Woofun AI reports that the paradox of USDC’s expansion versus Circle’s profitability has intensified, as a 72% surge in stablecoin supply masks significant margin erosion driven by Coinbase distribution dependencies.

The financial strain is evident in Circle’s 2025 performance, where distribution costs linked to Coinbase reached $1.4 billion, a sharp increase from $924.5 million the previous year, according to the company’s 10-K filing. These distribution expenses accounted for 51% of total 2025 revenue and reserve income, while combined distribution and transaction costs consumed 63% of fourth-quarter reserve income. This data highlights a critical vulnerability: as alternative stablecoin models and trading venues seek a larger share of reserve income, the pressure on Circle’s bottom line extends beyond its primary partnership.

The structural root of this cost burden lies in the collaboration agreement Circle and Coinbase entered in August 2023. The contract carries an initial three-year term concluding in August 2026, with provisions requiring both parties to discuss potential modifications in good faith before expiration. If no changes are agreed upon, the arrangement automatically renews for another three years, provided both entities continue meeting their obligations. This automatic renewal mechanism limits Circle’s ability to renegotiate terms favorably, locking in high distribution costs despite shifting market dynamics.

Decentralized competitors are exploiting this inefficiency, with Hyperliquid and Native Markets capturing value through alternative reserve income mechanisms. Although USDH, Native Markets’ native stablecoin for Hyperliquid, failed to displace USDC’s liquidity advantage, the economic model remains potent. Assuming the entire $6.16 billion stablecoin base qualifies as aligned supply earning a 3.5% reserve yield, it would generate approximately $215.6 million in annual gross reserve income. Applying a 90% retention rate yields roughly $194 million, though actual figures vary due to framework cost adjustments. This demonstrates how platforms can extract significant value without displacing USDC’s dominance.

Strategic leverage is shifting as platforms use tools like Open USD to negotiate better terms with Circle. A platform can cite Open USD’s revenue-sharing model as a bargaining chip, maintaining USDC on its rails while demanding a larger economic share. Hyperliquid has adopted a similar approach, preserving USDC’s liquidity leadership while securing greater profits from on-platform activity. Circle’s own sensitivity analysis underscores this vulnerability: holding USDC circulation and reserve allocation constant, a 100-basis-point rate increase would add $756 million to reserve income but also $369 million to distribution and transaction costs.

After these expenses, Circle retains only $387 million, or 51%, of the incremental income. These scenarios apply a 90% share to gross reserve income for illustration, with AQAv2 payments calculated based on cost-adjusted yield, meaning actual amounts differ. Per Woofun AI, this data confirms that each additional dollar of circulation becomes less valuable to the issuer as platforms capture more profit.

The era of issuer-dominated profit is ending, as Circle’s 2025 numbers reveal that supply growth no longer guarantees financial gain. Instead, platforms holding users now dictate how much of the profit behind that supply belongs to Circle, marking a definitive shift in stablecoin economics.