Hyperliquid stablecoin issuance battle: Paxos, Frax and other competitors, true competition or predetermined performance?

Author: Frank, PANews

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Hyperliquid, the hottest on-chain derivatives trading platform, recently announced that it will issue its on-chain native stablecoin, named USDH. However, unlike industry practice of “in-house” or protocol-built, Hyperliquid has opted for an unprecedented path – a public tender for co-publishers through on-chain validator voting. As soon as the news broke, the giants in the stablecoin space were moved, with Paxos, Frax Finance, Agora, and others submitting highly competitive proposals, and other stablecoin issuers rumored to be planning to participate in the proposals, and an online bidding boom around Hyperliquid's “minting rights” began. The battle is focused on the $5.6 billion USDC deposited on the Hyperliquid platform, which is expected to generate more than $220 million in interest income from Treasury bonds annually if successfully replaced with USDH. This huge revenue will no longer go to external publishers, but will be fed back to the Hyperliquid ecosystem. Following the announcement, the market reacted enthusiastically, with the price of Hyperliquid's native token, HYPE, rising nearly 10% in response. What kind of interest logic is hidden behind this battle for the right to issue stablecoins? Why are major publishers willing to give up their low-hanging fruit? Who will be the ultimate winner in this complex game? PANews will be broken down in this article. The most immediate driver of Hyperliquid's issuance of the native stablecoin USDH, a new source of revenue over the HPL vault, is a huge economic benefit. Currently, there are about $5.6 billion in stablecoins on the Hyperliquid platform, 95% of which are USDC. The fund's reserves are managed by its issuer, Circle, which earns interest on investments in low-risk assets such as U.S. Treasuries, a value that is entirely externally captured. Hyperliquid, as the application scenario and demand creator of these funds, has not been able to get a piece of the pie. By issuing USDH, Hyperliquid aims to internalize this value. Based on the current short-term U.S. Treasury yield of about 4%, $5.6 billion in reserves could generate about $220 million in revenue per year. This revenue will surpass the current annual revenue of the HPL vault (currently around $75 million) and become one of the largest revenue streams on the Hyperliquid chain, and there is no doubt that the incentives for the community are even greater. In addition to economic benefits, ecological incentives may be another consideration. As can be seen from the official announcement, the first reason put forward by the official is: “In order to improve liquidity and reduce user friction, the spot trading pair between the two spot quote assets will reduce the taker fee, maker order rebate and user trading volume contribution by 80%”. For exchanges, reducing transaction fees will be a must to directly enhance their core competitiveness. For Hyperliquid in particular, the low spot trading volume compared to the contract trading volume is also a problem that needs to be solved urgently. After all, by increasing spot trading, Hyperliquid has better spot depth, and it is also possible to further avoid incidents of price manipulation of tokens such as XPL in the past. Judging from the official announcement and bidding process, Hyperliquid's core requirements for issuers can be summarized into three points: 1. A stablecoin pegged to the U.S. dollar and compliant. 2. Suitable for Hyperliquid native casting. 3. Hyperliquid-first team. Among them, compliance is the focus of the current stablecoin issuance, and it has also become an inevitable condition for stablecoins. The second point, focusing on Hyperliquid's native minting, means that USDH no longer needs to go through a cross-chain bridge to enter the Hyperliquid chain like USDC. This provides the basis for a variety of transaction behavior savings on the subsequent chain. Finally, with regard to Hyperliquid-first teams, it can be seen that teams that are familiar with the Hyperliquid chain will be prioritized. It is worth mentioning that Jeremy Allaire, co-founder of Circle, said on social media in response to this matter: "It's great to see the competition and will enter the HYPE ecosystem in an important way. However, judging from the link posted by Jeremy Allaire, Circle's focus is still on issuing native USDC rather than competing in USDH. Paxos, Frax Finance, and many other bids have their own merits This on-chain bidding also attracted the participation of a number of key stablecoin issuers. As of September 8, the main participants include established compliant publishers such as Paxos, Frax Finance, and Agora, as well as Hyperliquid on-chain native projects such as Native Markets and Hyperstable. Among them, the key ones to pay attention to are Paxos, Frax Finance, Agora, Native Markets, etc., which are quite representative. Among them, Paxos and Agora are representatives of compliance, Paxos is a trust company regulated by the New York Department of Financial Services (NYDFS), with a compliance background and ecological advantages of PayPal, Paxos has issued a stablecoin BUSD for Binance. Paxos' proposal mentions buying back 95% of the interest on the reserve to HYPE, and commits to integrate HYPE into its brokerage infrastructure that serves giants like PayPal, in addition to Paxos' acquisition of Molecular Labs, the development team behind the existing core components of the Hyperliquid ecosystem, LHYPE and WHLP. Agora also has an advantage in terms of compliance, with its reserves held in custody by top-tier financial institution State Street, and managed by VanEck. In terms of revenue distribution, Agora's solution is to commit to sharing 100% of net revenue to the ecosystem. The key here is that the “net income” may be deducted from custody fees, operating costs, etc. However, Paxos' plan is to buy back HYPE with interest, and in the end, this part of the asset is not returned to the community. As a giant in the DeFi space, Frax Finance has advantages in the DeFi ecosystem, and its plan mentions that it will be backed 1:1 by the frxUSD stablecoin, which itself is also backed by RWA assets such as BlackRock's tokenized treasury bond fund BUIDL, which also has strong compliance and security. In addition, Frax Finance is committed to passing 100% of the yield of the underlying treasury bonds directly and losslessly to Hyperliquid's users through smart contracts, with no fees charged by Frax itself. In addition, due to the different mechanism design, Frax's returns may also be higher than those of several other stablecoins, but at the expense of a certain security score. Native Markets, which is a native project on Hyperliquid, has an advantage in terms of nativeness. In terms of compliance, it also said that it will integrate the global compliance profile and fiat currency channel of the issuer Bridge (a Stripe company). In terms of returns, Native Markets has pledged to contribute a significant portion of its reserve earnings to the Assistance Fund, an automated on-chain buyback protocol for HYPE. However, this does not equate to returning to the community, and on September 9, a supplemental proposal was submitted again, setting the return rate at 50%. On September 9, another DeFi giant, Sky (formerly MakerDAO), also plans to participate in the issuance of USDH's stablecoin. Sky is characterized by liquidity support, stating that it provides instant liquidity of 2.2 billion USDC and offers a definite return of 4.85%, potentially generating $250 million in annual revenue for Hyperliquid. Overall, these companies have their own strengths and weaknesses in terms of compliance, revenue return, and ecological nativeness. However, in terms of return of benefits, Frax Finance should be the most sincere one. For the community, the choice of USDH issuer is not just a simple ecological upgrade. Rather, it is an important choice when it comes to the tokenomics of HYPE, the competitive landscape of the stablecoin market, and even the prospects of the DeFi space as a whole. For the HYPE token, as mentioned above, once this part of the treasury bond interest is returned, it will become one of the largest ecological incomes, which will further affect the value expectation of HYPE. Indirectly, high-interest yield stablecoins can help the ecosystem absorb more funds into the market, which will not only increase the transaction depth of Hyperliquid, but also provide a steady stream of user conversion power. For the community, this decision is undoubtedly positive. In the forum, supportive voices also make up the vast majority. However, there are also voices questioning that the official on-chain voting is essentially a show after the decision. The biggest controversy was raised by another Hyperliquid native stablecoin project, Hyperstable, which believes that it had previously tried to use the USDH code but was told that the code had been blacklisted. In addition, some other community members felt that the overall content of the proposal was too general, and questioned the specific compliance details (such as the federal license or the state license), technical details, conflict of interest considerations, etc. in the stablecoin issuance. It's puzzling that the official decision on a publisher's behavior is just a matter of using these simple proposals, which are only available for 5 days. Indeed, judging from the details of the content of the proposal, the proposal on Hyperliquid is generally between hundreds of words and more than a thousand words, which may only be the number of words in the preface or summary compared to the proposal on other public chains. In addition, in addition to Native Markets' proposal released within 1 hour, Frax's proposal was also released within about 10 hours, which is indeed far more time-sensitive than the average time for decentralized organizations to make decisions, and it is inevitable that there is a possibility that the official will contact the candidate in advance. Conclusion Regardless, Hyperliquid's step is a good direction for the community. It reflects the official's thinking on the current spot trading volume and depth of the platform, as well as maximizing community benefits. But on the other hand, even if USDH can be issued quickly, it may not be able to completely replace USDC in a short period of time, after all, as a more versatile stablecoin, it has a more proven performance in terms of transaction stability and depth. As for who ends up, this will be an art of balance, and for the community, whether it is governance or just a suggestion is also a test of the results of Hyperliquid's decentralized governance.