Insights and personal views from BonnaZhu of Nothing Research Partner; the following content does not constitute any investment advice.

The latest news is that Circle has raised its valuation to $7.2 billion, selling 32 million shares, priced at $27-28 each. With an annual income of $1.676 billion and a net profit of $155 million, this corresponds to a static P/E of 46 times. Considering that Circle's stablecoin expansion in Q1 2025 is particularly rapid and growth expectations are good, this pricing does not seem outrageous and continues to attract various funds.

However, if you read the prospectus carefully and see that Circle has to pay Coinbase 907.9 million yuan annually, accounting for more than 50% of Circle's revenue, you will most likely frown and lament its difficult position in the middle.

1) The birth of USDC: a strong alliance

Many people only know this part as channel costs, but in fact, it is a profit-sharing agreement! When USDC was launched in 2018, this business was actually split equally between Circle and Coinbase. At that time, the entity behind USDC was a non-profit alliance called Centre Consortium. For USDC, Circle and Coinbase are co-issuers, making joint decisions, sharing reserve asset income, and jointly maintaining the issuance standards of USDC.

2) Internal directional differences

As the scale of USDC expanded, Circle wanted to make USDC a global payment and financial infrastructure, preferring to invest more in on-chain governance and enterprise-level expansion, while Coinbase has always leaned more towards trading and market-making. The two companies have subtle differences in their routes.

3) Circle repurchases Coinbase's shares

In 2023, Circle aimed to regain decision-making control over USDC in the entire ecosystem, leading to its repurchase of the 50% stake held by Coinbase in Centre. The transaction price was 209 million yuan, paid in Circle's shares. As a result, Coinbase received 8.4 million shares (which is less than 4% of Circle's company after the IPO) at 24 yuan per share. Since then, Circle has completely controlled USDC, while Coinbase has transitioned from a co-issuer/co-founder to a distribution channel.

4) The profit-sharing agreement that allows Coinbase to earn easily

However, if you see that the IPO price and Coinbase's initial investment price are not much different and think Coinbase did not earn much from Circle, you would be very mistaken. After the repurchase, to incentivize Coinbase to continue supporting USDC, Circle retained Coinbase's profit-sharing privileges and refined the details:

The interest income generated from USDC reserves must first be used to pay for Circle's necessary third-party expenses related to custody, compliance, auditing, etc. After deducting a small portion (a few basis points, very small) as the 'issuer's retained share' to cover Circle's investment in maintaining USDC, the remaining reserve income will be allocated as follows:

- on-platform part

Distribution is based on the amount of USDC held by Circle and Coinbase on their respective platforms (calculated based on daily snapshots), relative to the total circulating supply of USDC. According to financial report data, in recent years, the proportion of USDC balances on the Coinbase platform has been increasing, from 5% in 2022 to 20% in 2024. This is mainly due to the rapid development of Coinbase's custody business and the growing number of institutional holdings, and this trend is expected to continue in the future.

- off-platform part

For the off-platform portion outside of Circle and Coinbase, most of it consists of USDC floating on-chain and across various DeFi protocols. Regardless of the scale, both Coinbase and Circle each take 50% of the profits. Overall, since most of USDC's circulating supply comes from here, Coinbase actually receives significant benefits from USDC.

5) Coinbase unliquidated, Binance comes again

In November 2024, Circle also reached a similar agreement with Binance. Although Binance cannot receive the 50% off-platform share like Coinbase, its earnings are also very attractive: first, it received a one-time upfront cooperation fee of $60.25 million, and subsequently, it can earn a certain proportion of interest income generated from the amount of USDC held on the Binance platform, calculated quarterly at a certain discount based on the three-month overnight repurchase rate, with an annualized fee rate in the mid to high double-digit range.

Although the prospectus does not disclose specific ratios, it can generally be understood that a significant portion of the interest goes to Binance. The impact of this will only be reflected in the financial reports of 2025. Do not underestimate Binance's siphoning ability for liquidity; the incentives that Binance receives are also in the hundreds of millions.

6) So is Circle a good target?

It is undeniable that Circle is indeed a relatively rare and pure stablecoin target in the stock market, and the overall growth expectations for the stablecoin market are also quite good.

However, with the medium to long-term trend of interest rate cuts and the need to make dual 'tribute' payments to Coinbase and Binance, profit margins are being suppressed. Only half of a dollar's interest can go into the pocket, and with various traditional institutions newly issuing stablecoins (although I do not believe this will have a significant impact on USDC, as Circle's circulation/channel/scale momentum is already irreversible), Circle's business development clearly feels like a case of doubling the effort for half the result, making it less smooth.

In contrast, Coinbase is making easy profits. In 2024, the share Circle pays to Coinbase is 909 million yuan, which actually accounts for 13.8% of Coinbase's revenue of 6.564 billion yuan. Considering that this part of the business does not have much marginal investment cost, this income's value at the net profit level (Coinbase's profit in 2024 is 2.58 billion yuan) far exceeds the intuitive impression of its proportion to revenue.

For Coinbase, this is 'easy profit': without needing to invest much manpower or resources, it can take away a large amount of income that is almost equivalent to pure profit.