What if I told you that one of crypto’s biggest businesses is built partly on interest that stablecoin holders never actually see?
Just imagine giving someone $1,000 and asking them to keep it safe for you. Now, they put your money into a very safe account that earns them around 4% a year and hand you a digital receipt worth $1,000. You can redeem it whenever you want.
Fast forward to a year later and your receipt is still worth $1,000. But somewhere in the background, that money has been earning interest.
In very simplified terms, that is one of the most important business models sitting underneath the stablecoin market.
According to DeFiLlama, the total value of stablecoins sits at roughly $308 billion currently. Meanwhile, a three-month US Treasury bill for example yields around 4.20% today. With that in mind, let’s treat this as a thought experiment. If $308 billion were to earn just 4% annually, that would amount to roughly $12.3 billion in potential yield every year.
And most people holding traditional stablecoins don’t even automatically receive that yield.
Let’s take USDC as an example. Circle says USDC is backed by cash and highly liquid assets including short-term Treasuries and overnight Treasury repos. Its own terms also make it clear that USDC doesn’t pay holders the interest earned on those reserves. Now, that is not some hidden trick. It is just part of how the product works.
Just think of it like leaving money in a zero-interest checking account. Your bank may be able to earn something from the money you left with them, but you accept zero interest in exchange for liquidity, convenience and the ability to spend it whenever you want.
Stablecoins offer exactly that more or less, except the utility is happening on blockchain rails instead. The difference there is that you can move dollars globally, trade crypto, settle transactions and transfer value around the clock.
However, the issue now is that the tradeoff is starting to become much more noticeable when interest rates are high.
At 0.5%, nobody cares all too much about missing the yield. But at 4% or more, the numbers suddenly become enormous.
Now, that doesn’t mean stablecoin issuers can simply just collect $12 billion of pure profit. There is much more to it than just the simplistic argument above. There are things like reserves not all being invested at the same yield and companies needing to cover their operating costs for example.
However, I think the broader point still stands. That when you hold a stablecoin now, you’re not just choosing to hold a digital version of the dollar. You’re also making an economic trade. You get liquidity and crypto-native utility, but you are choosing to give up the yield that those dollars could otherwise be earning.
And with more than $300 billion now sitting in stablecoins, that seemingly small tradeoff has become a very big business.
This article was written by Justin Low at investinglive.com.