Circle Treasury

Kamal531

Stablecoin design has an advantage in supply transparency, which can be audited in real-time (at least in terms of blockchain data). However, when considering Circle's financial statements and monthly attestation reports, we can begin to construct a model of Circle's USDC Treasury and its operation, especially its profitability.

Looking at BlackRock's Circle Reserve Fund, it breaks down the portfolio by investment assets' maturity dates, with all assets maturing within 2 months and 65% maturing between 1-7 days. This estimate is based on a constant ratio composition of overnight repurchase agreements and 4-week commercial paper, with allocations of 70% and 30%, respectively.

The estimated size of the portfolio aligns closely with the current supply of USDC, which may not fully represent Circle's Treasury operations, especially redemption operations, but it should be proportional and consistent. However, this should be considered a naive estimate of the expected daily returns of these investments as it ignores transaction costs, roll costs, and management fees associated with managing this portfolio.

Using FRED's data, we can estimate the yield these securities would generate, using the effective federal funds rate to estimate the yield on overnight repurchase investments and the 4-week Treasury bill rate to estimate the yield on the remaining portion of these assets, 70% and 30%, respectively.


As shown in the chart above, daily returns are highly correlated with interest rates. Despite the peak in USDC supply in early 2022, estimated daily income actually peaked in early 2023—after a decrease in supply by nearly $7 billion. Even today, with the supply $18 billion lower than earlier this year, interest income remains significantly higher than in 2021 when the USDC supply was comparable. This well illustrates the business model of fiat-backed stablecoins, showing an increasing sensitivity to interest rates as a determining factor in driving profitability.



Using quarterly data from the chart above, we can compare this data with the reserve interest income disclosed in Circle's financial statements. We can see that their reported interest income for Q3 2022 is $274 million, similar to our estimated $240 million—however, when considering all the data for the current year and redemptions, this simple model seems to fall short. Financial reports beyond 2022 have not been publicly disclosed, hindering the validation of our model. Nevertheless, it's worth noting that Circle reportedly claims that its revenue for the first half of this year alone is higher than the entire previous year, at $779 million compared to $772 million.

Even with the excitement around PayPal's stablecoin news, the structural factors driving stablecoin adoption are changing as interest rates rise. The increasing opportunity cost of holding cash may drive stablecoin users to shift towards yield-bearing investments like money market funds, which offer over 5% real returns compared to less than 2% annualized returns in recent years. Additionally, interest-bearing stablecoins are gaining adoption, such as sDAI and sFRAX, with Coinbase also offering a 5% yield on USDC.

977Iti

Whether the supply is transparent or not, does it have any practical significance?

Jatin255

The treasury is also worth our understanding.

Kahn332

This is something we should look into as well.