This article delves into how stablecoins like USDT and USDC generate billions of dollars in revenue by investing their reserves in US Treasury Bills, with their income closely tied to Federal Reserve interest rates. If rates drop to zero, their profitability could plummet. As evidenced by the 2023 Silicon Valley Bank incident, fiat-backed stablecoins face regulatory challenges and depegging risks, while algorithmic stablecoins like USDe rely on crypto-native yields, making them less sensitive to interest rate changes. Tether's 20billionequityensuresadecades−longrunway,butCircle′s1.68 billion in revenue in 2024 and limited liquidity make it vulnerable with only 18-25 months of sustainability.

The Shift to Stability in Cryptocurrency

Initially, Bitcoin was seen as an alternative to traditional currencies, offering a decentralized, borderless, and censorship-resistant form of money. However, its high volatility, evolution into a speculative asset and store of value, and high blockchain transaction costs made it unsuitable for daily payments or stable value storage.

This limitation spurred the rise of stablecoins. Designed to maintain a fixed value, usually pegged to the US dollar, stablecoins provide transaction stability and efficiency that Bitcoin cannot match.

The evolution of the crypto ecosystem reflects a pragmatic shift. While Bitcoin's original ideal was to replace traditional currencies, the demand for stability led to the widespread adoption of stablecoins (often backed by traditional assets) as pillars of the entire ecosystem.

These stablecoins act as bridges between the real-world traditional financial markets and the crypto ecosystem, facilitating the popularization and application of cryptocurrencies while also raising questions about the decentralized ideal of crypto. For instance, stablecoins like Tether (USDT) and USD Coin (USDC) are issued by centralized institutions with reserves held in traditional banks, seen as a compromise between ideals and reality.

Over the years, stablecoin adoption has surged. In 2017, their total market capitalization was less than 3billion,growingtoapproximately228 billion by March 2025. Stablecoins now account for about 8.57% of the entire crypto market, serving as essential tools for trading, cross-border payments, and as a haven during market turmoil.

This growth underscores stablecoins' role as a critical bridge connecting traditional financial markets and the crypto world. A chart from Coinglass clearly shows the steady and significant growth in the total market capitalization of major stablecoins from early 2019 to present.

How Do Stablecoin Issuers Profit from US Treasury Bills and Interest Rates?

What are Stablecoins?

Stablecoins are cryptocurrencies designed to maintain stable value by pegging their price to an external asset, such as a fiat currency or commodity. For example, Tether (USDT) and USD Coin (USDC) are both 1:1 pegged to the US dollar. The goal of stablecoins is to offer the advantages of digital currencies (like fast, borderless transactions on blockchains) without the price volatility risks of Bitcoin.

Stablecoins strive to maintain price stability through holding reserve assets or adopting other mechanisms, making them more suitable as daily transaction tools or value storage in the crypto market. In reality, most mainstream stablecoins achieve price stability through a collateralization mechanism, where each stablecoin issued is backed by an equivalent amount of reserve assets.

Ensuring the stability and credibility of stablecoins requires clear regulation. Currently, the US lacks comprehensive federal legislation, relying primarily on state-level rules and some proposals under consideration. The EU has implemented strict reserve and audit requirements through the MiCA framework. Asia presents diverse regulatory strategies: Singapore and Hong Kong impose strict reserve requirements, Japan allows banks to issue stablecoins, while China has largely banned stablecoin-related activities. These differences reflect regional trade-offs between "innovation" and "stability."

Despite the lack of a globally unified regulatory framework, stablecoin usage and adoption have steadily grown year by year.

Why Are They Issued?

As mentioned, stablecoins were initially intended to provide users with a reliable digital asset for payments or as a store of value pegged to major global currencies, particularly the US dollar. However, their issuance is not altruistic but a highly profitable business opportunity, with Tether being the first to identify and exploit this opportunity.

Tether launched USDT in 2014, becoming the first stablecoin and pioneering an extremely lucrative business model, one of the most successful projects in history from a "per capita profit" perspective. The business logic is simple: Tether issues 1 USDT for every $1 received and destroys the corresponding number of USDT when users redeem dollars. The received dollars are invested in safe short-term financial instruments (like US Treasury Bills), with the resulting yields going to Tether.

Understanding how stablecoins make money is key to grasping their underlying economic logic.

How Do Stablecoin Issuers Profit from US Treasury Bills and Interest Rates?

Despite their seemingly straightforward business model, stablecoin issuers cannot control their primary source of income—interest rates set by central banks (especially the Federal Reserve). When rates are high, they can earn considerable profits; when rates are low, profitability drops significantly.

Currently, the high-interest rate environment is highly favorable for Tether. But what happens if rates fall again in the future, even approaching zero? Are algorithmic stablecoins also affected by interest rate fluctuations? Which type of stablecoin may perform better in such an economic environment? This article further explores these questions and analyzes how stablecoin business models adapt to changing macroeconomic conditions.

2. Types of Stablecoins

Before analyzing stablecoin performance under different economic conditions, it's crucial to understand the operating mechanisms of different stablecoin types. While all aim to maintain a stable value pegged to real-world assets, each reacts differently to interest rate changes and overall market conditions. Below, we introduce major stablecoin types, their mechanisms, and their reactions to economic changes.

Fiat-Backed Stablecoins

Fiat-backed stablecoins are the most well-known and widely used type, essentially "tokenizing" the US dollar in a centralized manner.

Their mechanism is simple: for every $1 deposited, the issuer mints 1 corresponding stablecoin; when users redeem dollars, the issuer destroys the tokens and returns an equivalent amount of dollars.

The profit model of fiat-backed stablecoins mainly operates behind the scenes. Issuers invest user deposits in various short-term, safe financial instruments, such as Treasury Bills, secured loans, cash equivalents, and sometimes higher-volatility assets like cryptocurrencies (e.g., Bitcoin) or precious metals. The yields from these investments constitute the issuer's primary revenue source.

However, high returns come with significant risks. One persistent challenge is compliance. Many governments scrutinize fiat-backed stablecoins, arguing they essentially issue "digital currencies" and must comply with strict financial regulations.

While most issuers have managed regulatory pressures without severe disruptions, significant challenges persist. A notable example is Europe's MiCA regulation, which recently banned USDT (Tether) in some markets due to non-compliance.

Another major risk is "depegging." Issuers often invest significant reserves in various instruments. If many users redeem tokens simultaneously, the issuer may need to sell assets quickly, potentially incurring huge losses. This could trigger a "bank run"-like chain reaction, making it difficult to maintain the peg and potentially leading to insolvency.

The most prominent case was in March 2023 involving USDC (issued by Circle). When Silicon Valley Bank (SVB) collapsed, rumors quickly spread that Circle had significant reserves at SVB, sparking concerns about Circle's liquidity and USDC's peg. These fears led to a brief USDC depeg. This incident highlighted the risks when stablecoin reserves are held in centralized banks. Fortunately, Circle resolved the issue within days, restoring market confidence and stabilizing USDC's peg.

The two dominant fiat-backed stablecoins are USDT (Tether) and USDC (Circle).

Commodity-Backed Stablecoins

Commodity-backed stablecoins are an innovative category in the stablecoin ecosystem, issuing digital tokens backed by tangible physical assets (usually precious metals like gold and silver, or commodities like oil and real estate).

Their mechanism is similar to fiat-backed stablecoins: for every unit of physical commodity deposited, the issuer mints an equivalent token. Users can usually redeem these tokens for the physical commodity itself or its cash equivalent, with the corresponding tokens destroyed.

Issuers' revenue mainly comes from token minting and redemption fees. For example, Pax Gold (PAXG) charges a small fee for token creation and destruction, although Paxos currently does not charge storage fees for its gold holdings. Additionally, issuers may profit by providing services for trading and exchanging tokens with dollars or physical commodities.

Similarly, Tether Gold (XAUT) earns fees related to redemption and delivery. Users redeeming XAUT tokens for physical gold bars or converting gold to cash via Tether are charged fees. For instance, during redemption, a 25 basis point (0.25%) fee is charged based on the gold price, plus shipping costs for physical delivery. Selling redeemed gold bars in the Swiss market incurs an additional 25 basis point fee.

However, these stablecoins also face risks, especially commodity price volatility, which can affect the stable peg. Compliance is another significant challenge. Commodity-backed stablecoins are usually subject to strict regulatory requirements, necessitating transparent and secure custody arrangements.

Successful commodity-backed stablecoins include Paxos' Pax Gold (PAXG) and Tether's Tether Gold (XAUT), both backed by gold reserves, offering investors convenient digital exposure to commodities.

In summary, commodity-backed stablecoins bridge traditional commodity investments with digital finance, providing investors with stability and physical asset exposure while emphasizing regulatory compliance and transparency.

Crypto-Backed Stablecoins

Crypto-backed stablecoins are an important category, maintaining a stable value pegged to fiat currencies (usually the US dollar) through cryptocurrency collateral. Unlike fiat or commodity-backed stablecoins, these tokens rely on smart contract technology for a transparent and automated system.

The basic mechanism is: users lock crypto assets (usually over-collateralized) in smart contracts to mint stablecoins. Over-collateralization buffers against crypto price volatility, ensuring the stablecoin maintains its pegged value. When users redeem stablecoins, they return equivalent stablecoins, and the system destroys the tokens, releasing the originally collateralized crypto assets.

Crypto-backed stablecoins' profit models include:

• Charging interest to users borrowing stablecoins.

• Charging liquidation fees to users with under-collateralized assets.

• Governance mechanism rewards within the protocol, incentivizing token holders and liquidity providers.

DAI (now known as USDs), issued by MakerDAO (now renamed SKY), is a prominent example, primarily collateralized by crypto assets in the Ethereum ecosystem. MakerDAO's revenue sources include stability fees (interest) charged to USDs borrowers and penalties for liquidations. These fees support the protocol's stable operation and sustainable development.

Another example is Berachain's HONEY stablecoin, primarily collateralized by USDC and pYUSD. HONEY's revenue includes redemption fees: Berachain charges a 0.05% fee when users redeem HONEY and retrieve their collateral (USDC or pYUSD).

While classified as "crypto-backed," most of these stablecoins resemble wrapped versions of fiat-backed stablecoins (like USDC). While initially aiming for full reliance on native crypto assets as collateral, achieving true stability without fiat stablecoins remains challenging in practice.

These assets also carry inherent risks. For instance, underlying crypto price volatility can pose significant challenges—like triggering mass liquidations during sharp drops, potentially breaking the stablecoin's peg. Additionally, smart contract vulnerabilities or protocol attacks seriously threaten system stability.

In summary, crypto-backed stablecoins like USDs and HONEY play crucial roles in providing decentralized, transparent, and innovative financial solutions. However, despite being nominally crypto-collateralized, they often heavily rely on fiat stablecoins in reality, necessitating robust risk management mechanisms to maintain resilience and credibility.

Treasury-Backed Stablecoins

Treasury-backed stablecoins are backed by government bonds, particularly US Treasury Bills. These stablecoins are usually pegged to the US dollar, offering value stability while providing passive income to holders through underlying bond interest. Thus, they resemble yield-bearing investment tokens, combining traditional stablecoin stability with financial properties.

For example, Ondo's USDY (USD Yield Token) is a tokenized note backed by short-term US Treasury Bills and bank demand deposits. It aims to offer non-US individuals and institutional investors the convenience of stablecoins while providing USD-denominated, high-quality yields. Investors' funds are used to purchase Treasury Bills and partly deposited in banks, with interest distributed proportionally to token holders. USDY is a "yield-bearing asset," meaning it passively appreciates with underlying asset interest generation, growing over time.

Another example is Hashnote's USYC (USD Yield Coin), the on-chain representation of Hashnote's Short Duration Yield Fund (SDYF), investing in short-term Treasuries and participating in repo and reverse repo markets. USYC's return is linked to short-term "risk-free rates," combining blockchain speed, transparency, and composability 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), with on-chain minting being atomic and instant. Like USDY, USYC is a "yield-bearing asset," accumulating returns passively from underlying asset interest.