Where is the pivot of DeFi stablecoins?

Recently, the bidding war for the issuance rights of USDH initiated by HyperLiquid attracted players such as Circle, Paxos, and Frax Finance to publicly compete. Some giants even offered 20 million USD in ecological incentives as a bargaining chip. This storm not only showcased the immense allure of native stablecoins in DeFi protocols but also gave us a glimpse into the stablecoin logic of the DeFi world.

Taking this opportunity, we also hope to revisit: What are stablecoins in DeFi protocols, why are they so valued? And in today's increasingly mature issuance mechanisms, what are the real pivot points that determine their success or failure?

Source: Paxos

Why are DeFi stablecoins so popular?

Before discussing this issue, we must face a fact: the stablecoin market is currently dominated by stablecoins issued by centralized institutions (such as USDT and USDC). With their strong compliance, liquidity, and first-mover advantage, they have become the most important bridge between the crypto world and the real world.

At the same time, a force pursuing a purer decentralization, anti-censorship, and transparency has always been driving the development of DeFi native stablecoins, and for a decentralized protocol with a daily trading volume often reaching several billion dollars, the value of native stablecoins is self-evident.

It is not only the core pricing and settlement unit within the platform, which can greatly reduce dependence on external stablecoins, but also firmly locks the value of transactions, lending, clearing and other links within its own ecosystem. Taking USDH in HyperLiquid as an example, its positioning is not simply to replicate USDT, but to become the "heart" of the protocol - operating as collateral, pricing unit, and liquidity hub.

This means that whoever holds the issuance rights of USDH can occupy a critically important strategic high ground in the future landscape of HyperLiquid. This is the fundamental reason why the market responded quickly after HyperLiquid extended the olive branch, and even Paxos and PayPal were willing to offer $20 million in ecological incentives as a bargaining chip.

In other words, for DeFi protocols that are highly dependent on liquidity, stablecoins are not just a "tool," but rather the "pivot" of on-chain economic activities that encompass trading and value circulation. Whether it is DEX, Lending, derivative protocols, or on-chain payment applications, stablecoins play a core role in the dollarized settlement layer.

Source: imToken Web (web.token.im) DeFi protocol stablecoin

From imToken's perspective, stablecoins are no longer a tool that can be summarized by a single narrative, but rather a multi-dimensional "asset collective"—different users and different needs correspond to different stablecoin choices (Further reading: "The Worldview of Stablecoins: How to Build a Classification Framework for Stablecoins from the User's Perspective?").

In this classification, "DeFi protocol stablecoins" (DAI, GHO, crvUSD, FRAX, etc.) represent an independent category. Compared to centralized stablecoins, they emphasize decentralization and protocol autonomy more—anchored by the mechanism design of the protocol itself and collateral assets, striving to break free from reliance on a single institution. This is also why, despite frequent market fluctuations, there are still a large number of protocols continuously trying.

The "Paradigm War" Started by DAI

The evolution of native stablecoins in DeFi protocols is essentially a paradigm battle centered around scenarios, mechanisms, and efficiency.

1.MakerDAO (Sky)'s DAI (USDS)

As the pioneer of decentralized stablecoins, MakerDAO's DAI has created a paradigm of over-collateralized issuance, allowing users to deposit collateral such as ETH into the vault to mint DAI, and has withstood multiple extreme market conditions.

But little known is that DAI is also one of the earliest stablecoins in the DeFi protocol to embrace RWA (real-world assets). As early as 2022, MakerDAO began attempting to allow asset originators to convert real-world assets into tokenized tokens for loan financing, trying to find a larger asset backing and demand scenarios for DAI.

After the recent rebranding of MakerDAO to Sky and the launch of USDS as part of the final plan, MakerDAO aims to attract a different user base from DAI based on the new stablecoin, further expanding the adoption from Decentralized Finance to off-chain scenarios.

2.Aave's GHO

Interestingly, Aave, which is based on lending, is moving closer to MakerDAO by launching a decentralized, collateral-backed, DeFi native stablecoin GHO that is pegged to the USD.

Its logic is similar to that of DAI—it's an over-collateralized stablecoin minted using aTokens as collateral, where users can use assets from Aave V3 as collateral for over-collateralized minting. The only difference is that since all collateral is productive capital, it generates a certain amount of interest (aTokens), which specifically depends on borrowing demand.

Source: Dune

From the perspective of experimental control, MakerDAO relies on the expansion of issuance to create its ecosystem, while Aave derives stablecoins from its mature lending scenario. These two provide different development templates for stablecoin protocols in DeFi.

As of the time of writing, the issuance of GHO has surpassed 350 million coins, and it has been experiencing steady growth over the past two years, with market recognition and user acceptance steadily increasing.

3. Curve's crvUSD

Since its launch in 2023, crvUSD has successively supported a variety of mainstream assets as collateral, including sfrxETH, wstETH, WBTC, WETH, and ETH, covering major categories of LSD (liquid staking assets). Its unique LLAMMA liquidation mechanism also makes it easier for users to understand and use.

As of the time of writing, the issuance of crvUSD has surpassed 230 million coins. It is worth mentioning that wstETH alone accounts for about half of the total issuance of crvUSD, highlighting its deep binding and market advantage in the LSDfi field.

4. frxUSD of Frax Finance

The story of Frax Finance is the most dramatic. During the stablecoin crisis in 2022, Frax quickly adjusted its strategy by increasing adequate reserves to completely transform into a fully collateralized stablecoin, which helped it stabilize its position.

A more crucial step is that it has precisely entered the LSD track in the past two years, utilizing its ecological products frxETH and the governance resources accumulated, creating highly attractive yields on platforms like Curve, successfully achieving a second growth curve.

In the latest USDH bidding competition, Frax has proposed a "community-first" initiative and plans to peg USDH to frxUSD at a 1:1 ratio. frxUSD is supported by BlackRock's yield-generating BUIDL on-chain treasury fund, and "100% of the underlying treasury yields will be directly distributed to Hyperliquid users through on-chain programmatic methods, with Frax not charging any fees."

From 'issuance' to 'trading', what is the pivot?

From the above case, it can be seen that to some extent, stablecoins are the necessary path for DeFi protocols to transition from "tools" to "systems."

As a narrative that was forgotten after the summer of 2020-2021, DeFi protocol stablecoins have been on a path of continuous evolution. From MakerDAO, Aave, and Curve to the current HyperLiquid, we find that the focus of this war has quietly changed.

The key is not in the ability to issue, but in the trading and application scenarios. In plain terms, whether it is over-collateralization or full reserves, issuing a stablecoin pegged to the USD is no longer a challenge; the real crux lies in "what can it be used for? Who will use it? Where can it circulate?"

As emphasized by HyperLiquid when bidding for the issuance rights of USDH - prioritizing service to the HyperLiquid ecosystem and compliance as the standard, this is where the true pivot of DeFi stablecoins lies:

• First, it is naturally the endogenous scenarios that can provide a wide range of applications for this stablecoin, which is also the "base" of the stablecoin. 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 strong endogenous scenario can provide the most original and faithful demand for the stablecoin;
• Secondly, liquidity depth is crucial, as the lifeline of stablecoins lies in their trading pairs with other mainstream assets (such as ETH, WBTC) and other stablecoins (such as USDC, USDT). Having one or more deep liquidity pools is fundamental for maintaining price stability and meeting large-scale trading demands, which is why Curve remains a battleground for all stablecoins to this day;
• Then there is composability and scalability. Whether a stablecoin can be easily integrated into other Decentralized Finance protocols, serving as collateral, lending assets, or the underlying asset for yield aggregators, determines the ceiling of its value network.
• Finally, there is the profit-driven "adding flowers to the brocade"—in the existing DeFi market, yield is the most effective means to attract liquidity, and stablecoins that "make money for users" are more appealing;

In short, centralized stablecoins are still the underlying liquidity of Decentralized Finance, and for all DeFi protocols, the issuance of native stablecoins is no longer simply a technical choice, but a strategic layout concerning the ecological value closed loop. The real pivot has long shifted from "how to issue" to "how to enable it to be traded and used frequently."

This also determines that in the future, the DeFi stablecoins that will surely succeed are those that can provide their holders with the most solid application scenarios, the deepest liquidity, and the most sustainable returns, rather than just being a "currency."