Hyperliquid's USDH Stablecoin: A Strategic Threat to Circle's Revenue Model

In the rapidly evolving stablecoin landscape, Hyperliquid's proposed USDH stablecoin represents a paradigm shift that could destabilize traditional centralized models like Circle's USDC. By leveraging a decentralized, on-chain auction mechanism to determine USDH's issuer, Hyperliquid is not only redefining yield distribution but also challenging the economic foundations of legacy stablecoin platforms. This analysis explores how USDH's governance-driven model could erode USDC's dominance, force Circle to adapt, and potentially cost it 10%+ of its revenue stream.

The USDH Auction Model: Decentralization Meets Yield Optimization

Hyperliquid's USDH initiative is a direct response to its reliance on USDC, which accounts for 95% of its on-chain USD liquidity Circle's Revenue At Risk As Hyperliquid Opens Auction For USDH^[1]. Instead of relying on a single issuer, Hyperliquid has opened a competitive bidding process where validators select the USDH issuer based on criteria like compliance, yield-sharing transparency, and ecosystem contribution The battle for USDH begins, everyone is eyeing the stablecoin + Hyperliquid concept^[2]. This model mirrors procurement practices in traditional finance but introduces blockchain-native transparency.

Key bidders like Paxos, Frax, and Agora have proposed aggressive yield-sharing terms:
- Paxos offers to return 95% of USDH reserve interest to HYPE token buybacks Hyperliquid's Stablecoin Issuance Bidding War: Paxos, Frax ...^[3].
- Frax promises 100% yield distribution to the Hyperliquid community USDH Battle Begins, Everyone Envious of Stablecoin + ...^[4].
- Agora commits to sharing 100% of net revenue after custody fees Hyperliquid stablecoin USDH becomes a ^[5].

These proposals starkly contrast with USDC's model, where Circle retains nearly all reserve income. For context, in Q2 2025, Circle reported $634 million in reserve income—96% of its total revenue and reserve income—primarily from USDC Circle Reports Second Quarter 2025 Results^[6]. If USDH captures even a fraction of this yield, it could redirect billions into Hyperliquid's ecosystem, creating a flywheel effect that strengthens its DeFi platform.

Quantifying the Threat: USDH's Potential Revenue Impact on Circle

Circle's financials underscore its vulnerability. In Q2 2025, USDC's reserve income grew 50% year-over-year to $634 million, driven by a 90% increase in its circulating supply to $61.3 billion Circle Reports Second Quarter 2025 Results^[6]. However, the $5.5 billion in USDC currently used as collateral on Hyperliquid represents 7.5% of the total supply Circle's USDC Market Share ^[7]. If Hyperliquid transitions this collateral to USDH, Circle could lose $150–200 million annually in reserve income Ethena’s USDH Proposal^[8].

To estimate the broader impact, consider a scenario where USDH captures 10–30% of USDC's current $5.5 billion collateral base. At a 10% capture rate, Circle would lose $55 million in annual revenue—a 8.4% cut to its Q2 reserve income. At 30%, the loss jumps to $165 million, or 25.8% of its Q2 reserve income . Given Circle's adjusted EBITDA of $126 million in Q2 2025, such losses could erode profitability and force the company to diversify its revenue streams.

Strategic Implications for Circle and the Stablecoin Industry

USDH's success hinges on its ability to align with Hyperliquid's “Hyperliquid-first” ethos, which prioritizes community governance and shared value creation The battle for USDH begins, everyone is eyeing the stablecoin + Hyperliquid concept^[10]. This model challenges Circle's centralized approach, where 98.9% of USDC reserves are held in U.S. Treasuries and cash equivalents USD Coin (USDC) Statistics 2025: Adoption, Trading ...^[11]. While Circle's compliance and regulatory clarity (bolstered by the GENIUS Act) remain strengths, USDH's decentralized governance could attract users seeking transparency and yield optimization.

For Circle, the threat extends beyond Hyperliquid. If USDH sets a precedent for on-chain auctions, other DeFi platforms may follow suit, fragmenting the stablecoin market and reducing centralized issuers' market share. This could force Circle to innovate—perhaps by introducing its own decentralized governance model or enhancing yield-sharing incentives for USDC holders.

Conclusion: A Tipping Point for Stablecoin Innovation

Hyperliquid's USDH is more than a stablecoin; it's a blueprint for how decentralized platforms can reclaim control of their monetary infrastructure. By redirecting yield to its ecosystem, Hyperliquid is creating a self-sustaining model that challenges the status quo. For Circle, the stakes are high: a 10%+ revenue loss is not just a financial risk but a strategic warning that the stablecoin industry is entering an era of decentralized competition.

As the September 14 validator vote approaches, the outcome will signal whether USDH can disrupt USDC's dominance—or if centralized models will adapt to retain their edge. Either way, the battle for USDH marks a pivotal moment in the evolution of stablecoin economics.