Hyperliquid’s Validator Auction Challenges Stablecoin Centralization

Sky Enters Hyperliquid Stablecoin Race With Bold USDH Proposal

Hyperliquid, the decentralized exchange dominating the perpetuals market, has launched an ambitious initiative to introduce its native stablecoin, USDH. The move aims to reduce reliance on external stablecoin issuers like Circle, whose USDC currently dominates the platform’s liquidity. With nearly $5.5 billion in USDC deposits on Hyperliquid—accounting for roughly 7.5% of USDC’s total supply—the platform seeks to redirect yield from these deposits back into its own ecosystem. The stablecoin will be issued through an on-chain auction process, where validators will evaluate and vote on competing proposals from third-party stablecoin providers.

Hyperliquid’s USDH stablecoin is designed to be fully aligned with the interests of its community. The auction process mirrors procurement practices in traditional finance, with bidders required to disclose their compliance strategies, reserve management plans, and revenue-sharing structures. Validators, who stake HYPE tokens to secure the network, will cast binding votes to determine which issuer will be granted the right to launch USDH. The winning bid will not only issue the token but also control how billions in yield are redistributed within the Hyperliquid ecosystem, potentially funding HYPE buybacks, validator rewards, and liquidity incentives.

The competition to issue USDH has attracted major players in the stablecoin space. Paxos, known for its regulatory compliance and experience issuing stablecoins for PayPal and Binance, has proposed a 95% revenue share from interest earned on USDH reserves toward HYPE buybacks. The proposal also includes zero-fee transitions from USDC to USDH and liquidity incentives for AMM pools. Paxos Labs has pledged to deploy USDH natively on Hyperliquid’s HyperEVM and HyperCore blockchains and integrate it with its brokerage infrastructure, which supports crypto trading on platforms like Venmo and MercadoLibre.

Frax Finance, a DeFi-native stablecoin issuer, has positioned itself with a "community-first" approach. Its proposal involves backing USDH 1:1 with frxUSD, a stablecoin collateralized by BlackRock’s yield-bearing BUIDL treasury fund. Under this model, 100% of the underlying Treasury yield would be programmatically distributed to Hyperliquid users with no Frax take rate. The proposal emphasizes seamless minting and redemption across frxUSD, USDC, USDT, and fiat, along with full compliance with the GENIUS Act. Frax has emphasized that it has no interest in controlling USDH beyond providing the stablecoin infrastructure.

Agora, a newer entrant in the stablecoin arena, has submitted a coalition-based bid with its institutional infrastructure. The firm plans to back USDH with cash and short-term U.S. Treasurys held in a segregated reserve administered by State Street and VanEck. Agora has pledged to share 100% of net revenue from USDH with Hyperliquid, to be directed toward HYPE buybacks or the platform’s Assistance Fund. The bid highlights Agora’s neutrality and lack of competing infrastructure, making it a potential ally for a Hyperliquid-native stablecoin.

The auction process has also attracted a diverse range of participants, including Native Markets, a newly formed team led by former Uniswap Labs executive MC Lader. Native Markets proposed leveraging Bridge, a stablecoin platform acquired by Stripe, to back USDH with both on-chain and off-chain reserves. The team pledged to allocate 50% of interest earnings toward HYPE buybacks and 50% toward USDH growth. However, concerns have been raised about potential single points of failure if Bridge is relied upon heavily for issuance.

For Hyperliquid, the USDH initiative marks a strategic shift toward self-sufficiency in its financial infrastructure. By introducing a stablecoin governed by its own community, the platform aims to capture a larger share of the yield from its deposits and reduce reliance on external issuers. The move also aligns with broader trends in DeFi, where protocols are increasingly seeking to control their capital and governance processes without intermediaries.

The outcome of the auction, scheduled for a vote on Sept. 14, will have significant implications for the stablecoin market. If successful, USDH could disrupt the dominance of USDC and USDT on Hyperliquid, potentially redirecting hundreds of millions in annual yield away from Circle and Tether. For DeFi at large, the experiment sets a precedent for how protocols can negotiate with third-party vendors in a transparent and competitive manner.

Hyperliquid’s USDH stablecoin is expected to be a turning point in the evolution of decentralized finance. As the first major DeFi platform to launch a stablecoin through a validator-governed auction, Hyperliquid is demonstrating a new model where community interests take precedence over centralized control. The results of the vote will not only determine the fate of USDH but also signal the direction of governance in the broader crypto ecosystem.