DeFi's Power Shift: Hyperliquid Auctions Control Over $5B in Stablecoin Reserves

Hyperliquid, the leading decentralized perpetuals exchange with a dominant 75% market share in DeFi trading, is shifting strategy with the planned launch of USDH, a proposed dollar-pegged stablecoin designed to replace its reliance on Circle’s USDC and reallocate yield back to its ecosystem. Hyperliquid currently holds $5.5 billion in USDC deposits—approximately 7.5% of USDC’s circulating supply—making it one of Circle’s largest institutional clients. The platform’s USDH initiative, which involves a public on-chain auction for the stablecoin issuer, aims to redirect nearly $5 billion in deposits to Hyperliquid’s community by sharing yield from the reserves. The auction, set to conclude with a validator vote on September 14, has attracted proposals from Paxos, Frax Finance, Agora, and a new team called Native Markets. Each bidder outlines compliance strategies, yield-sharing models, and infrastructure support, with the winning entity gaining the right to issue USDH.

The auction is part of a broader strategic shift toward decentralization and governance in DeFi, where protocols increasingly seek to control their financial infrastructure rather than relying on external stablecoin issuers. Hyperliquid’s approach mirrors traditional finance’s competitive procurement processes, forcing bidders to compete on transparency, compliance, and value-sharing. For instance, Paxos proposed a 95% yield share to HYPE token buybacks, while Frax offered a 100% yield share to Hyperliquid users without retaining any revenue. Agora, backed by $50 million in institutional funding, pledged 100% of net revenue to HYPE buybacks or the Assistance Fund. The proposals highlight varying degrees of institutional credibility and decentralized ethos, with each offering different advantages in terms of liquidity, compliance, and integration.

Circle, which derives more than 99% of its $1.68 billion 2024 revenue from interest on USDC reserves, faces a potential annual loss of $150–200 million if Hyperliquid transitions to USDH. The shift would represent a significant erosion of Circle’s stablecoin dominance, particularly in DeFi, where USDC is the primary liquidity vehicle. While Circle has sought to mitigate this risk by deploying native USDC and its cross-chain transfer protocol (CCTP) on Hyperliquid, delays in implementation allowed USDH to gain traction. The company’s CEO, Jeremy Allaire, has responded by reaffirming Circle’s commitment to the HyperEVM ecosystem, but analysts remain skeptical about the sustainability of USDC’s dominance without a more competitive yield-sharing model.

Hyperliquid’s move is also emblematic of a broader trend in DeFi governance, where protocols are increasingly taking control of their financial infrastructure. Unlike traditional models that rely on token votes for minor fee adjustments, Hyperliquid’s auction process allows its community to directly influence the management of billions in assets. This model could serve as a blueprint for other protocols seeking to negotiate with stablecoin issuers, asset managers, and infrastructure providers on more equitable terms.

The USDH initiative has also drawn attention from other market players. For example, Stripe, which recently launched its own blockchain called Tempo, may compete for a stake in Hyperliquid’s ecosystem through its infrastructure provider Bridge. Additionally, Ethena Labs—the issuer of the third-largest stablecoin—hinted at submitting a proposal. These developments underscore the growing institutional interest in stablecoin issuance and the potential for USDH to become a key asset in the evolving DeFi landscape.

Source:

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