The battle for Hyperliquid's native stablecoin: Paxos, Frax, and others compete, with the community questioning whether it's a show-off.

Hyperliquid, a leading on-chain derivatives trading platform, is launching its native stablecoin, USDH, through an open on-chain bidding process for partner issuers. This move aims to capture an estimated $220 million in annual revenue from the platform's $5.6 billion USDC reserves, which currently generate interest for Circle rather than the Hyperliquid ecosystem.

Key proposals have been submitted by major players:

Paxos offers strong regulatory compliance and pledges to repurchase HYPE tokens with 95% of reserve interest.
Frax Finance promises to return 100% of underlying Treasury yields directly to users via smart contracts with no fees.
Agora commits to sharing 100% of net revenue with the ecosystem, though "net" may deduct operational costs.
Native Markets, a native Hyperliquid project, proposes contributing 50% of reserve earnings to repurchase HYPE.

The initiative has boosted HYPE's token price and is seen as beneficial for improving spot trading liquidity and ecosystem value. However, community concerns include potential insider advantages and the brevity of proposal details, with some questioning if the voting process is genuinely open or pre-determined. The outcome will significantly impact Hyperliquid's revenue, token economics, and DeFi competitive positioning.

By Frank, PANews

Hyperliquid, the popular on-chain derivatives trading platform, recently announced the issuance of its own native stablecoin, dubbed USDH. However, unlike the industry practice of internally selecting or developing its own protocol, Hyperliquid has chosen an unprecedented path—open bidding for partner issuers through on-chain validator voting.

As soon as this news came out, giants in the stablecoin field took action. Paxos, Frax Finance, Agora and others submitted highly competitive proposals. It is rumored that other stablecoin issuers are also planning to participate in the proposal. An online bidding craze centered on Hyperliquid's "coinage rights" has thus begun.

At stake in this battle is the $5.6 billion USDC held on the Hyperliquid platform. Successfully replacing it with USDH would generate an estimated $220 million in annual Treasury bond interest income. This substantial revenue would no longer flow to external issuers, but instead flow back into the Hyperliquiquit ecosystem. The announcement sparked a strong market reaction, with the price of Hyperliquid's native token, HYPE, surging nearly 10%.

What's the underlying profit logic behind this battle for stablecoin issuance rights? Why are major issuers willing to forgo potentially lucrative profits? Who will ultimately emerge victorious in this complex game? PANews will examine each of these factors in this article.

New sources of income beyond HPL's coffers

The most direct driving force behind Hyperliquid's issuance of its native stablecoin USDH is huge economic benefits.

Currently, Hyperliquid holds approximately $5.6 billion in stablecoins, 95% of which is USDC. This reserve is managed by its issuer, Circle, which earns interest by investing in low-risk assets like U.S. Treasuries. This value is entirely captured externally. Hyperliquid, despite being the user and demand generator for this capital, has yet to capture a share of this pie.

By issuing USDH, Hyperliquid aims to internalize this value. Based on the current short-term US Treasury yield of approximately 4%, the $5.6 billion reserve can generate approximately $220 million in annual revenue. This revenue will surpass the current annual revenue of the HPL treasury (currently approximately $75 million), becoming one of the largest sources of revenue on the Hyperliquid chain and undoubtedly providing greater incentives for the community.

Besides economic benefits, stimulating the ecosystem may be another consideration. The official announcement states that the first reason cited is: "To improve liquidity and reduce user friction, spot trading pairs between two spot-quoted assets will see an 80% reduction in taker fees, maker rebates, and user trading volume contributions." For exchanges, reducing transaction fees is a crucial step in directly improving core competitiveness. For Hyperliquid in particular, the lower spot trading volume compared to futures trading volume is a pressing issue they need to address.

After all, by improving spot trading, Hyperliquid will have better spot depth and may further avoid incidents of token price manipulation like the previous XPL.

Judging from the official announcement and bidding process, Hyperliquid's core requirements for publishers can be summarized into three points:

1. A compliant stablecoin pegged to the US dollar. 2. Suitable for native minting on Hyperliquid. 3. A Hyperliquid-first team.

Among these, compliance is a key focus for current stablecoin issuance and has become a necessary condition. Secondly, the emphasis on Hyperliquid native minting means USDH no longer requires a cross-chain bridge like USDC to access the Hyperliquid chain. This provides a foundation for saving costs in various subsequent on-chain transactions. Finally, regarding Hyperliquid's priority team, teams familiar with the Hyperliquid chain will be given priority.

It’s worth mentioning that Circle co-founder Jeremy Allaire commented on social media regarding this matter: “I’m happy to see competition entering the HYPE ecosystem in a significant way.” However, judging by the link Jeremy Allaire posted, Circle’s focus remains on issuing its own native USDC rather than competing with USDH.

Paxos, Frax Finance and other bidders each have their own merits

This on-chain bidding process also attracted participation from several major stablecoin issuers. As of September 8th, major participants included established, compliant issuers like Paxos, Frax Finance, and Agora, as well as Hyperliquid-native projects like Native Markets and Hyperstable.

Among them, the focus is on Paxos, Frax Finance, Agora, Native Markets and other companies, which are quite representative.

Paxos and Agora are representatives of compliance. Paxos, a trust company regulated by the New York Department of Financial Services (NYDFS), boasts a strong regulatory background and the ecosystem advantages of PayPal. Paxos previously issued the stablecoin BUSD for Binance. Paxos's proposal mentioned repurchasing 95% of its reserve interest back into HYPE and pledged to integrate HYPE into its brokerage infrastructure, which serves giants like PayPal. Furthermore, Paxos recently acquired Molecular Labs, the development team behind LHYPE and WHLP, core components of the Hyperliquid ecosystem.

Agora also has an advantage in compliance, with its reserves held in custody by top financial institution State Street and asset management handled by VanEck. Regarding revenue distribution, Agora pledges to share 100% of its net revenue with the ecosystem. The key point here is that "net revenue" may include deductions for custody fees, operating costs, and other factors. However, Paxos's plan uses interest to repurchase HYPE, which ultimately does not constitute a return of assets to the community.

As a giant in the DeFi space, Frax Finance boasts advantages within the DeFi ecosystem. Its proposal also mentions the frxUSD stablecoin, backed 1:1 by RWA assets such as BlackRock's tokenized Treasury bond fund, BUIDL, ensuring strong compliance and security. Furthermore, Frax Finance promises to directly and seamlessly transfer 100% of the underlying Treasury bond returns to Hyperliquid users via smart contracts, with no fees charged by Frax itself. Furthermore, due to its unique mechanism design, Frax's returns may be higher than those of other stablecoins, though this will come at the expense of a certain security rating.

Native Markets has an advantage in terms of nativeness, as it is a native project on Hyperliquid. Regarding compliance, it has also stated that it will integrate the global compliance profile and fiat currency access of its issuer, Bridge (a Stripe company). Regarding profit rebates, Native Markets has pledged to contribute a significant portion of its reserve earnings to the Assistance Fund (automatically repurchasing HYPE protocol on-chain). However, this does not equate to a return to the community. On September 9th, a supplementary proposal was submitted, setting the return ratio at 50%.

On September 9th, another DeFi giant, Sky (formerly MakerDAO), also planned to participate in the issuance of the USDH stablecoin. Sky's unique feature is its liquidity support, stating that it will provide 2.2 billion USDC in immediate liquidity and a clear return rate of 4.85%, which could generate $250 million in annual revenue for Hyperliquid.

Overall, these companies each have their own strengths in terms of compliance, return on investment, and ecosystem nativeness. However, in terms of profit return, Frax Finance is probably the most sincere one.

Questioned or perhaps a show of governance after the appointment

For the community, the choice of USDH issuer is not just a simple ecosystem upgrade. It is a crucial decision that involves the economics of HYPE tokens, the competitive landscape of the stablecoin market, and even the prospects of the entire DeFi field.

As mentioned above, once this portion of the treasury bond interest is repaid, it will become one of the largest sources of ecosystem revenue, further impacting HYPE's expected value. Indirectly, high-interest yield-generating stablecoins can help the ecosystem attract more capital, increasing Hyperliquid's trading depth and providing a continuous source of user conversion momentum.

This decision is undoubtedly beneficial to the community, and support is overwhelmingly expressed in forums. However, some voices question whether the official on-chain vote is essentially a pre-determined show.

The biggest controversy was raised by Hyperstable, another Hyperliquid native stablecoin project. Hyperstable believes that it had previously attempted to use the USDH code but was told that the code had been blacklisted. This time, another project, Native Markets, quickly released a proposal within an hour of the official announcement, which may have been a factor in leaking information in advance.

Furthermore, some community members questioned the proposal's overall scope, arguing it was too general. They raised questions about specific compliance details (such as whether to use a federal or state license), technical details, and conflict of interest considerations involved in stablecoin issuance. They expressed doubts about the authorities' ability to determine an issuer's actions based solely on such a simple proposal, given the limited five-day deadline.

Indeed, judging by the details of the proposals, Hyperliquid proposals typically range from several hundred to over a thousand words, compared to proposals on other public chains, which may only contain the length of a preface or summary. Furthermore, while Native Markets published its proposal within an hour, Frax's proposal was also published within approximately 10 hours. This timeliness far exceeds the average decision-making time for decentralized organizations, inevitably leading to the question of whether the authorities may have contacted alternative parties in advance.

Summarize

Regardless, this move by Hyperliquid is a positive development for the community. It reflects official considerations regarding the platform's current issues with spot trading volume and depth, as well as its commitment to maximizing community benefits. However, even if USDH can be rapidly issued, it may not completely replace USDC in the short term. After all, as a more versatile stablecoin, it has a more proven track record of trading stability and depth. The ultimate winner will be a balancing act. For the community, the question of whether governance is the key or simply providing advice will be a testament to Hyperliquid's decentralized governance.