What’s wrong with current stablecoins?

Put simply, too much profit is directed to issuers. In most cases, the yield from reserves flows back to those managing the stablecoin rather than to its users.

When you hold a stablecoin like USDC (USDC) or Tether’s USDt (USDT), the issuer (Circle or Tether) holds real dollars or safe assets (such as US Treasurys, money market funds or cash) to back every token in circulation.

They park their reserves in safe assets such as US Treasurys, which earn interest. That interest adds up to billions, and it goes straight to the issuers, not to the exchanges or traders using the coins.

Hyperliquid wants to change that. The exchange, which already handles nearly 70% of decentralized futures trading, is considering a native stablecoin called USDH. Instead of letting outside issuers capture the yield, Hyperliquid’s plan is to recycle it back into its own ecosystem through buybacks, incentives and rewards.

To make it happen, Hyperliquid has invited partners to bid for the job of issuing and managing USDH.

Paxos, a regulated firm best known for its work with PayPal and Binance, has put forward the strongest offer so far. Its updated USDH v2 plan combines regulatory credibility, PayPal and Venmo integrations, a $20-million incentive fund and a model that directs most reserve yield back into Hyperliquid.

The big questions: Could this move turn USDH into more than just another stablecoin? Could it be the spark that pushes Hyperliquid into its next phase of growth?

Did you know? Issuing a stablecoin is hugely profitable, which is why so many firms compete to be the issuer when a major exchange like Hyperliquid opens the door.

What are Hyperliquid and USDH aiming for?

Hyperliquid isn’t your typical decentralized exchange (DEX).

It runs on two key systems: HyperCore, which serves as a high-performance onchain order book for trades, and HyperEVM, an Ethereum Virtual Machine-compatible layer that lets developers build apps and smart contracts on top.

Together, these give Hyperliquid the speed of an exchange and the flexibility of a smart contract platform. That combination has helped it gain around $400 billion in perpetual trading volume in a single month and generate roughly $100 million in revenue.

USDH is designed to slot directly into this setup.

It would be a stablecoin that meets strict US and European rules (the GENIUS Act in the US and Market in Crypto-Assets in the EU), backed by safe reserves like cash and Treasurys. Instead of profits leaving the system, the yield from those reserves would flow back into Hyperliquid through buybacks, rewards and ecosystem growth.

If USDH launches successfully, it could help Hyperliquid rely less on outside stablecoins like USDT and USDC, make trading more efficient for users and open the door to institutions that want compliance-ready infrastructure.

Paxos’ proposal: Key features and mechanics

Paxos has framed its case for USDH around three main pillars. The plan highlights yield, infrastructure and regulatory safeguards as its foundation.

Yield and reserve backing

About 95% of the yield from US Treasurys, cash and repos would flow back into HYPE buybacks and reinvestment, with roughly 5% retained for operational costs.

Dual-chain deployment

USDH would launch natively on both HyperEVM and HyperCore, enabling composability across trading, settlement and decentralized finance (DeFi) integrations.

Regulatory and compliance edge

Paxos brings a long licensing history, alignment with GENIUS and Markets in Crypto-Assets (MiCA) and plans to include PayPal USD (PYUSD) in reserves (measures aimed at strengthening trust and oversight).

Distribution, incentives and ecosystem integrations

One of the most striking elements of Paxos’ proposal is how it connects Hyperliquid to mainstream payment networks while also backing adoption with tangible incentives. Key points include:

PayPal and Venmo integration

USDH and HYPE would be listed within PayPal’s ecosystem, extending to PayPal Checkout, Venmo, Xoom and other remittance and payment platforms. On- and off-ramps would be free of charge.

Ecosystem incentive fund

Paxos is committing $20 million to jumpstart adoption and growth. The fund would cover liquidity support, subsidies for merchants and builders, and other ecosystem initiatives, delivered through its partnership with PayPal.

Performance-based revenue model

Paxos will not take any fees until USDH surpasses $1 billion in total value locked (TVL). Beyond that, revenue share scales up gradually and is capped at 5%, even if TVL exceeds $5 billion. Importantly, all revenue earned by Paxos would be held in HYPE tokens, reinforcing alignment with Hyperliquid’s growth.

Additional integrations and builder support

The plan also provides incentives for market makers, promotion of new asset issuers through Hyperliquid’s HIP-3 market creation process, a forthcoming “Earn” product built around USDH and broader global payment access via PayPal’s platforms.

The competitive landscape

Paxos is not the only player vying for USDH. Several firms are putting forward competing proposals, each with different models of yield sharing and collateral.

Ethena, Frax, Agora, Sky (formerly MakerDAO), Native Markets, OpenEden and BitGo are all in the running.

Ethena, for instance, has suggested backing USDH with USDtb (tied to BlackRock’s BUIDL fund) while covering USDC migration costs and offering significant incentives.

Frax and Agora have floated aggressive revenue-sharing plans, in some cases pledging 100%, and bringing strong institutional collateral to the table.

Paxos, however, brings a history of issuing stablecoins (currently PYUSD and previously BUSD) alongside regulatory licenses across multiple jurisdictions. Its established reputation for compliance, reserve management and partnerships gives it credibility.

Why Paxos’ proposal stands out

Paxos’ proposal stands out for three reasons:

  • Its PayPal/Venmo partnerships offer unmatched mainstream reach.
  • The platform has a performance-based revenue model that delays earnings until growth milestones are met.
  • Its compliance-first approach, including PYUSD among reserves and aligning incentives through buybacks, reinvestment and HYPE token mechanisms.

Did you know? Paxos was the first company ever to receive a limited-purpose trust company charter for digital assets from the New York Department of Financial Services back in 2015 (years before most regulators even recognized stablecoins).

Risks, open questions and potential roadblocks

Even with these advantages, there are several risks and uncertainties that could affect how the proposal plays out.

Regulatory risks

Frameworks such as the US GENIUS Act and Europe’s MiCA are still being phased in. Compliance claims may be accurate in intent but remain forward-looking until rules are fully in force, creating potential uncertainty.

Adoption risks

Traders and protocols may prefer to stick with established stablecoins such as USDC and USDT. Migrating liquidity, particularly for existing USDC pairs, could face resistance or friction.

Execution risks

Rolling out free on-/off-ramps, sustaining the $20-million incentive pool, ensuring transparent reserves and integrating products like payments and Earn will all require precise execution. Any misstep could undercut trust.

Competitive risks

Rival issuers may offer more attractive models or yield-sharing structures. In addition, Hyperliquid’s validator governance could tilt decision-making toward proposals that align with voter interests, even if Paxos’ model proves more robust.

The potential impact

If approved, Paxos’ USDH could completely change how Hyperliquid captures value, keeping stablecoin flows within the protocol, aligning users and issuers through buybacks and offering a compliance-ready anchor for institutional growth.

The critical proof points will be whether USDH can clear major benchmarks: surpassing $1 billion and later $5 billion in TVL, integrating seamlessly with PayPal and Venmo payment infrastructure and navigating the rollout of GENIUS and MiCA frameworks.

How these milestones are managed will ultimately decide if the proposal delivers on its potential.

Should Paxos execute, USDH could be an interesting stablecoin, to say the least. It could reposition Hyperliquid from being just the leading perps DEX into somewhat of a liquidity hub for DeFi and potentially a bridge into fintech’s mainstream payment networks.