DeFi’s First Stablecoin Auction Challenges Circle’s Dominance

Hyperliquid, a decentralized exchange and Layer-1 chain, is set to finalize its USDH stablecoin initiative, a move that could redefine how protocols negotiate with stablecoin issuers. The project aims to reduce its dependence on external stablecoins like USDC, which currently dominates its trading volume and has contributed to nearly $5 billion in deposits enriching Circle’s revenue. With the USDH stablecoin under development, Hyperliquid is launching a public on-chain auction to determine the issuer, a process that reflects governance practices typically reserved for traditional finance [1].

Hyperliquid’s USDH is designed to redirect the yield from these deposits back into the community. The auction process requires bidders to disclose how much of the interest they will share, their compliance strategies, and the infrastructure they bring to the table. Validators, who stake HYPE tokens to secure the network, will cast binding votes to decide the issuer [1]. This approach emphasizes transparency and competition, as issuers are treated like bidders in a procurement process, with the outcome determining how billions in yield are redistributed [1].

Three leading proposals have emerged, each offering a distinct value proposition. Paxos, a New York-based fintech with a strong compliance record, has committed to allocating 95% of the interest earned on USDH’s reserves toward HYPE buybacks. It plans to back USDH with US Treasury Bills, repurchase agreements, and its Global Dollar stablecoin [3]. Frax Finance, a DeFi native, has proposed a 100% yield-sharing model, allowing Hyperliquid users to directly benefit from the interest generated by USDH’s reserves. Agora, backed by institutional players like State Street and VanEck, promises to redirect 100% of net revenue from USDH’s reserves to HYPE buybacks and assistance funds [3]. These proposals highlight the diverse strategies emerging from the auction and signal a broader shift toward community-centric governance in DeFi [1].

The potential implications for Circle, whose USDC is the primary stablecoin used on Hyperliquid, are significant. USDC generates nearly all of Circle’s revenue through interest earned on its reserves, with over 99% of its $1.68 billion in 2024 revenue coming from short-term treasuries and money-market funds. If Hyperliquid’s USDH captures a substantial share of the $5 billion in deposits, Circle could face a sudden loss of $150–200 million annually, or about 10% of its business [1]. The risk is compounded by delays in Circle’s efforts to launch native USDC and its cross-chain transfer protocol (CCTP) on Hyperliquid, which have given USDH an opportunity to gain traction [1].

Beyond the financial implications, the USDH auction represents a broader governance experiment. Hyperliquid is testing the feasibility of decentralized protocols managing their capital independently, forcing vendors to compete in the open on yield, compliance, liquidity, and governance [1]. This model challenges the traditional reliance on closed-door deals and allows decentralized communities to decide who manages their reserves. For DeFi, the USDH process is arguably more significant than the outcome, as it sets a precedent for how protocols can engage with external partners while preserving user control and transparency [1].

Validators are set to vote on September 14, with the Hyperliquid Foundation abstaining from the decision [5]. The winner will not only gain the right to issue USDH but also influence how the stablecoin’s yield is distributed. The outcome will shape Hyperliquid’s future as it seeks to establish a self-sustaining, community-driven financial ecosystem [1]. With USDH positioned to compete directly with USDC and USDT, the project could redefine the role of stablecoins in DeFi and set a new standard for governance and economic alignment within the crypto industry [1].

Source: [1] Circle's Revenue At Risk As Hyperliquid Opens Auction For ... (https://www.forbes.com/sites/tomerniv/2025/09/08/circles-revenue-at-risk-as-hyperliquid-opens-auction-for-usdh/) [2] Hyperliquid Price: HYPE Live Price Chart, Market Cap & ... (https://www.coingecko.com/en/coins/hyperliquid) [3] Meet the bidders vying to build Hyperliquid's USDH stablecoin (https://www.dlnews.com/articles/defi/paxos-frax-agora-and-native-markets-compete-to-build-usdh-stablecoin/) [4] Sky Pitches Genius-Compliant USDH Stablecoin With $8B ... (https://www.coindesk.com/markets/2025/09/09/sky-pitches-genius-compliant-usdh-stablecoin-with-usd8b-balance-sheet-and-4-85-yield) [5] Hyperliquid Validators to Decide USDH Ticker in First ... (https://finance.yahoo.com/news/hyperliquid-validators-decide-usdh-ticker-052845788.html)