Is Circle’s USDC $5 Billion IPO a Game-Changer or Just Hype for DeFi?

Circle, the powerhouse behind USDC, is on the brink of a monumental $5 billion IPO. This development has sent ripples through the crypto community, igniting debates about its potential impact on the valuation of DeFi projects. Let’s dive into a recent Twitter thread to uncover what this IPO means for the future of decentralized finance.

1. Circle's Business Model: Circle's primary business involves offering USDC for use on the blockchain while generating yield from cash collateral in traditional finance (tradfi). Essentially, clients like Coinbase provide Circle with cash, and in return, receive USDC. Circle then invests most of this cash in U.S. Treasury bills.

2. USDC Issuance and Management: As of the latest report in June 2024, Circle has issued 33 billion USDC and manages slightly more in client deposits. They have invested $30 billion in U.S. Treasury notes and keep about $4 billion in cash on hand.

3. Revenue Generation: With treasury bills yielding approximately 5.35%, Circle's annualized revenues from USDC are projected at $1.77 billion. Including other smaller business lines like payments and investments, Circle's annual revenue should be close to $2 billion.

4. IPO Valuation Multiple: If Circle IPOs at $5 billion, it implies a 2.5x revenue multiple. This is slightly higher than what traditional financial companies like PayPal ($PYPL) and Square ($SQ) trade at (2x) but much lower than Coinbase's (COIN) 15x multiple.

5. Understanding the Low Multiple: To those familiar with crypto, a 2.5x multiple might seem low. However, it's crucial to remember that traditional finance is pricing this. The decrease in USDC supply by 40% since 2021, contrasted with Tether's (USDT) 40% growth, likely contributes to the lower valuation.

6. Strategic Decisions: Despite the low multiple, Circle might proceed with the IPO. The company has been in operation for 13 years, and there could be internal pressure for liquidity. Additionally, Circle may need more cash for product expansion or mergers and acquisitions.

7. Tradfi's Perspective on CeFi: The key takeaway is that traditional finance won't assign special premiums to crypto companies just because they're in the crypto space. Circle's valuation will reflect that of a mature financial services company.

8. Estimating DeFi Valuations: Using Circle's IPO as a benchmark, we can estimate how traditional finance might value DeFi projects like Maker. Maker operates similarly to Circle but as a pure software play. Software companies typically trade at higher multiples (2-4x) than non-software companies.

9. Maker's Valuation: Applying a 5-10x multiple to Maker yields a fully diluted valuation (FDV) of $1.4-$2.8 billion, aligning with Maker's current trading value of $2.75 billion FDV.

10. Broader Implications: While predicting non-stablecoin DeFi multiples based on Circle's IPO is challenging, this scenario offers valuable insights into how late-stage dynamics in the crypto industry are evolving.

Additional Considerations:

• Revenue Share Agreements: Circle has revenue share agreements that reduce overall revenue, meaning the $2 billion figure is not entirely accurate.
• Interest Rate Dependence: Circle's revenue heavily depends on interest rates, which are predicted to drop, potentially lowering yields from their $30 billion in notes.

Conclusion

Circle's potential IPO is a significant milestone, not just for the company but for the entire DeFi ecosystem. It underscores how traditional finance values crypto projects and provides a framework for understanding future valuations. As the DeFi landscape continues to evolve, these insights will be crucial for investors and developers alike.