued recovery underscores its ability to maintain user trust and liquidity dominance through market cycles.
USDS/DAI (SKY)
USDS is the current evolution of DAI, the first major decentralized stablecoin issued by MakerDAO, which aims to provide a censorship-resistant alternative to traditional fiat-backed assets. While both belong to the Maker ecosystem, there are structural differences in their collateral models and target use cases.
DAI is an over-collateralized stablecoin, backed by a mix of cryptocurrencies, RWAs, and stablecoins. Users deposit collateral such as ETH, stETH, or USDC through Maker Vaults to mint DAI, ensuring that it always remains fully collateralized. This design makes DAI highly resistant to risks, but also limits its scalability.
On the other hand, USDS represents MakerDAOs evolution into a more traditional finance-compatible stablecoin. While USDS is still overcollateralized, it uses a structured reserve approach, including tokenized short-term U.S. Treasuries. This makes it consistent with institutional demand and a competitor to stablecoins such as USDT and USDC, while maintaining MakerDAOs decentralized governance model.
The transition from DAI to USDS reflects a shift towards broader institutional adoption. While DAI started out as a crypto-native stablecoin backed primarily by decentralized assets, USDS has optimized its collateral structure by introducing more RWAs, especially U.S. Treasuries.
Additionally, USDS has enhanced stability through a direct convertibility mechanism, making it easier to maintain its peg to the dollar. Unlike DAI’s early reliance on external DeFi incentives, USDS was designed from the outset to provide built-in yields through the DSR, making it more attractive in both DeFi and TradFi environments. This structure fits in with the increasingly popular RWA yield DeFi strategy in 2025.
Transparency is fundamental to the design of the Sky ecosystem. It is not only a tool to maintain the anchor mechanism, but also a prerequisite for building trust, attracting institutional participation and responsible capital allocation. In an environment where billions of dollars of assets are managed, users and institutions require a clear view of where these funds are stored, how they are used, and the endorsement of the system.
Therefore, Sky provides a public real-time dashboard that clearly shows the backing, decentralization, and returns of USDS. However, transparency alone cannot stabilize the currency, and the anchor is maintained through over-collateralization, risk-managed asset allocation, and protocol-level mechanisms.
USDS always maintains more collateral than issuance. As of now, the total collateral base of USDS is over $10.8 billion, and the supply is about $8.3 billion, ensuring sufficient buffer to cope with market fluctuations or redemptions. Its collateral is distributed across several key sources:
Stablecoins (54.8%): Mainly supported through the LitePSM module, which is a pegged stability module that allows 1:1 exchange between DAI and USDC to support the peg of USDS.
Spark (24.7%): Sky’s lending and liquidity protocol that mints USDS with high-quality, yield-generating collateral.
Cash RWA (9.7%): 100% held in BlockTower Andromeda, a strategy that invests in short-term U.S. Treasuries and provides low-risk, real-world returns.
Core (9%): Sky’s over-collateralized Vault system, where users mint USDS using assets such as ETH and stETH under strict collateral thresholds.
Together, these mechanisms ensure that USDS remains stable, over-collateralized, and backed by a range of liquid, yield-generating assets, while transparency ensures that anyone can verify this at any time.
Historical revenue trends
The chart above shows the Sky Protocols cumulative revenue from mid-2022 to early 2025. While revenue grew steadily in the early months, revenue growth accelerated significantly in late 2023 as DeFi integrations expanded, USDS adoption increased, and deeper exposure to real-world assets such as short-term U.S. Treasuries, coinciding with the start of rising interest rates. By early 2025, cumulative revenue had exceeded $500 million, reflecting Skys ability to capture returns in both crypto-native and institutional strategies while sustainably scaling.
USDe
USDe is a delta-neutral synthetic USD stablecoin with a synthetic USD structure maintained through perpetual futures, developed by Ethena Labs. Unlike traditional stablecoins backed by fiat reserves or over-collateralized crypto assets, USDe maintains its peg to the USD through automated hedging strategies. This makes it fully backed, scalable, and censorship-resistant. Ethena also offers sUSDe, a yield-bearing version of USDe that earns rewards through funding rate arbitrage in liquid collateral assets and futures markets.
Since its public launch in early 2024, Ethena has expanded rapidly, reaching a supply of $6 billion in ten months, making USDe the third largest USD-denominated asset in the crypto space. It has also become a fundamental component of DeFi, integrated in major protocols such as Pendle, Morpho, and Aave, and its adoption has driven significant growth. In addition to DeFi, USDe has also penetrated CeFi and is currently integrated as margin collateral on about 60% of centralized exchanges, surpassing the USDC balance on Bybit in less than a month.
If we drill down into revenue, Ethena is not far behind, becoming the second fastest dApp in history to reach $100 million in revenue (after Pump.fun), reaching this milestone in 251 days. In 2024, Ethena became the dominant force in DeFi, with assets accounting for more than 50% of Pendle TVL, ~30% of Morpho TVL pegged to Ethena-related assets, and became the fastest growing new asset on Aave, reaching $1.2 billion in deposits in just three weeks.
Ethenas next phase is defined by Convergence, which aims to achieve the convergence of DeFi, CeFi, and TradFi through USDe. By introducing iUSDe, a wrapped version of sUSDe designed for institutional adoption, Ethena plans to offer a high-yield, crypto-native USD product tailored for asset managers, private credit funds, and exchange-traded products. By connecting capital flows and interest rates across financial systems, Ethena positions USDe as a cornerstone of the evolving digital dollar space.
How does USDe work?
USDe is kept stable through a delta-neutral hedging strategy, ensuring that its value is not affected by market fluctuations. When a user mints USDe, the collateral received by Ethena can include ETH, BTC, LSTs, USDT, USDC, and SOL, etc. In order to neutralize price risk, Ethena will open a short position in perpetual futures for each collateral received. For example: if the collateral is ETH, Ethena will short ETH perpetual futures.
This mechanism ensures that any price fluctuations of the collateral will be hedged by the corresponding futures position. If the collateral appreciates, the short position will lose money, but it will be compensated by the appreciation of the collateral. Conversely, if the price of the collateral falls, the short position will make a profit, offsetting the depreciation of the collateral. This mechanism ensures that USDe remains stable and is not affected by market fluctuations.
Unlike other synthetic stablecoins, Ethena does not use additional leverage and only uses the leverage naturally applied by derivatives exchanges to value collateral. This minimizes liquidation risk and ensures that every short position is 1:1 backed by assets.
For enhanced security, Ethena’s backing assets remain on-chain and are custodied through an over-the-counter settlement system to reduce counterparty risk. Ethena never fully transfers control of assets to derivatives platforms, but is only used to provide margin for its short hedging positions, ensuring decentralized and transparent asset management.
Ethena generates revenue by capturing a portion of the returns generated by its delta-neutral strategy, including:
Funding rate arbitrage: Ethena profits when the funding rate of perpetual futures is positive.
Liquid Staking Rewards: Staking income generated by staked LSTs, a portion of which is retained by Ethena.
Basis Profit: Ethena benefits from the efficiency differences between the spot and futures markets.
Protocol Fees: A portion of the total returns is used for the reserve fund and protocol treasury to ensure long-term sustainability.
While USDe’s delta-neutral strategy minimizes exposure to price volatility, it remains vulnerable to fluctuations in funding rates, market imbalances, and counterparty risk. If funding rates are negative for a long time, Ethena’s reserve fund will absorb losses, but long-term negative rates could put pressure on the system.
A liquidity crisis or extreme volatility could lead to a temporary depegging if the spot and futures markets diverge. Additionally, relying on centralized exchanges for hedging introduces counterparty risk, but Ethena mitigates this risk by keeping assets on-chain and performing over-the-counter settlement.
Historical revenue trends
Ethena was opened to the public on February 19, 2024, allowing users to mint USDe by depositing stablecoins and staking them as sUSDe to earn yield. In less than a year, the protocol has accumulated more than $320 million in revenue, becoming one of the fastest profit curves in DeFi history.
The steady growth in revenue in the first half of 2024 reflects the continued increase in USDe supply and its widespread adoption on DeFi and CeFi platforms. However, the sharp acceleration in revenue began in October 2024, coinciding with the occurrence of the following factors:
USDe and sUSDe are integrated into major lending markets such as Aave and Morpho.
Increased market volatility has brought about a surge in funding rate arbitrage opportunities.
The launch of new institutional products such as iUSDe extends Ethena’s influence into the TradFi space.
By the first quarter of 2025, the protocols cumulative revenue exceeded $300 million, and despite being online for less than 15 months, Ethena has already ranked among the top revenue generators in the crypto space. This rapid growth indicates strong market demand and verifies the sustainability of USDes delta-neutral model.
However, after peaking in late 2024, monthly revenues fell sharply in the first quarter of 2025. This decline correlates with a reduction in funding rate arbitrage opportunities, as perpetual futures funding rates across major exchanges normalize. With lower volatility and a more neutral funding environment, one of Ethena’s main revenue streams has temporarily weakened, highlighting the model’s sensitivity to market conditions.
4. Correlation between interest rates and income
The impact of interest rates on stablecoins is one of the most determinants of their income performance. As mentioned earlier, stablecoins generate income through a variety of mechanisms, including interest-bearing reserves, market arbitrage, and other yield-generating strategies. Because many stablecoins hold assets that are subject to changes in interest rates, their income potential is often affected by macroeconomic conditions.
To better understand this relationship, we adjust revenue by dividing it by supply. This normalization allows for a more accurate comparison, as an increase in stablecoin supply naturally leads to greater potential revenue generation. By focusing on revenue per unit of supply, we can isolate the direct impact of interest rate fluctuations on stablecoin profitability.
USDT
In-depth chart analysis vividly demonstrates the positive correlation between Tether revenue and interest rate fluctuations. The historical chart compares Tether’s quarterly revenue with interest rate changes, showing clear synchronicity, highlighting the near-instant response of revenue to interest rate adjustments.
These visualizations effectively highlight the sensitivity of Tether’s revenue to the interest rate environment, providing predictive insights into potential future performance scenarios. They highlight the importance of active financial and reserve management strategies to mitigate revenue risks associated with volatile or declining interest rate cycles.
The following charts show the correlation between interest rates and adjusted stablecoin revenue. Each chart shows the relationship between the supply of each unit of stablecoin (vertical axis) and the interest rate (horizontal axis).
The chart further highlights the strong positive correlation between interest rates and USDT’s adjusted revenue per unit of supply (R = 0.937). This shows that as interest rates rise, USDT’s revenue per unit of supply also increases, reflecting the growth in USDT’s earnings from its investments in U.S. Treasuries. As interest rates rise, the yields on these Treasuries increase, directly affecting USDT’s overall revenue.
This correlation highlights how USDT effectively manages its reserve assets to benefit from changing economic conditions, especially in a high-yield environment. It reflects USDTs flexible financial strategy and its positioning to perform well when interest rates rise, reinforcing its economic stability and role as a reliable digital asset. As mentioned earlier, a 100% correlation is impossible because 80% of reserves are held in cash and Treasuries, with 80% specifically allocated in Treasuries.
USDC
USDCs economic strength is reflected in its strategic reserve management. As interest rates rise, USDC benefits from its large holdings in U.S. Treasuries, which offer higher returns. USDC invests 75%-80% of its reserves in Treasuries, which not only maintains stability but also generates additional income as bond yields rise. The direct correlation with interest rate fluctuations allows USDC to benefit in a rising interest rate environment, further solidifying its position as a yield-generating stablecoin.
The trend line shows a strong positive correlation (R = 0.889), indicating that as interest rates rise, USDC revenue per unit of supply increases accordingly. This is in line with expectations, as USDC, like other reserve-backed stablecoins, derives its income from high-yielding assets such as U.S. Treasuries.
This correlation highlights USDC’s ability to optimize reserves and adapt to economic changes. It also highlights how reserve-backed stablecoins can take advantage of rising interest rates to enhance yield generation, further solidifying their role in the digital asset ecosystem.
While this correlation is strong (R = 0.889), it is lower than that of USDT due to differences in reserve composition. USDT maintains a larger portion of its reserves (approximately 80%) in short-term U.S. Treasuries, which are highly sensitive to changes in interest rates. In contrast, USDCs reserves are more diversified, with only 37.5% of its reserves in Treasuries and nearly 50% of its reserves in repurchase agreements, which respond more indirectly to interest rate fluctuations. This diversified approach enhances liquidity and stability, but also slightly weakens the direct impact of interest rate increases on returns, resulting in a weaker correlation. In summary, the direct comparison of USDT and USDC revenues highlights the impact of reserve composition and revenue strategy.
SKY (DAI/USDs)
SKYs economic strength is reflected in its strategic reserve management. As interest rates rise, SKY stablecoins (USDS and DAI) benefit from their exposure to yield-yielding assets.
Unlike USDC and USDT, which are traditionally backed by institutional reserves, DAI has historically relied on crypto-collateralized assets such as ETH. However, in October 2022, MakerDAO began allocating a large portion of DAI reserves into U.S. Treasuries and other real-world assets (RWAs) to capture higher yields. As of July 2023, over 65% of DAIs reserves are pegged to RWAs, making its income more sensitive to interest rate fluctuations. This shift brings DAIs behavior closer to that of institutional stablecoins, benefiting directly from rising interest rates.
As expected, changes in the composition of DAI reserves led to a strong positive correlation between interest rates and SKY stablecoin revenue per unit of supply (R = 0.937). The data confirms that higher interest rates contribute to increased revenue generation, further confirming that SKY stablecoin now behaves similarly to yield-optimized institutional stablecoins.
USDe
USDe’s revenue model is primarily based on funding rate arbitrage in the perpetual futures market, rather than traditional interest-bearing assets like U.S. Treasuries. As we’ve seen, its hedging strategy involves taking a short position in perpetual futures, profiting from fees paid by long traders when an imbalance in open interest occurs.
When demand for long positions increases, funding rates rise, making it more expensive to hold long positions while providing income opportunities for short traders (including USDe). However, this income model is less directly affected by traditional interest rate changes and more dependent on market volatility, trader positions, and overall leverage demand in the crypto market.
The trend line shows a weak positive correlation (R = 0.256), indicating that while higher interest rates may have some impact on USDe revenue, the relationship is not particularly strong.
This is in line with expectations, as USDe’s revenue model is primarily driven by conditions in the perpetual futures market, rather than interest rate movements. Funding rates and leverage requirements play a much larger role in revenue generation than traditional interest rate hikes.
This correlation highlights that USDe’s returns rely on trader behavior rather than direct exposure to real-world interest rate changes. While lower interest rates may encourage greater risk-taking and leverage use in crypto markets, USDe’s profitability remains closely tied to the imbalance in funding rates in perpetual futures trading.
5. The impact of interest rates falling to 0%
interest rate
Interest rates represent the cost of borrowing money, or conversely, the return earned on lending or depositing money. Central banks, such as the U.S. Federal Reserve System, set benchmark interest rates (such as the federal funds rate) to manage economic growth, control inflation, and stabilize the financial system. Lower interest rates generally encourage borrowing, stimulating economic activity, but can also fuel inflation.
Conversely, higher interest rates discourage borrowing, slowing economic expansion, but helping to curb inflationary pressures. Historically, interest rates have fluctuated wildly depending on economic cycles and crises, often approaching zero during recessions (e.g., the 2008 financial crisis, the COVID-19 pandemic) and rising sharply during inflationary periods (e.g., post-pandemic 2022-2024). Interest rate fluctuations directly affect the yields on Treasury bills (T-Bills) and bonds, which is critical for stablecoin issuers that rely on returns on these investments.
Historical interest rates
The interest rates that require the most attention are those set by the U.S. Federal Reserve System, especially the federal funds rate, because of the dollars global dominance as the main reserve currency and its broad impact on international financial markets. Changes in U.S. interest rates have a significant impact on global economic activity, currency valuations, investment flows, and borrowing costs, making them an important benchmark for global financial stability.
The historical chart clearly shows several major interest rate cycles, including the historically high rates in the early 1980s to combat inflation, followed by a steady decline in rates into the low interest rate environment of the past two decades. The 2008 financial crisis in particular forced interest rates to near zero to stimulate economic recovery.
Specifically, in the last interest rate cycle (2010-2020), the Federal Reserve kept interest rates at a historically low level (close to 0%) for a long time, and only began to gradually increase them when the economy gradually recovered from 2015 to 2018. However, the outbreak of the COVID-19 pandemic in early 2020 once again prompted a sharp reduction in interest rates to near zero, aimed at responding to the economic slowdown, ensuring liquidity, and stabilizing financial markets.
Comparison of the correlation between interest rates and income
As we discussed earlier, the revenue models of some stablecoins are highly dependent on interest rates, while others have structures that insulate them from these fluctuations.
The data provided clearly demonstrates this distinction. USDT, USDC, and SKY are all highly correlated (R ~ 0.89 – 0.94), which highlights their significant dependence on prevailing interest rates. Their income is mainly derived from traditional investments, such as treasury bonds, which makes them more exposed to risks when interest rates are close to zero, which can seriously affect their profitability.
In stark contrast, USDe has a significantly weaker correlation (R = 0.256), reflecting its completely different revenue generation approach. USDe’s revenue is primarily derived from crypto market mechanics, such as perpetual futures funding rate arbitrage and staking income, rather than traditional, interest rate-sensitive assets.
In summary, these data strongly suggest that fiat-backed and treasury-backed stablecoins such as USDT, USDC, and SKY face considerable risk in a low-interest rate environment. In contrast, algorithmic stablecoins such as USDe, with their alternative income strategies, have demonstrated greater resilience and may become strategic diversification tools in portfolios, providing relative stability when interest rates fall.
Scenario of interest rates falling to 0%
In a scenario where interest rates return to 0%, the impact of stablecoins varies significantly, depending on their revenue model and asset allocation:
Tether
Since USDT generates income primarily through traditional financial assets such as treasury bills, a drop in interest rates to 0% will greatly reduce its revenue stream, severely impacting profitability. However, Tethers strategic diversification into alternative investments, including cryptocurrencies (BTC, ETH) and precious metals, may partially mitigate this impact. However, these alternative assets carry higher volatility and risk and may not fully compensate for the lost interest income, which could weaken its overall market position.
In 2024, Tether maintained very low operating expenses, thanks to a lean structure of less than 50 employees, minimal administrative overhead, and since transaction fees for USDT tokens generally covered these transactional expenses. Legal and regulatory expenses were also relatively low, with no major fines this year, compared to a $18.5 million fine paid to the New York Attorney General in 2021.
Financially, Tether maintains strong reserves at the end of 2024, with reserves exceeding USDT holder obligations of approximately $7.1 billion and total equity of approximately $20 billion. Given its conservative annual operating expenses (likely less than $100 million), even if future revenues are completely zero, Tether will be able to maintain operations for more than 70 years, demonstrating its excellent financial stability and almost unlimited operating space.
Circle
Circle recently filed an S-1 registration statement with the U.S. Securities and Exchange Commission, indicating that it plans to list on the New York Stock Exchange under the ticker symbol CRCL.
In 2024, Circle reported total revenue of approximately $1.68 billion, up 16% from $1.45 billion in 2023. Notably, more than 99% of these revenues came from reserve income, primarily interest earned on assets backing USDC. In 2024, the companys net income was approximately $156 million, a significant drop from $268 million the year before, primarily due to increased operating and distribution expenses.
Total operating expenses in 2024 are approximately $492 million, most of which are used for employee compensation ($263 million), general administrative expenses ($137 million), IT infrastructure ($27 million), depreciation and amortization (approximately $51 million), marketing expenses ($17 million), and digital asset losses ($4 million). In addition, Circle also incurred approximately $1.01 billion in distribution and transaction costs, of which approximately $908 million was paid to Coinbase, its main distribution partner.
As of December 31, 2024, Circle held $751 million in cash and cash equivalents and another $294 million in other liquid investments, for a total available liquidity of approximately $1.045 billion. When estimating the companys financial sustainability in a zero-revenue scenario, it is important to distinguish between these two types of assets:
Cash and cash equivalents of $751 million represent highly liquid, immediately available funds - suitable for a conservative financial sustainability estimate. Based on this alone, and assuming current annual operating expenses of $492 million, Circles financial sustainability is approximately 18 months.
If the full $1.045 billion of liquidity (cash and other current assets) is included, and assuming that these additional assets are readily available and unrestricted, the financial sustainability period can be extended to approximately 25 months.
A more conservative approach would focus only on cash equivalents to avoid reliance on potentially illiquid or constrained assets. However, if Circle can tap into a wider pool of liquidity without issue, it would have greater flexibility.
In a prolonged zero interest rate environment, Circles high reliance on interest income from reserves could significantly impact its revenue streams. If it fails to effectively diversify its revenue streams, the companys profitability could be adversely affected and strategic adjustments, such as modifying its fee structure or exploring new investment avenues, may be necessary.
SKY In a 0% interest rate environment, Sky Protocol (formerly MakerDAO) does face significant challenges, especially in terms of its revenue streams and financial sustainability. The protocol relies on US Treasuries, ETH staking rewards, and DeFi income, which means that a complete lack of interest could significantly affect its revenue.
Revenue sources are under pressure:
Stability Fees and Borrowing Demand: As borrowing demand decreases, stability fees on DAI loans are likely to decline. This decline, combined with lower yields on U.S. Treasuries and other bonds, could exacerbate financial stress on the protocol.
DeFi funding fees: In a low-interest environment, traders may be less willing to engage in leveraged operations, which will lead to a decrease in funding fees for DeFi activities.
Historically, the Sky Agreement has demonstrated resilience to low interest rate environments by adjusting parameters such as the Sky Savings Rate (SSR). For example, the SSR was recently reduced to 4.5% effective from 24 March 2025 to align with current market conditions.
The Sky Agreement has a total asset value of approximately $220 million and includes the following:
$101M DAI – Stable
$82.2M in SKY Tokens – Fluctuating
$36.4M in MKR Tokens – Volatile
$243k stkAAVE – Volatility
$470,000 in ENS – Fluctuating
This total value of $220 million combines liquid assets such as DAI and volatility tokens such as SKY and MKR, whose value may fluctuate depending on market conditions. Liquid assets are the most accessible source of funds for protocol operations, while volatility tokens are a more strategic asset class that is subject to market fluctuations.
The operating cycle is the length of time that the Sky agreement can last without generating new revenues, based on current assets and annual operating expenses. The annual operating expenses of the agreement are estimated to be $35 million. The calculation formula is as follows:
If only liquid assets (DAI) are considered: Operating period = $101 million ÷ $35 million = 2.89 years
If we consider total assets (liquidity + volatility) at current prices: Operating Life = $220 million ÷ $35 million = 6.29 years
At 0% interest, the financial sustainability of the Sky Protocol relies heavily on the value of volatile assets such as SKY and MKR, whose fluctuations may affect the total operating cycle. However, based solely on the surplus of the DAI system, the Sky Protocol can sustain operations for approximately 2.89 years without generating additional revenue. If the entire asset pool (including liquid and volatile assets) is considered, Sky can sustain operations for approximately 6.29 years, assuming no other major changes in the market.
As a protocol that has historically demonstrated its ability to adapt, Sky Protocol can adjust its fee structure and make strategic adjustments in its asset allocation to respond to a prolonged low interest rate environment.
If the Fed cuts interest rates to 0%, several factors could impact USDes ability to maintain and grow its yields. Lower interest rates reduce borrowing costs, making leverage more attractive to traders and investors. In traditional markets, this typically drives capital flows into riskier assets as returns on fixed-income instruments decrease, prompting investors to seek higher returns elsewhere. This dynamic also applies to crypto markets, where a lower interest rate environment typically leads to capital flows into cryptocurrencies such as Bitcoin and Ethereum.
As more liquidity enters the market, traders are more inclined to take leveraged long positions on crypto assets, expecting prices to continue to rise. This creates an imbalance in the perpetual contract market, with long demand exceeding short demand. As a result, funding rates rise, making it more expensive to hold long positions, while short traders benefit, such as the way the USDe strategy is used.
However, this benefit is not without potential risks. If interest rates remain low for a long time, USDes yield may eventually stabilize or even decline as market participants adjust their strategies to the new normal. This adjustment may take the form of reducing leverage or changing trading strategies. In addition, while the low interest rate environment initially supports USDes yield generation through perpetual contract funding rates, the long-term stability of these conditions may incentivize a shift in investor behavior toward assets other than those currently generating the highest yields.
From a protocol perspective, Ethena is in a strong financial position. The project has raised over $120 million through venture capital and token sales, and maintains a reserve fund of approximately $61 million, which can be verified through the on-chain wallet 0x2b5ab59163a6e93b4486f6055d33ca4a115dd4d5. This reserve fund acts as a buffer in a negative yield environment, supporting the stability of USDe. Ethena also uses a lean team and has an estimated annual operating expense of $2 million to $5 million, which allows the project to remain operational for many years even if the protocol revenue shrinks significantly.
In summary, while the low interest rate environment provides a unique opportunity for USDe to remain attractive in the short term, its long-term sustainability relies on the persistence of market activity and volatility. Nevertheless, Ethenas strong reserve position and low burn rate provide it with a solid financial buffer, ensuring that the protocol can operate stably during a long period of low returns without compromising its core stability.
6. Conclusion
The stablecoin ecosystem is closely tied to macroeconomic dynamics, especially interest rates. As this analysis shows, there are significant differences in the performance and sustainability of various stablecoin models in a scenario where interest rates fall to 0%.
Most affected:
USDC is almost entirely dependent on the returns of U.S. Treasuries, and without effective diversification, its business model becomes structurally fragile in a long-term low-interest rate environment. High operating costs and relatively limited treasury reserves further limit Circles long-term operating capabilities.
Significantly impacted but more resilient:
USDT and SKY will also face considerable revenue compression because they rely on interest-bearing assets. However, they both have some buffers. Tether (USDT) holds a large treasury surplus, has extremely low operating costs, and is partially invested in diversified assets (such as Bitcoin and gold), which gives it a longer financial operating period under zero interest rate conditions.
SKY (USDS/DAI) is also at risk of declining returns. However, it maintains a diverse revenue stream through DeFi native mechanisms such as protocol fees, crypto collateral liquidations, and smart contract lending, providing greater operational flexibility. In addition, the protocol can also rely on governance token sales to cover expenses, as demonstrated in past cycles.
Least impact/most adaptable:
Ethena (USDe) stands out with its market-driven, crypto-native revenue model that does not rely on interest-bearing instruments. Instead, Ethena captures value through perpetual futures funding rates, staking rewards, and market inefficiencies. In a world of 0% interest rates, USDe may even benefit from increased leverage and speculation, making it one of the few projects that can thrive when other stablecoins shrink.
However, in the long term, a sustained low interest rate environment could cause market conditions to turn neutral or bearish, potentially reducing Ethena’s profitability. In fact, the protocol could even face short-term losses when funding rates become strongly negative for shorts.
This comparative analysis highlights a key insight: revenue diversification is no longer optional, but critical. In a world where interest rates may return to historically low levels, stablecoin issuers that rely too heavily on traditional financial instruments face significant risk of declining profitability. Protocols with flexible crypto-native revenue engines, especially those like USDe, may not only be able to weather the storm, but even emerge stronger.
Ultimately, the sustainability of the stablecoin market will be determined not just by peg stability or market acceptance, but by resilience across economic systems. Protocols that adapt through product innovation, diversified collateral, or yield mechanisms will define the next generation of digital dollars.
Finally, it’s worth pointing out that Circle and Tether may already be preparing for a world of low-interest yields. Each is actively building or participating in its own blockchain infrastructure: Circle is building Cortex and Tether has Plasma. These efforts appear to be aimed at diversifying their service offerings and potentially opening up new revenue streams beyond treasury yields.
Additionally, Circle’s IPO announcement coincided with the end of our research. The details disclosed are highly consistent with the vulnerabilities and strategic directions we identified, especially the need to diversify and expand through new ventures. The IPO could be both a liquidity event and a sign of a transition to a more services and infrastructure-focused business model.
Finally, one can’t help but wonder, does Circle have another ace up its sleeve? Is it quietly preparing to become the official issuer of a digital dollar? While there has been no official announcement confirming this, such a move would certainly fit in with its regulation-first strategy and partnership with the United States. Who knows.
The secret to Web3 success is just one step away — don’t let others get ahead while you wander in confusion.
