Scenario Analysis of Circle and the DeFi Liquidity Impact of KelpDAO

Author: Tanay Ved, Senior Researcher at CoinMetrics; Translation: Shaw Jinse Caijing

Key Points

• Circle’s revenue of nearly $2.7 billion in fiscal year 2025 is almost entirely derived from USDC reserve interest, making interest rate trends, USDC supply growth, and the contract renewal with Coinbase in August 2026 the core variables for its profit outlook.

• USDC is shifting from simple holding to more use cases: adjusted transfer volume in 2025 grew by about 320% year-over-year; Circle’s payment network, CCTP, and subscription services are beginning to scale, forming a new layer of fee income based on reserve yields.

• KelpDAO’s rsETH cross-chain bridge was attacked for approximately $290 million, triggering widespread DeFi liquidity shocks — uncollateralized rsETH was used to lend WETH on Aave, draining liquidity and causing broad “bank runs” in affected DeFi markets.

Introduction

Circle (CRCL) has been listed on the NYSE for nearly a year. Its stock price soared from the IPO price of $31 on June 5 to over $280, with the stablecoin issuer’s market cap reaching a peak of about $70 billion.

Since then, the stock has pulled back from its high, currently trading around $103, with a market cap of approximately $26 billion. As the hype around the listing subsides, market focus has shifted more toward Circle’s fundamental business model and whether it should be viewed as a reserve-yield enterprise or a broader payments and infrastructure platform.

In this article, building on previous analyses of Circle’s IPO and USDC economic model, we further dissect the core drivers affecting its fundamentals. We will evaluate Circle’s sensitivity to interest rates, the evolution of its partnership model with Coinbase, potential revenue restrictions under the CLARITY Act, and its ability to expand beyond reserve yields into other fee and subscription income.

Circle’s Business Model and 2025 Financial Data

Circle’s current business model is primarily driven by four factors:

• USDC circulating supply

• Actual yield on USDC reserve assets

• Circle’s share of reserve income (after distributing to partners like Coinbase)

• Subscription, service, and other fee income

In fiscal year 2025, Circle’s total revenue and reserve income reached about $2.7 billion, up 64% year-over-year. This growth was supported by a year-end USDC market cap of $290M, maintaining a stablecoin market share of around 28%, with trading volume increasing by 320%, indicating improved capital turnover efficiency.

Source: Coin Metrics Network Data Pro

Reserve income linked to USDC balances and interest rates remains its core revenue source (about $2.64 billion, 96%); while subscription, service, and other fee income, though smaller in absolute terms, has begun to contribute more noticeably to total revenue ($110 million).

In Q4 last year, distribution, trading, and other costs totaled $461 million, mainly paid to partners in USDC distribution and usage. After deducting these costs, revenue minus distribution costs (RLDC) was $1.08 billion, with an RLDC profit margin of 39%. This metric directly reflects Circle’s actual retained earnings from USDC business before operational expenses.

Source: Circle Q4 2025 Quarterly Report

Therefore, in the short term, the company’s financial performance is mainly driven by USDC circulation, reserve yields, and revenue sharing mechanisms (especially with Coinbase). In the following sections, we will model how changes in these drivers could impact Circle’s financial health and revenue structure.

Scenario Analysis for Circle

Interest Rate Sensitivity

Since about 96% of FY2025 revenue comes from reserve yields, Circle’s profitability is directly tied to short-term interest rates on USDC reserve assets. According to Circle’s guidance estimates, a 100 basis point decrease in interest rates would reduce annual revenue by approximately 25%–30%, indicating a high correlation between interest rates and company revenue.

Based on Federal Reserve expectations and futures market pricing, the federal funds rate is likely to be in the 3%–3.75% range in 2026–2027. The key question is: To what extent can USDC’s growth offset the drag from declining yields?

To illustrate this relationship, we built a simple scenario matrix. Each cell estimates annual reserve income based on different effective reserve yields and USDC circulation levels, with the baseline set at FY2025: yield 4.1%, average circulation about $65 billion, and revenue around $2.7 billion.

Circle Reserve Income Matrix:

[Insert matrix image or table here]

Source: Coin Metrics Network Data Pro

In the high-interest-rate range (around 4%–4.5%), reserve income is expected to continue growing beyond FY2025; if USDC circulation reaches $900–$75.3B, reserve income could easily surpass $4 billion. At levels around 3%–3.5%—aligned with Fed forecasts and futures pricing for 2026–2027—moderate USDC growth from the current ~$75 billion could keep reserve income roughly flat or slightly higher than FY2025.

In deeper rate-cut scenarios, if actual yields approach 2.5%, even strong USDC growth can only partially offset the impact of declining rates. Under similar supply levels, reserve income might ultimately be 30%–50% lower than in a “high-rate persistence” scenario.

Coinbase Revenue Sharing and Distribution Channels

Circle’s profit model is also heavily influenced by partnership agreements, especially with Coinbase. Under current terms, Coinbase receives all interest on USDC held on its platform, plus 50% of interest on USDC held in other scenarios, as compensation for driving USDC distribution and demand growth through its products and user base.

Source: Coinbase Q4 2025 Shareholder Letter

In FY2025, despite Circle reporting reserve income of $2.63 billion, about $1.35 billion (51%) of this flows to Coinbase based on the revenue sharing structure. After deducting distribution costs (RLDC), Circle’s net was $1.08 billion, with a profit margin of 39%. This partnership is both strategically and economically valuable: Coinbase is one of the largest demand and distribution channels for USDC, and also the main beneficiary of reserve income.

This revenue sharing agreement will expire and be renewed in August 2026. Even small changes in Circle’s share of reserve income, combined with interest rate and supply scenarios, could amplify effects on profitability. Using FY2025 as a baseline, we summarize the potential impacts of different distribution outcomes:

[Insert table or chart here]

In scenarios where profitability improves, renewal terms and diversified distribution channels could lower costs and increase Circle’s share and RLDC margins. The FY2025 actuals show that for every dollar of reserve income, Circle retains about $0.37, still relying on high interest rates and a USDC stock of around $75 billion. Conversely, a deterioration scenario involves Coinbase and partners capturing a larger share of reserve income, reducing RLDC margins and making Circle more vulnerable to declining yields and sluggish USDC growth.

Other Revenue Sources and Potential Risks

Beyond reserve yields and distribution costs, several emerging factors could shape Circle’s long-term revenue and competitive position. Other income (including subscription and service fees, trading revenue, validator node earnings) grew from just $15 million in FY2024 to $110 million in FY2025, with guidance of $150–$170 million for FY2026. Although this accounts for only about 4% of total revenue now, its growth trajectory is critical for how the market ultimately values Circle. Key factors include:

• CLARITY Act Revenue Restrictions: A draft clause in the CLARITY Act would prohibit stablecoin issuers from paying yields directly to holders, allowing only “activity-based rewards.” For Circle, this is a subtle risk—since USDC yields are not paid directly to holders, this clause might not directly harm its business model and could help preserve interest income. Indirectly, it could limit Coinbase’s ability to attract USDC supply via yield-sharing programs, potentially altering asset structures on and off its platform and affecting Circle’s distribution costs and overall demand for USDC.

• Circle Payment Network (CPN) and Cross-Chain Transfer Protocol (CCTP): Launched in May 2025, CPN has reached an annualized TPV of $5.7 billion as of February 2026, with 55 institutions onboarded across 14 markets, and over 500 more in the pipeline. CCTP, which handled $41.3 billion in Q4 2025 alone, now accounts for 62% of USDC cross-chain transfers. Both are in early stages but demonstrate that USDC’s velocity is outpacing supply growth, with Circle building a fee income layer on top of reserve yields.

• Arc (L1 Settlement Blockchain): Arc is a blockchain optimized for stablecoins, planned to launch mainnet in 2026 with USDC as the native gas token. Commercialization is still early, but if it gains adoption in cross-border payments, smart contract business, or asset tokenization, it could shift Circle’s valuation from interest-sensitive to a platform with entirely new valuation logic.

For market participants, key variables include: USDC growth rate, the profitability terms of the August 2026 Coinbase renewal, and the speed of scaling “other income” via CPN, CCTP, and Arc. With an estimated valuation of around $25–$30 billion and trailing revenue of about $2.7 billion, the market prices Circle as a rate-sensitive infrastructure platform and one of the few liquidity assets capable of long-term stablecoin growth, with valuation trends closely tied to confidence in these core drivers.

KelpDAO Attack and DeFi Liquidity Shock

This week, we witnessed the largest hack event in 2026, with contagion spreading across the entire decentralized finance (DeFi) sector. On April 18, an attacker exploited a configuration vulnerability in KelpDAO’s rsETH cross-chain bridge, targeting the LayerZero DVN module relying on a single validator, stealing about 116,500 rsETH (worth roughly $90B, representing 18% of total supply).

rsETH is a liquid staking derivative token representing claims on staked ETH. The attacker was able to mint “fake” rsETH without collateral at one end of the cross-chain bridge, then used the stolen rsETH as collateral to borrow WETH on lending platforms (mainly Aave).

This caused WETH liquidity on Aave v3 to be drained, with utilization reaching 100%, leaving no liquidity for instant withdrawals. Due to bad debt risk, the liquidity shock rapidly escalated into a broad liquidity run: USDC and USDT utilization surged, with over $9 billion withdrawn from Aave deposits.

Source: Coin Metrics Network Data Pro

This incident vividly illustrates how interconnected DeFi can be both an advantage and a risk. A single validator breach in a cross-chain architecture can propagate risk through the bridge, affecting re-staking tokens, lending markets, and other protocols, ultimately causing chain-wide liquidity exhaustion far beyond the initial attack.

It also highlights that derivatives like rsETH as collateral can layer risks: they combine Ethereum staking, re-staking protocol risks, cross-chain infrastructure risks, and lending market risks. As discussed in our previous issue on liquidity pools, in such an environment, collateral selection, management, and risk control in lending markets become critical, because misconfigured assets can threaten the entire ecosystem.