Stablecoins like USDT and USDC have become foundational pillars in the cryptocurrency ecosystem, acting as vital bridges between traditional finance and digital assets. A key aspect of their operational model involves generating substantial revenue by investing user deposits in safe, interest-bearing assets—primarily U.S. Treasury bills. Their profitability is closely tied to the interest rate environment set by central banks, particularly the U.S. Federal Reserve.
In a high-interest-rate environment, these issuers earn significant returns. However, should interest rates drop to near zero, their revenue models could face severe pressure. Beyond macroeconomic factors, stablecoins also face regulatory challenges and the risk of depegging, as demonstrated during the 2023 Silicon Valley Bank collapse involving USDC.
Meanwhile, algorithmic stablecoins like Ethena’s USDe rely on crypto-native yield generation mechanisms, making them less sensitive to traditional interest rate fluctuations. This analysis explores the economic foundations, risks, and resilience of various stablecoin models in different rate environments.
The Rise of Stablecoins
Bitcoin was initially conceived as a decentralized, borderless, and censorship-resistant alternative to traditional money. However, its high volatility, evolution into a speculative asset, and often expensive blockchain transactions made it less suitable for everyday payments or as a stable store of value.
This limitation paved the way for stablecoins—digital assets designed to maintain a fixed value, typically pegged to the U.S. dollar. They offer the transaction efficiency of cryptocurrencies without the volatility.
The growth of stablecoins reflects a pragmatic shift in the crypto ecosystem. While Bitcoin aimed to disrupt traditional money, the practical need for stability led to the rise of asset-backed stablecoins, which now serve as core infrastructure in the digital economy.
Stablecoins act as a bridge between traditional finance and crypto applications, facilitating trading, cross-border payments, and serving as a safe haven during market turbulence. Their adoption has surged dramatically: from a market capitalization of under $3 billion in 2017 to approximately $228 billion as of early 2025. Today, they account for over 8.5% of the entire cryptocurrency market.
What Are Stablecoins?
A stablecoin is a type of cryptocurrency designed to maintain a stable value by pegging it to an external asset, such as a fiat currency or a commodity. For example, Tether (USDT) and USD Coin (USDC) are both pegged 1:1 to the U.S. dollar.
These digital assets offer the benefits of blockchain-based transactions—speed, borderless transfer, and transparency—without the price volatility associated with assets like Bitcoin. Most major stablecoins achieve price stability through collateralization: each token is backed by an equivalent value of reserve assets.
Regulatory approaches to stablecoins vary globally. The U.S. lacks comprehensive federal legislation, while the European Union enforces strict reserve and auditing rules under its MiCA framework. Asia displays a range of strategies—from strict reserve requirements in Singapore and Hong Kong to an outright ban in China. These differences reflect regional efforts to balance innovation with financial stability.
The Business Incentive Behind Stablecoins
While stablecoins provide users with a reliable digital dollar, their issuance is also a highly profitable business opportunity. Tether, which launched USDT in 2014, pioneered this model.
The business logic is simple: for each dollar deposited, the issuer mints one stablecoin. When users redeem, the tokens are burned, and the dollar is returned. The received dollars are invested in safe, short-term instruments like U.S. Treasuries, and the interest earned constitutes the issuer’s primary revenue source.
However, issuers like Tether and Circle do not control this primary revenue stream—it depends heavily on interest rates set by central banks. High rates are profitable; low rates compress earnings.
This reliance raises important questions: What happens if interest rates approach zero? How would different types of stablecoins be affected? Are algorithmic stablecoins better positioned in a low-yield environment?
Types of Stablecoins and Their Revenue Models
Not all stablecoins respond equally to interest rate changes. Below are the main categories and their operational mechanics.
Fiat-Backed Stablecoins
These are the most widely used stablecoins. They operate through a straightforward tokenization process: users deposit fiat currency, and the issuer mints an equivalent amount of stablecoins.
Revenue is generated by investing these deposits in short-term, safe instruments such as U.S. Treasury bills, commercial paper, or bank deposits. The interest earned forms the core of the issuer’s income.
However, these models face significant risks:
- Regulatory Scrutiny: Governments increasingly treat these issuers as money transmitters or shadow banks, subjecting them to financial regulations.
- Depegging Risk: If too many users redeem simultaneously, the issuer may need to liquidate assets quickly, potentially at a loss. This can trigger a bank run-like scenario, as seen with USDC during the Silicon Valley Bank crisis in March 2023.
Leading examples include USDT (Tether) and USDC (Circle).
Commodity-Backed Stablecoins
These stablecoins are backed by physical commodities like gold, silver, or oil. Each token represents a claim on a certain amount of the underlying asset.
Revenue comes primarily from fees associated with minting and redeeming tokens. For instance, Tether Gold (XAUT) charges a 0.25% fee upon redemption, along with delivery charges for physical gold.
Risks include commodity price volatility and stringent custody requirements. Examples: PAX Gold (PAXG) and Tether Gold (XAUT).
Crypto-Backed Stablecoins
These stablecoins are collateralized by other cryptocurrencies. Users lock crypto assets into smart contracts to mint stablecoins, often with overcollateralization to buffer against price swings.
Revenue is generated through:
- Interest on loans
- Liquidation fees
- Protocol rewards for liquidity providers
Examples include DAI (now part of the Sky protocol) and Berachain’s HONEY. Though designed to be decentralized, many still rely heavily on fiat-backed stablecoins like USDC as collateral.
Key risks involve crypto market volatility, smart contract vulnerabilities, and liquidity crises.
Treasury-Backed Yield-Bearing Stablecoins
This emerging category blends characteristics of traditional stablecoins with yield-generating products. These tokens are backed by U.S. Treasuries and other high-quality assets, offering holders both stability and passive income.
Examples include Ondo Finance’s USDY and Hashnote’s USYC. They aim to provide non-U.S. persons and institutions with easy access to dollar-denominated yield via blockchain.
Risks include regulatory uncertainty, custody concerns, and liquidity constraints during market stress.
Algorithmic Stablecoins
Algorithmic stablecoins use economic mechanisms and market incentives—rather than direct collateralization—to maintain their peg. Ethena’s USDe is a prominent example, using a delta-neutral hedging strategy: it holds crypto assets like ETH and simultaneously shorts perpetual futures to neutralize price risk.
Revenue is derived from:
- Funding rate arbitrage in futures markets
- Staking rewards from liquid staking tokens
- Basis trading profits
This model is less dependent on traditional interest rates and more on crypto market conditions. However, it carries risks such as negative funding rates, counterparty risk, and market instability.
Leading Stablecoins and Their Performance
Tether (USDT)
USDT is the largest stablecoin by market capitalization, deeply embedded in both centralized and decentralized crypto trading.
Tether’s revenue comes mainly from interest earned on its reserve assets, which are predominantly held in U.S. Treasury bills. As of its latest reserve report, over 80% of its reserves are in cash, cash equivalents, and other short-term deposits.
The company’s income is highly correlated with U.S. interest rates. During high-rate periods, Tether’s earnings surge; in low-rate environments, they decline.
Notably, Tether does not distribute earnings to USDT holders. All revenue is retained by the company. With over $20 billion in equity and low operating costs, Tether is well-positioned to withstand extended periods of low revenue.
USD Coin (USDC)
Circle’s USDC is known for regulatory compliance and transparency. It is widely used in institutional and DeFi applications.
Like Tether, Circle invests its reserves primarily in U.S. Treasuries and bank deposits. Revenue is generated from interest income, and again, not shared with users.
Circle’s income is also strongly correlated with interest rates. In 2024, the company reported $1.68 billion in revenue, over 99% of which came from reserve income.
However, Circle faces higher operational costs and has less buffer against a sustained low-rate environment. Its available liquidity suggests it could operate for 18–25 months without significant revenue.
Sky Protocol (USDS/DAI)
Formerly known as MakerDAO, the Sky protocol issues the decentralized stablecoins DAI and USDS. Initially backed mostly by crypto assets, the protocol now holds a significant portion of its reserves in real-world assets (RWAs), including U.S. Treasuries.
This shift has made its revenue more sensitive to interest rates. The protocol earns through stability fees, lending operations, and yield from its RWA investments.
Sky maintains transparency through real-time dashboards showing its collateralization levels. With overcollateralization and multiple revenue streams, it possesses moderate resilience in a low-interest scenario.
Ethena (USDe)
USDe is a synthetic dollar protocol that uses crypto collateral and derivative hedging to maintain its peg. Its revenue comes primarily from funding rates in perpetual futures markets and staking yields.
This model shows low correlation with traditional interest rates. Instead, it thrives in environments with high crypto volatility and speculative activity.
Ethena holds a reserve fund of over $61 million and has low operating expenses, giving it a substantial runway even if market conditions become unfavorable.
Interest Rates and Revenue Correlation
Interest rates set by central banks directly influence the earning potential of stablecoins backed by traditional assets. The following correlations illustrate this relationship:
- USDT: R = 0.937 (Very Strong Correlation)
- USDC: R = 0.889 (Strong Correlation)
- Sky (USDS/DAI): R = 0.937 (Very Strong Correlation)
- USDe: R = 0.256 (Weak Correlation)
These figures confirm that fiat-backed and treasury-backed stablecoins are highly susceptible to interest rate changes, while algorithmic models like USDe are largely decoupled from them.
Scenario: Impact of 0% Interest Rates
If the U.S. Federal Reserve were to cut interest rates to zero, the implications would vary significantly across stablecoin models:
- USDC: Would be severely affected due to its heavy reliance on Treasury yields. Limited liquidity and high operating costs could challenge its long-term sustainability.
- USDT: Would experience major revenue decline but possesses sufficient equity and diversified assets to operate for decades even with zero income.
- Sky Protocol: Would face reduced earnings but could adapt through fee adjustments, DeFi revenue streams, and governance mechanisms.
- USDe: Might initially benefit from increased speculation and leverage in crypto markets. Its funding-rate-dependent model could remain profitable even with zero traditional interest rates.
Frequently Asked Questions
How do stablecoin issuers make money?
They invest user deposits in interest-bearing assets like U.S. Treasury bills. The interest earned constitutes their primary revenue source.
Why are stablecoin revenues tied to interest rates?
Because their reserves are held in short-term debt instruments whose yields are determined by prevailing interest rates.
Can stablecoins survive if interest rates go to zero?
Yes, but those with diversified income streams, low costs, and large equity buffers (like Tether) are better positioned than those relying solely on interest income.
What is a depegging event?
It occurs when a stablecoin loses its 1:1 peg with the underlying asset, often due to a loss of confidence, bank runs, or collateral liquidations.
Are algorithmic stablecoins safer in a low-rate environment?
They are less directly impacted by traditional rate cuts, but they carry other risks, such as derivative market instability and smart contract vulnerabilities.
How can users assess the safety of a stablecoin?
Look for regular attestations, reserve breakdowns, regulatory compliance, and the issuer’s equity buffer against market shocks.
Conclusion
Stablecoins have evolved into indispensable tools within the digital asset space, but their profitability is closely linked to macroeconomic conditions. Traditional models like USDT and USDC are highly exposed to interest rate fluctuations, while algorithmic alternatives like USDe derive value from crypto-market dynamics.
In a near-zero-interest-rate environment, revenue diversification becomes critical. Issuers with robust treasury management, low operating costs, and alternative income streams will likely endure—and possibly thrive—amid change.
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The future may see leading issuers like Tether and Circle expanding into blockchain infrastructure and services, reducing their reliance on interest income. As the industry matures, resilience across economic cycles will define the next generation of digital dollars.