Hyperliquid’s upcoming USDH stablecoin aims to reduce USDC dependence, generating a competitive bidding war among issuers and prompting a significant stock re-evaluation for Circle Internet Group.

Executive Summary

Hyperliquid, a prominent decentralized exchange, is set to launch USDH, its native stablecoin. This initiative seeks to enhance the platform's efficiency, stimulate spot market growth, and significantly reduce its reliance on external stablecoins like USDC. The move has triggered an intense bidding war among major stablecoin issuers for the right to manage USDH's issuance, reflecting a strategic shift to internalize yield and revenue. This development has direct implications for established players, notably Circle Internet Group, whose stock price target was subsequently lowered by Compass Point due to projected revenue loss.

The Event in Detail

Hyperliquid has initiated a Request for Proposal (RFP) process, inviting stablecoin issuers to present their strategies for issuing and stewarding USDH. The USDH stablecoin is designed to stimulate Hyperliquid's spot markets and introduce an 80% reduction in trading fees for select spot pairs, thereby evolving the HyperCore exchange into a comprehensive full-service platform. This strategic pivot addresses Hyperliquid's significant reliance on USDC, where it currently holds approximately 8% of Circle's total USDC supply, amounting to around $5.4 billion in deposits. This dependency is estimated to result in an annual revenue leakage of $100 million to Coinbase and Circle, revenue which Hyperliquid aims to reclaim and recycle back into its ecosystem, potentially generating an estimated $200 million in internal revenue annually.

Financial Mechanics and Strategic Imperatives

The competitive proposals for USDH issuance highlight various financial mechanisms aimed at maximizing benefits for the Hyperliquid ecosystem. Key differentiators among bidders, including Native Markets, Ethena, Paxos, Frax Finance, and Sky Ecosystem, revolve around revenue sharing models. Most proposals pledge to return between 95% and 100% of the yield generated from USDH's reserves directly back to the Hyperliquid community, primarily through buybacks of its native HYPE token. For instance, Ethena Labs committed to returning 95% of reserve revenue and providing $75 million in ecosystem incentives. Paxos proposed a 95% interest return towards HYPE token buybacks, emphasizing regulatory compliance and enterprise infrastructure. Frax Finance offered a zero-take rate model, with on-chain Treasury bill yields flowing directly to Hyperliquid, backed 1:1 by frxUSD collateralized by U.S. Treasuries through institutional partners like BlackRock and Superstate. Sky Ecosystem proposed a 4.85% direct yield to all USDH holders. This shift represents Hyperliquid's intent to transform from a capital venue into an economy with its own currency, ensuring profits support its growth.

Market Implications and Competitive Dynamics

The introduction of USDH poses a direct challenge to the market dominance of incumbent stablecoins, particularly USDC. Compass Point revised its price target for Circle Internet Group from $130.00 to $96.00 and maintained a Sell rating, attributing the reduction to the potential revenue loss stemming from Hyperliquid's USDH initiative. Projections suggest a successful migration to USDH could result in an annual revenue loss for Circle estimated between $150 million and $220 million. In response, Circle has announced plans to deploy native USDC and its Cross-Chain Transfer Protocol (CCTP) on Hyperliquid, signaling its commitment to retain market share. This competitive dynamic underscores a shift in the stablecoin market structure, where centralized issuers previously maintained full control over yield generated from reserves. Hyperliquid's aggressive growth, marked by averaging $57 billion in weekly volume and monthly revenues exceeding $100 million, positions it as a significant force. Analysts suggest that Hyperliquid's profitability at its current rate may even exceed that of the NASDAQ.

Broader Web3 Context

Hyperliquid's move to launch USDH sets a precedent for other large crypto ecosystems and decentralized finance (DeFi) protocols. By issuing a native stablecoin and internalizing yield, Hyperliquid demonstrates a new model for value capture within its ecosystem, potentially inspiring similar strategies across the Web3 landscape. This could lead to a more fragmented stablecoin market, with reduced reliance on current major stablecoins like USDC and USDT, and a proliferation of platform-specific stablecoins designed to recycle revenue and drive ecosystem growth. The direct voting power granted to Hyperliquid validators in selecting the USDH issuer also signifies an unprecedented democratization of stablecoin selection within DeFi protocols.