Beijing Time, mid-December 2024, the capital flow and profit model surrounding Circle and USDC have been systematically sorted out again: in the aftermath of the Bitcoin halving and amidst the high volatility of U.S. Treasury rates, this project, regarded as the "underlying infrastructure of crypto dollars," is using a set of long-underestimated arbitrage and interest margin mechanisms to drive its own valuation and the wealth of its founders against the trend.

The "Crypto Dollar" Positioning and Triple Role of USDC

● Settlement Layer Role: USDC essentially serves as the "dollar clearing layer" in the crypto world, repeatedly used as a pricing unit, base currency for trading pairs, and settlement asset across various scenarios such as CEX, DEX, on-chain lending, and cross-chain bridges, forming a network effect.
● Interest Margin Capture Vehicle: After its issuance, the corresponding dollars and short-term U.S. Treasury assets are centrally managed by Circle. In the macro environment of rapid interest rate hikes by the Federal Reserve from 2022 to 2024, with the federal funds rate maintained in the 5%–5.5% range, Circle earns considerable interest through holding short-term bonds and overnight repos, while ordinary token holders generally do not receive profits or only limited profits, with the entire interest margin accruing as company profit.
● Compliance Bridge: Since its inception, USDC has positioned itself as "compliance-friendly," establishing partnerships with traditional financial institutions and payment networks (such as Visa), attempting to build a regulatory and auditable bridge between on-chain assets and the traditional banking system, giving it a relative advantage in the context of new regulations like MiCA.
● Differences from USDT:
- In terms of asset structure, USDC emphasizes transparent custody of short-term U.S. Treasuries and cash equivalents, with reserve proofs issued by third-party auditing firms;
- In market share, USDT still holds an absolute dominance, but USDC has a higher proportion in compliance institutions in Europe and the U.S. and mainstream DeFi protocols, resembling more of an "institutional vote";
- In terms of business model, the core logic of USDC is "scaling up and capturing interest margins," which significantly differs from USDT's tendency towards diversified investments and allocation of some high-yield assets.

How Circle Mints USDC: From Reserve Structure to Interest Margin Logic

● Asset Side: Short-Term Bond Portfolio in a High-Interest Era
- Against the backdrop of the Federal Reserve's cumulative interest rate hikes of 500bp+ since 2022, the yield on short-term U.S. Treasuries once surged above 5%;
- The bulk of USDC reserves is allocated to extremely short-term, highly liquid government bonds and money market instruments, allowing Circle to maximize interest income while ensuring liquidity for redemptions;
- Since the scale of reserve assets is highly tied to the circulating amount of USDC, as long as the total market value of USDC does not collapse, Circle's interest income is a "U.S. Treasury asset management business" linearly linked to market value.

● Liability Side: Almost Zero-Cost "Interest-Free Deposits"
- Ordinary users and institutions holding USDC in the secondary market essentially exchange U.S. sovereign credit for "Circle-managed dollar IOUs" without earning interest;
- Compared to the banking system, Circle does not have to pay deposit rates for these "deposits" and has no rigid constraints like reserve requirements, making the cost on the liability side close to 0;
- While some large institutions may receive a small portion of the interest margin through rebates and cooperative earnings, overall, Circle enjoys a treatment similar to "interest-free dollar reserves" on the liability side.

● Essence of Interest Margin: The Overlooked "Dollar Money Market Fund" Model
- The asset side earns around 4%–5% short-term bond yields, while the liability side does not distribute interest to the vast majority of token holders, forming a full allocation of interest profit pool to the company;
- This model is very similar to traditional dollar money market funds, except that USDC packages "shares" as on-chain transferable tokens that circulate freely in the secondary market;
- When the circulation scale of USDC reaches hundreds of billions of dollars, annual interest margin income can reach hundreds of millions or even billions of dollars, supporting Circle's revenue and valuation narrative.

Capital Flow Data: USDC Increases and Decreases Reflecting On-Chain Capital Preferences

● Circulation Fluctuations and Capital Preferences
- Research Brief shows that in 2024, USDC circulation experienced a two-way fluctuation of first declining and then rebounding, reflecting the dynamic switching of crypto capital between risk assets and dollar cash positions;
- During the strong rally phases of BTC and ETH, some funds may flow out of USDC into spot and derivatives longs, thus putting pressure on USDC circulation;
- When the market enters high volatility or adjustment phases, USDC circulation rises again, demonstrating its function as a "safe cash reserve."

● On-Chain Activity and Scenario Distribution
- USDC's distribution across mainstream public chains is relatively dispersed, covering Ethereum mainnet, L2, Solana, and several other chains;
- Data shows that the main use cases of USDC in DeFi include liquidity pools, collateralized lending, yield aggregators, and on-chain payments, characterized by high turnover and high-frequency usage;
- In contrast, while some other dollar tokens may have absolute volume advantages on certain chains, USDC has a higher proportion in high-quality scenarios such as DeFi protocol depth, payments, and cross-border settlements.

● Over-the-Counter Demand and Institutional Adoption
- As some compliant trading platforms and financial institutions use USDC as a medium for dollar inflows and outflows, the over-the-counter demand for USDC is steadily increasing;
- Research Brief mentions that Circle's collaborations with multiple payment, custody, and asset management institutions further solidify USDC's "bridging position" between traditional finance and Web3.

Circle's Finances and Valuation: From Burn Rate to Profit Inflection Point

● Revenue Structure: Interest Income Becomes the Absolute Main Character
- In the macro interest rate rising phase, the interest generated from USDC reserve assets becomes the absolute majority of Circle's income, far exceeding transaction fees and other service-related income;
- As USDC scales up, Circle's total revenue is positively correlated with its market value, and its business model is essentially a hybrid of "asset management + clearing network";
- In the time window where the market warms up post-halving and U.S. Treasury yields remain high, this model enters a rare "high-profit zone."

● Cost and Burn Rate Improvement
- In the early stages, Circle's high investments in technology development, compliance, and market expansion led to a high Burn Rate, but as USDC scales up and interest income amplifies, the fixed costs corresponding to unit revenue have been significantly diluted;
- Research Brief points out that as USDC matures, some non-core businesses contract, and compliance costs transition from "initial phase" to "maintenance phase," Circle's cash flow structure begins to improve significantly.

● Valuation and Wealth Effect
- During the same period, the paper wealth of most crypto billionaires shrank due to price volatility, regulatory pressures, or equity revaluation, but the wealth curve of Circle and its executives shows a counter-trend rise;
- The core logic behind this is not the token market value, but rather the "dollar interest margin cash flow" formed around USDC, which is closer to the valuation model of traditional financial assets;
- The market's pricing of Circle has also gradually shifted from a simple "exchange/fintech company" to a composite understanding of "asset management-like institution + global clearing network operator."

Compliance, Regulation, and RWA: The Upper Limit and Ceiling of USDC

● The Double-Edged Sword Effect of the Compliance Environment
- Against the backdrop of tightening regulations in Europe and the U.S., USDC, as a representative of a strong compliance route, gains policy friendliness in banking cooperation, custody, auditing, and other aspects;
- On the other hand, it also means that Circle must accept more frequent disclosure requirements and stricter asset restrictions, making it more difficult to pursue high-risk, high-return in asset allocation, reinforcing its single logic of "capturing U.S. Treasury interest margins";
- This double-edged sword effect means that the success of USDC on the compliance route naturally comes with concerns about growth limits and restricted business diversification.

● RWA Narrative and USDC's Embedded Position
- Research Brief points out that in the context of the rising narrative of RWA (Real World Assets on-chain), USDC is embedded as settlement and margin assets in various RWA platforms and structured products;
- As U.S. stocks, bonds, ETFs, and other assets are tokenized and traded on-chain, USDC can play multiple roles such as pricing currency, trading margin, and yield settlement medium, amplifying its network effect;
- As the regulatory framework gradually clarifies, USDC's position in the RWA track is expected to further solidify, but it will also engage in more direct business competition with banks, brokerages, and asset management companies.

● Competitive Landscape and Ceiling Constraints
- Competition from other dollar tokens, commercial banks' own on-chain dollar products, and potential CBDCs will compress USDC's marginal growth space in the medium to long term;
- If global interest rates enter a downward cycle in the future and short-term bond yields decline, Circle's interest margin model will transition from a "high-profit period" to a "normal period," and valuation premiums may be compressed;
- This means that USDC's current high-profit phase is both a growth window and a critical moment to seek business diversification and risk hedging in advance.

The Deep Logic of the USDC Model and Industry Insights

The dissection of capital and models surrounding Circle and USDC is not an isolated phenomenon but resonates with the multiple backgrounds of the Federal Reserve's interest rate hike cycle, the institutionalization process of crypto finance, and the rising narrative of RWA. As the crypto market shifts from merely chasing price fluctuations to placing greater emphasis on cash flow and regulatory sustainability, USDC's path of "layering dollar sovereign credit with on-chain liquidity and then applying an interest margin model" provides the entire industry with a replicable yet highly thresholded template. On one hand, it proves that the combination of compliance + asset management + clearing network can successfully close the business loop in the crypto world; on the other hand, it exposes structural risks such as high sensitivity to macro interest rates and high dependence on regulation and the banking system. For observers, the story of USDC serves as both a magnified yield illustration in the current high-interest era and a precursor sample of how the industry evolves under future interest and regulatory cycles.

Bull-Bear Viewpoint Game: Is it a "Risk-Free Money Printer" or a High-Leverage Interest Margin Game?

● Optimistic/Supporters: They believe this is a milestone in the maturation and institutionalization of crypto finance.
- USDC demonstrates a sustainable profit model in a high-interest and heavily regulated environment;
- Circle, with its focus on transparent reserves, audit disclosures, and compliance partnerships, reduces systemic credit risk, helping to enhance the overall credibility of "on-chain dollars";
- In the construction of RWA and global clearing networks, USDC is expected to become the on-chain dollar vehicle that mainstream financial institutions are most willing to cooperate with, thereby gaining long-term stable cash flow and valuation premiums.

● Pessimistic/Opponents: They are concerned that it is essentially a high-leverage bet on a single macro and regulatory environment.
- Over-reliance on short-term U.S. Treasury interest margins makes its profit model highly sensitive to the Federal Reserve's interest rate cycle; once it enters a rate-cutting phase, maintaining current profit margins will be difficult;
- The deep binding to regulation, banking cooperation, and the U.S. dollar clearing system poses a structural risk of being "choked" under extreme geopolitical or regulatory events;
- As more commercial banks, financial institutions, and potential sovereign digital currencies enter the market, USDC's relative advantages may be eroded, making it challenging to sustain the current high growth and high valuation phase in the long term.

Outlook: The Next Phase of Crypto Dollars After USDC

In the short term, the market will continue to focus on the Federal Reserve's interest rate path, the progress of RWA implementation, and the final tuning of regulatory details in Europe and the U.S. During this window period, USDC and Circle remain in the peak prosperity phase of their business model: enjoying the substantial interest margins brought by high rates while continuously solidifying the narrative of their "crypto dollar foundation" amid the waves of compliance and institutionalization. In the medium to long term, whether USDC can break free from its dependence on a single interest rate and regulatory environment to build a more diversified income structure and risk hedging mechanism will determine whether it remains a "temporary winner in the high-interest era" or truly grows into a global clearing infrastructure that spans multiple currency and regulatory cycles. For the entire industry, the sample value of USDC lies in its clear demonstration that a cash flow and valuation model can be established around "on-chain dollars" that can withstand scrutiny from Wall Street—what remains is to let time and macro cycles test it.

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