Recently, Hyperliquid’s launch of USDH sparked a public contest among major players including Circle, Paxos, and Frax Finance. Paxos even committed $20 million in ecosystem incentives. Beyond highlighting the appeal of protocol-native stablecoins, the episode sheds light on the underlying logic of DeFi’s stablecoin market.
This is a good time to pause and consider: What are DeFi-protocol stablecoins, why do they matter, and as issuance matures, what truly defines success?
Source: Paxos
I. Why DeFi Stablecoins Matter
Let’s start with a reality check: USDT and USDC still dominate. Backed by compliance, deep liquidity, and first-mover advantage, they serve as crypto’s bridge to the real world.
Yet the demand for decentralization, censorship resistance, and transparency keeps fueling DeFi stablecoins. For protocols moving billions in daily volume, a native stablecoin is more than a feature — it’s a strategic necessity.
A protocol-native stablecoin anchors pricing and settlement, cuts dependence on external stablecoins, and keeps value from trading, lending, and liquidation loops within its own ecosystem. In Hyperliquid’s case, USDH isn’t just a USDT lookalike — it’s the beating heart of the system: margin, unit of account, and liquidity hub all in one.
Control over USDH issuance is a strategic lever for Hyperliquid’s future. That’s why the market reacted so quickly—Paxos alone put $20 million in incentives on the table.
For liquidity-hungry DeFi protocols, a stablecoin isn’t just a tool. It’s the fulcrum of on-chain economic activity: the dollar-based settlement layer powering DEXs, lending, derivatives, and even payments.
Source: DeFi Stables, imToken Web (web.token.im).
At imToken, we look at stablecoins through the lens of user needs—there is no single narrative anymore. In our framework, Stablecoins, Simplified: A Practical Guide to User Needs, we categorize stablecoins into several user-driven, practical segments.
In this framework, DeFi stablecoins (DAI, GHO, crvUSD, FRAX, and others) stand as a distinct category. Unlike centralized stablecoins, they emphasize decentralization and protocol autonomy—grounded in mechanism design and collateral instead of a single issuer. That’s why experimentation in this space continues, cycle after cycle.
II. The Paradigm Shift Debate DAI Kicked Off
The evolution of DeFi stablecoins is, at its core, a race to prove use cases, refine mechanisms, and maximize efficiency.
1) MakerDAO (Sky): DAI → USDS
DAI, the pioneer of decentralized stablecoins, introduced the over-collateralization model—locking assets like ETH in vaults to generate DAI—and has survived multiple stress tests.
Less well known is that DAI also embraced RWAs early. Back in 2022, MakerDAO allowed asset originators to tokenize real-world assets for on-chain financing, expanding collateral options and fueling demand.
MakerDAO’s rebrand to Sky and the launch of USDS under its endgame plan aim to build a user base distinct from DAI’s and push adoption beyond DeFi into real-world use cases.
2) Aave: GHO
GHO, Aave’s protocol-native stablecoin, is decentralized, over-collateralized, and USD-pegged. Users mint it by depositing aTokens on Aave V3. Like DAI, it relies on over-collateralization, but with a twist: all collateral is productive, earning interest through aTokens as borrowing demand shifts.
Maker, by contrast, grows through the seigniorage it controls. Aave spins up a stablecoin from its lending venue. Two different paths, two templates for protocol-native growth. Today, GHO supply has topped 350 million and continues to climb.
Source: Dune
3) Curve: crvUSD
Launched in 2023, crvUSD supports major collateral types including sfrxETH, wstETH, WBTC, WETH, and ETH—covering the key categories of LSD assets. Its LLAMMA liquidation model improves usability and simplifies user experience.
Today, supply exceeds 230 million, with wstETH making up nearly half, highlighting crvUSD’s strong roots in LSDfi.
4) Frax Finance: frxUSD
Frax’s trajectory has been the most dramatic. After the 2022 algorithmic stablecoin crisis, Frax shifted decisively to full-reserve collateralization, establishing a stable foundation.
The bigger pivot was a deliberate move into LSDs. With frxETH and broad governance influence, Frax engineered attractive yields on platforms like Curve, driving a second wave of growth.
In Hyperliquid's USDH rollout, Frax proposed a community-first design: peg USDH to frxUSD at 1:1, with frxUSD backed by BlackRock’s yield-bearing on-chain U.S. Treasuries fund. All of the underlying Treasury yield would flow programmatically to Hyperliquid users—Frax takes no cut.
III. From Issuance to Usage: Where’s the Fulcrum?
These cases point to a larger truth: for DeFi protocols, a stablecoin is what turns a tool into a system. Since DeFi Summer, DeFi stablecoins have kept evolving—from MakerDAO, Aave, and Curve to today’s Hyperliquid, the battlefield has moved.
The question is no longer how to mint, but where the stablecoin finds use. Over-collateralized or fully reserved, minting a USD-pegged token is the easy part. The hard questions are: What can it power? Who will use it? Where will it circulate?
Hyperliquid’s approach to USDH is clear: serve its own ecosystem first, and stay compliant. The real fulcrum is native demand.
Demand
Every stablecoin needs a home base. For Aave, it’s lending; for Curve, trading; for Hyperliquid, derivatives margin. Strong internal demand is the most reliable foundation.
Liquidity
A stablecoin’s lifeblood is deep pairs with ETH, WBTC, and major stables like USDC and USDT. These pools anchor price stability and enable large trades—one reason Curve remains vital.
Composability
The easier a stablecoin integrates with other protocols—whether as collateral, a lending asset, or a base for yield strategies—the stronger its network effect.
Yield
In a crowded market, sustainable yield is the ultimate draw. A coin that pays its holders will always stand out.
Centralized stablecoins still provide the foundational liquidity for DeFi. For protocols, issuing a native stablecoin is no longer just a technical choice, but a strategic move to close the ecosystem’s value loop. The real fulcrum has shifted from ‘how to issue’ to ‘how to ensure it is frequently traded and actively used.’
The winners will be those DeFi stablecoins that provide utility, liquidity, and sustainable yield—becoming core assets for holders, not just another token.