DeFi’s High-Stakes Stablecoin Auction Rivals Traditional Models

Hyperliquid, a dominant player in the decentralized perpetual futures market, has initiated a competitive bidding process to select a stablecoin issuer for its native stablecoin, USDH. The project has attracted significant attention from major industry players, including Paxos, Frax Finance, and a coalition led by LayerZero. The winning issuer will gain control over a liquidity base of approximately $5.5 billion, with potential annual yield revenue estimated at $220 million. This high-stakes competition reflects Hyperliquid’s broader strategy to capture value within its ecosystem and reduce reliance on external stablecoins like USDC.

Paxos, a regulated financial technology firm, has positioned itself as a leading contender by leveraging its institutional relationships and regulatory expertise. Its proposal includes a 95% allocation of interest from USDH reserves toward HYPE token buybacks, a move designed to align the interests of the Hyperliquid community. Additionally, Paxos has integrated its proposal with PayPal’s ecosystem, offering $20 million in incentives and free on/off ramps. The firm also announced that it will take no revenue from USDH until the stablecoin reaches $1 billion in TVL, with a maximum cap of 5% once TVL exceeds $5 billion. This approach has drawn praise for its transparency and potential to accelerate global adoption.

Frax Finance, on the other hand, has emphasized decentralization and community benefits in its proposal. The DeFi protocol plans to back USDH on a 1:1 basis with its frxUSD stablecoin, which is collateralized by U.S. Treasuries through institutional partners. Unlike other bidders, Frax has committed to passing 100% of the Treasury yield directly to Hyperliquid users, with no fees retained. The model prioritizes yield-sharing and transparency, making it an attractive option for validators and users who value decentralized governance.

A third major contender, a coalition of LayerZero, Agora, and Rain, has proposed a neutral and interoperable solution. The coalition aims to ensure seamless cross-chain operations and reduce bridge-related risks. It plans to return 100% of net revenue from USDH reserves to the Hyperliquid Assistance Fund or HYPE buybacks. Although the term “net” may include deductions for custodial fees, the coalition’s emphasis on neutrality and ecosystem alignment has resonated with validators seeking a balanced approach.

The Hyperliquid Foundation has ensured the selection process remains transparent and stakeholder-driven. Starting on September 11 and concluding on September 14, a stake-weighted validator vote will determine the winner. This mechanism allows the Hyperliquid community to influence the decision, with validators encouraged to align their voting power with their preferred candidate. The outcome will shape not only the future of USDH but also broader governance practices in DeFi.

The competitive bidding process has already influenced market dynamics. The intense competition among bidders has driven up the price of HYPE as contenders offer increasingly generous revenue-sharing proposals to secure validator support. Moreover, the process challenges traditional stablecoin models by reframing issuance as a service rather than a product, compelling issuers to align with the host ecosystem.