DeFi Stablecoins Evolution: HyperLiquid's USDH Battle and Beyond

DeFi Stablecoins Evolution: HyperLiquid's USDH Battle and Beyond

The recent competition for USDH issuance rights by HyperLiquid sparked significant interest in the DeFi space, with prominent entities like Circle, Paxos, and Frax Finance engaging in a heated contest. Some major players even offered ecological incentives worth US$20 million to contribute to the stakes. This battle highlights the immense potential within Decentralized Finance and raises important questions about the one-coin logic in this world.

This article aims to re-examine DeFi protocol stablecoins, exploring why they have gained such importance, and the critical factors determining their success amidst ever-evolving issuance mechanisms. While centralized stablecoins like USDT and USDC currently dominate the market, a pursuit of true decentralization, censorship resistance, and transparency drives the growth of DeFi-native stablecoins.

Why are DeFi Stablecoins so Attractive?

For DeFi protocols with daily transaction volumes often reaching billions of dollars, the value of a native stablecoin is self-evident. It's not merely the core pricing and settlement unit within the ecosystem, but it also reduces reliance on external stablecoins. Furthermore, it locks the value of transactions, lending, and liquidation within its own ecosystem. For example, HyperLiquid's USDH aims to serve as the protocol's "heart", not just a copy of USDT, operating as a native liquidity unit. This explains why entities are willing to compete fiercely for USDH issuance rights, as it allows them to control a crucial strategic position in HyperLiquid's future landscape.

For DeFi protocols heavily reliant on liquidity, a stablecoin is more than just a "tool." It acts as a "fulcrum" for on-chain economic activities encompassing trading and value circulation. Stablecoins play a core role in USD-denominated settlement, whether it's in decentralized exchanges, lending, derivatives protocols, or cross-chain payment applications.

A Multi-Dimensional Perspective on Stablecoins

Stablecoins can be viewed as a multi-dimensional asset collection, with different users choosing different stablecoins based on their specific needs. "DeFi protocol stablecoins" (like DAI, GHO, crvUSD, and FRAX) are a distinct category within this classification. Compared to centralized stablecoins, they prioritize decentralization and protocol autonomy, relying on the protocol's own mechanism design and collateralized assets as the peg foundation, and striving to reduce reliance on a single entity. This is why protocols continue to experiment, despite market fluctuations.

The Evolution of DeFi Native Stablecoins

The evolution of DeFi-native stablecoins is fundamentally a battle revolving around scenarios, mechanisms, and efficiency. Let's explore some key examples:

DAI (USDS) from MakerDAO (Sky)

As a pioneer in decentralized stablecoins, MakerDAO's DAI introduced the paradigm of over-collateralized stablecoin creation, allowing users to deposit ETH as collateral to mint DAI. It has successfully weathered several extreme market conditions. Notably, DAI was also among the first DeFi stablecoins to embrace Real World Assets (RWA). In 2022, MakerDAO began experimenting with allowing asset originators to tokenize real-world assets for loan financing, attempting to find greater asset backing and demand scenarios for DAI. Having recently rebranded to Sky and launching USDS as part of its end-game plan, MakerDAO aims to attract a different user segment than DAI and further expand its adoption from DeFi to off-chain scenarios.

GHO from Aave

Interestingly, Aave, whose core business is lending, is converging with MakerDAO by launching GHO, a decentralized, collateralized, and USD-pegged DeFi native stablecoin. Its logic is similar to DAI: an over-collateralized stablecoin created using aTokens as collateral. The only difference is that all collateral is productive capital, generating interest based on lending demand. From an experimental comparison perspective, MakerDAO relies on seigniorage to expand its ecosystem, while Aave derives a stablecoin from its mature lending scenario, providing two different templates for DeFi protocol stablecoin development. As of this writing, the amount of GHO minted has exceeded 350 million and has remained on a steady growth trajectory in the past two years, demonstrating increasing market recognition and user acceptance.

crvUSD from Curve

Since its launch in 2023, crvUSD has successively supported several mainstream assets as collateral, including sfrxETH, wstETH, WBTC, WETH, and ETH, covering the main LSD (Liquid Staking Derivatives) category. Its unique LLAMMA liquidation mechanism also makes it easier for users to understand and use. As of this writing, the number of crvUSD minted has exceeded 230 million. Notably, wstETH alone accounts for approximately half of the total crvUSD minted, highlighting its deep binding with the LSDfi field and its competitive advantage.

frxUSD from Frax Finance

Frax Finance's story is the most dramatic. During the 2022 stablecoin crisis, Frax quickly adjusted its strategy and transitioned to a fully collateralized stablecoin by increasing sufficient reserves, effectively stabilizing its ship. Another crucial step is that it precisely entered the LSD field in the past two years. By leveraging its ecological products frxETH and accumulated governance resources, it created highly attractive yields on platforms like Curve, successfully achieving a second growth curve. In the latest USDH bidding race, Frax proposed a "community first" proposal and plans to peg USDH to frxUSD at a 1:1 ratio. frxUSD is supported by BlackRock's income-generating BUIDL US Treasury fund. "100% of the underlying US Treasury bond yields will be directly distributed to any Hyquiliquid user fees through on-chain programmatic operations."

From "Issuance" to "Trading": What is the Fulcrum?

We can see from the above examples that a stablecoin is to some extent the path that DeFi protocols take from a "tool" to a "system." In fact, as a narrative forgotten after the summer of 2020-2021, DeFi protocol stablecoins have been on a path of continuous evolution. From MakerDAO, Aave, Curve to HyperLiquid today, we find that the focus of this war has quietly changed. The key is not the ability to issue, but the trading and application scenarios. Simply put, whether it's over-collateralization or sufficient reserves, issuing a USD-pegged stablecoin is no longer a problem. The real difficulty lies in "What can it be used for? Who will use it? Where can it circulate?" Just as HyperLiquid emphasized when it put out the USDH issuance rights, "Service first for the HyperLiquid ecosystem and compliance as the standard." This is the real fulcrum of the DeFi stablecoin: first, there is an internal scenario in which this stablecoin can land on a large scale, which is also its "base camp". For example, for Aave, it is lending; for Curve, it is trading; for HyperLiquid, it will be derivatives trading (margin assets). It can be said that a powerful internal scenario can provide the most original and most loyal needs for the stablecoin; second, the depth of liquidity. After all, the lifeline of the stablecoin lies in its trading pair with other mainstream assets (such as ETH, WBTC) and other stablecoins (such as USDC, USDT). Having one or more deep liquidity pools is the basis for maintaining price stability and meeting large-scale trading needs. This is why Curve is still a battleground for all stablecoins; then there is composability and scalability. Whether a stablecoin can be easily integrated into other DeFi protocols, as collateral, lending assets, or the underlying asset of yield aggregators, determines the ceiling of its value network; finally, the "icing on the cake" is yield. In the zero-sum game DeFi market, yield is the most effective way to attract liquidity. Stablecoins that "make money for users" are more attractive; in short, centralized stablecoins remain the underlying liquidity of DeFi. For all DeFi protocols, issuing a native stablecoin is no longer a simple technological choice, but a strategic layout concerning the ecological value closed loop. Its real fulcrum has already shifted from "how to issue" to "how to make it traded and used frequently". This also means that in the future, the DeFi stablecoins that can win will necessarily be those that can provide their holders with the most solid application scenarios, the deepest liquidity, and the most sustainable yields, and not just a "currency".