# Stablecoins: The Infrastructure Backbone of Digital Asset Markets

Stablecoins have become a key infrastructure component in the digital asset market. However, profitability, liquidity, and growth potential vary significantly across different projects. Steakhouse Financial has conducted an analysis of the financial structures of major stablecoins such as USDT (Tether), USDC (USD Coin), and USDS, detailing the distinct business models and their corresponding risks and returns.

# Stablecoin Liquidity Models

USDC operates on a full-reserve model prioritizing liquidity, while USDT and USDS use partial-reserve models, investing in lower-liquidity, high-yield assets to maximize profitability. Each model targets different user demands and market functionalities.

# Categorization of Stablecoin Models

Steakhouse Financial categorizes stablecoins based on their reserve structures into three groups:

– **Full-reserve (USDC):** Comprised solely of highly liquid assets like bank deposits and short-term government securities, ensuring high liquidity but lower profitability.
– **Partial-reserve (USDT, USDS):** Invests a portion of reserves in high-yielding assets such as commercial paper, collateralized loans, and commodities to enhance profitability.
– **Non-reserve:** Issued without external asset backing, such as algorithm-based stablecoins.

# Profitability Through ROE

The sustainability of stablecoins can be gauged by return on equity (ROE). Full-reserve models like USDC often require non-interest revenue sources to remain viable, such as API services, transaction fees, and credit products. Circle, for instance, is expanding its business in this direction with initiatives like the USDCkit SDK-based payment solution.

Conversely, Tether and Sky opt for higher profitability by sacrificing some liquidity to invest in high-yield assets. Tether recorded a 7% return in 2024, which would have been difficult to achieve with short-term government bonds and reserves alone. A significant portion of their profit stems from unrealized gains on commodities, particularly gold and Bitcoin.

Sky operates on an on-chain model where users provide collateral to borrow and issue stablecoins. By using collateral like wstETH, they issue USDS, which is then re-loaned or invested, driving demand.

# Liquidity and Risk Management Strategies

Post-2022, Tether has adjusted the balance between liquidity and profitability by reducing bank deposits. However, a lack of transparency regarding non-bank asset composition is a concern for investor confidence.

Sky uses on-chain data to predict user attrition and adjusts its asset maturity structure accordingly, paralleling traditional finance’s margin-lending models.

Circle maintains safer asset profiles centered around government securities, sacrificing some profitability for security. They employ a partner-centric platform model which, while lowering direct ROE, ensures broader scalability and network growth.

# Valuation Challenges

Stablecoins are still emerging as a distinct asset class in capital markets, with few public companies and varying accounting standards making valuation difficult. Various methods—such as price-to-assets, price-to-operating income, and price-to-equity—are being explored, but unique structures of stablecoins complicate direct comparisons.

Tether, for example, reports unrealized gains as non-interest income, unlike Circle and Sky, leading to significant variances in profitability metrics.

# The Future of Stablecoins

Analysis of ROE indicates that different projects are targeting unique markets and demands:

– **USDC:** Accepts lower yields in exchange for platform-based expansion.
– **USDT:** Maintains market dominance through high-risk, high-reward assets.
– **USDS:** Pursues high capital efficiency through user-centric on-chain design.

Steakhouse Financial concludes that the value of stablecoins extends beyond merely maintaining a peg; it is equally dependent on structural profitability and adept liquidity management. The market is likely to further specialize into segments such as payments, investments, and DeFi liquidity provision. Clear identification of roles and risk tolerances is essential for the long-term sustainability of each project.