USDH Auction Event Analysis: A Power Struggle Reshaping the Stablecoin Market Rules

Original Author: Haotian, Crypto Researcher

Let's talk about the highly publicized @HyperliquidX $USDH stablecoin bidding event.

On the surface, it may seem like a battle of interests among several issuers such as Frax, Sky, Native Market, but in reality, it is a "public auction" of stablecoin minting rights that will reshape the rules of the stablecoin market moving forward.

Combining insights with @0xMert_, I'd like to share a few viewpoints:

1) The USDH minting rights scramble has exposed a fundamental contradiction between the demand for native stablecoins in decentralized applications and the need for unified stablecoin liquidity.

In simple terms, every major protocol is trying to have its own "minting authority," which inevitably leads to fragmented liquidity.

To address this issue, Mert proposed two solutions:

1. "Alignment" of the ecosystem's stablecoins, where everyone agrees on a common stablecoin, sharing profits proportionally. The question is, assuming that the current USDC or USDT is the consensus-strong aligned stablecoin, are they willing to share a large portion of profits with DApps?

2. Building a stablecoin liquidity hitchhiking (M0 model), using Crypto Native thinking to construct a unified liquidity layer, such as Ethereum as an interactive operation layer, allowing various native stablecoins to seamlessly interchange. However, who will bear the operating costs of the liquidity layer, who will ensure the anchoring of different stablecoin architectures, and how to mitigate the systemic risk of individual stablecoins going off-peg?

These two solutions may seem reasonable, but they only address the issue of liquidity fragmentation, as once the interests of each issuer are considered, the logic becomes inconsistent.

Circle relies on a 5.5% Treasury bond yield to earn billions of dollars a year passively. Why should they share with a protocol like Hyperliquid? In other words, when protocols like Hyperliquid are entitled to break away from traditional issuers and stand on their own in the stablecoin space, the "passive earning" model of issuers like Circle will also face challenges.

The USDH bidding event can be seen as a demonstration of defiance against the dominance of traditional stablecoin issuance. In my view, whether the rebellion succeeds or fails is not important; what matters is the moment the gauntlet is thrown.

2) Why do I say this? Because the profit rights of stablecoins will ultimately return to the value creators' hands.

The traditional stablecoin issuance model, exemplified by Circle and Tether, essentially revolves around acting as intermediaries. Users deposit funds, which these entities then use to purchase government bonds or deposit in Coinbase to earn fixed lending interest, with most of the benefits being kept for themselves.

Evidently, the USDH incident aims to point out a flaw in this logic: the true value is created by the protocol processing transactions, not merely by the issuer holding reserve assets. From Hyperliquid's perspective, processing over $5 billion in transactions daily, why should they hand over more than $200 million in annualized government bond returns to Circle?

In the past, the primary demand for stablecoin circulation was to ensure "safety without being unpegged," so issuers like Circle, who have incurred significant "compliance costs," were expected to enjoy this portion of the returns.

However, as the stablecoin market matures and regulatory clarity improves, the trend will likely shift this revenue-sharing right to the value creators.

Therefore, in my opinion, the significance of USDH bidding lies in defining a new stablecoin value revenue distribution rule: those who control real transaction demand and user traffic should have priority in revenue distribution;

3) So, what will the endgame be: will the application chain dominate the discourse, relegating issuers to the "backend service provider"?

Mert mentioned the third option, which is quite intriguing: let the application chain generate revenue, while traditional issuers tend to see diminishing profits? How should we understand this?

Imagine Hyperliquid generating hundreds of millions of dollars in revenue from transaction fees alone in a year; compared to this, the potential stable but "nice-to-have" government bond returns from managing reserves pale in comparison.

This explains why Hyperliquid chose not to lead the issuance themselves but instead delegated the issuance rights, as there is no need to do so; self-issuance would not only increase their "credit liability" but the profits obtained would be far less enticing than those from handling large transaction volumes' fees.

In fact, as you can see, when Hyperliquid delegated the issuance rights, the reactions of the bidders are evidence enough: Frax pledged to return 100% of the proceeds to Hyperliquid for HYPE repurchases; Sky offered a 4.85% return rate plus $250 million annual buybacks' bargaining chip; Native Markets proposed a 50/50 split, and so on;

Fundamentally, what was originally a battle of interests between DApps application parties and stablecoin issuers has evolved into an "internal loop" game among the three issuers, particularly with new issuers pressuring old issuers to change the rules.

Above.

Mert's fourth proposed solution sounds a bit abstract. When it comes to that point, the brand value of stablecoin issuers may be completely reduced to zero, or the issuance and minting authority may be fully centralized under regulatory control, or it could be some kind of decentralized protocol, which is currently unknown. That should still belong to the distant future.

Anyway, in my opinion, this USDH auction melee has the potential to mark the end of the era where old stablecoin issuers could simply coast along. It truly guides stablecoin yield rights back into the hands of "applications" that create value, which is already a remarkable development!

As for whether it's "vote buying" and whether the auction is transparent, I actually think this is a window of opportunity before the real implementation of regulatory solutions like the GENIUS Act. Just watching the spectacle unfold is entertaining enough.

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