The Twilight of the Giants: How the New Stablecoin Nobility is Eroding the Empires of Tether and Circle?

Original Title: Apps and Chains, Not Issuers: The Next Wave of Stablecoin Economics Belongs to Decentralized Finance

Original author: Simon

Source:

Reprint: Mars Finance

Tether and Circle's moat is being eroded: distribution channels surpass network effects. The market share of stablecoins occupied by Tether and Circle may have peaked in a relative sense—even though the overall supply of stablecoins continues to grow. It is expected that by 2027, the total market value of stablecoins will exceed $1 trillion, but the benefits of this expansion will not primarily flow to the existing giants as in the previous cycle. Instead, an increasing share will go to “ecosystem-native stablecoins” and “white label issuance” strategies, as blockchains and applications begin to “internalize” the benefits with distribution channels.

Currently, Tether and Circle account for about 85% of the circulating stablecoin supply, totaling approximately 265 billion dollars.

The background data is as follows: According to reports, Tether is raising $20 billion at a valuation of $500 billion, with a circulation of approximately $185 billion; while Circle is valued at around $35 billion, with a circulation of about $80 billion.

The network effects that once supported their monopoly position are weakening. Three forces are driving this change:

First of all, the importance of distribution channels has surpassed the so-called network effects. The relationship between Circle and Coinbase illustrates this well. Coinbase receives 50% of the residual yield from Circle's USDC reserves and monopolizes all the earnings from USDC on its platform. In 2024, Circle's reserve yield is expected to be around $1.7 billion, of which approximately $908 million is paid to Coinbase. This shows that distribution partners of stablecoins can capture most of the economic benefits — this also explains why players with strong distribution capabilities are now more inclined to issue their own stablecoins rather than continue allowing issuers to profit.

Coinbase earns 50% from Circle's USDC reserve income and exclusively holds the USDC earnings on the platform.

Secondly, cross-chain infrastructure makes stablecoins interchangeable. The official bridge upgrades of mainstream Layer 2, the universal messaging protocol launched by LayerZero and Chainlink, and the maturity of smart routing aggregators have made stablecoin exchanges both on-chain and cross-chain almost costless, providing a native user experience. Nowadays, which stablecoin you use is no longer important, as you can quickly switch based on liquidity needs. Not long ago, this was still a cumbersome task.

Thirdly, the clarification of regulations is eliminating entry barriers. Legislation such as the GENIUS Act has established a unified framework for domestic stablecoins in the United States, reducing the risks for infrastructure providers holding tokens. Meanwhile, an increasing number of white-label issuers are driving down issuance fixed costs, while treasury yields provide strong incentives for “float monetization.” The result is that the stablecoin stack is being commoditized and is becoming increasingly homogenized.

This commodification has erased the structural advantages of the giants. Now, any platform with effective distribution capabilities can choose to “internalize” the stablecoin economy—rather than paying profits to others. The earliest actors include fintech wallets, centralized exchanges, and an increasing number of Decentralized Finance protocols.

And DeFi is the most obvious manifestation of this trend and the most far-reaching scenario.

From “Loss” to “Gain”: The New Narrative of Stablecoins in Decentralized Finance

This shift has already begun to emerge in the on-chain economy. Compared to Circle and Tether, many public chains and applications with stronger network effects (in terms of product-market fit, user stickiness, distribution efficiency, and other metrics) are starting to adopt white-label stablecoin solutions to fully leverage existing user bases and capture revenues that traditionally belonged to established issuers. For on-chain investors who have long ignored stablecoins, this change is creating new opportunities.

Hyperliquid: The first “defection” within DeFi

This trend first appeared on Hyperliquid. At that time, approximately 5.5 billion USDC was stored on the platform—this means that about 220 million dollars in additional revenue flowed to Circle and Coinbase instead of staying with Hyperliquid itself.

For Circle, being the main trading pair in the core markets of Hyperliquid has brought substantial revenue. They directly benefit from the explosive growth of the exchange but have given almost no value back to the ecosystem itself. For Hyperliquid, this means that a significant amount of value has flowed into the hands of third parties that contribute almost nothing, which is in serious contradiction to its community-first and ecosystem-synergy philosophy.

During the bidding process for USDH, nearly all major white-label stablecoin issuers participated, including Native Markets, Paxos, Frax, Agora, MakerDAO (Sky), Curve Finance, and Ethena Labs. This marks the first large-scale competition at the application layer of the stablecoin economy, signifying that the value of “distribution rights” is being redefined.

In the end, Native won the issuance rights of USDH—its proposal is more aligned with the Hyperliquid ecosystem incentives. This model features issuer neutrality and compliance characteristics, with reserve assets managed offline by BlackRock and the on-chain portion supported by Superstate. The key point is: 50% of the reserve earnings will be directly injected into Hyperliquid's aid fund, and the remaining 50% will be used to expand USDH liquidity.

Although USDH will not replace USDC in the short term, this decision reflects a deeper shift in power: in the DeFi space, the moat and yields are gradually shifting towards applications and ecosystems with a stable user base and strong distribution capabilities, rather than traditional issuers like Circle and Tether.

The Spread of White-Label Stablecoins: The Rise of SaaS Model

In recent months, an increasing number of ecosystems have adopted the “white-label stablecoin” model. The “Stablecoin-as-a-Service” solution proposed by Ethena Labs is at the center of this wave—on-chain projects such as Sui, MegaETH, and Jupiter are either using or planning to issue their own stablecoins through Ethena's infrastructure.

The appeal of Ethena lies in its protocol that directly returns profits to token holders. The yield of USDe comes from basis trading. Although the yield has compressed to about 5.5% as the total supply exceeds 12.5 billion dollars, it is still higher than the yield on U.S. Treasury bonds (approximately 4%) and far better than the zero-yield state of USDT and USDC.

However, as other issuers begin to directly pass on government bond yields to users, Ethena's relative advantage is declining—government bond-backed stablecoins are more attractive in terms of risk and return ratio. If the interest rate cut cycle continues, the basis trading spread will expand again, thus reinforcing the attractiveness of such “yield models.”

You may wonder if this violates the GENIUS Act, which prohibits stablecoin issuers from directly paying rewards to users. In fact, this restriction may not be as strict as it seems. The Act does not explicitly prohibit third-party platforms or intermediaries from distributing rewards to stablecoin holders—as long as the funds are provided by the issuer. This gray area has not been completely clarified, but many believe that this “loophole” still exists.

Regardless of how regulations evolve, DeFi has always operated in a permissionless and marginal state, and it is likely to continue to do so in the future. More important than legal texts is the economic reality behind them.

Stablecoin Tax: Revenue Loss of Mainstream Public Chains

Currently, there are approximately 30 billion USD of USDC and USDT sitting idle on Solana, BSC, Arbitrum, Avalanche, and Aptos. With a reserve yield of 4%, this could generate about 1.1 billion USD in interest income annually for Circle and Tether. This figure is about 40% higher than the total transaction fee revenue of these public chains. This also highlights a reality: stablecoins are becoming the largest yet under-monetized value landscape in L1, L2, and various applications.

In simple terms, these ecosystems are losing hundreds of millions of dollars in stablecoin yields every year. Even if only a small portion of that is kept on-chain to capture it, it would be enough to reshape its economic structure—providing public chains with a more robust and counter-cyclical revenue base than transaction fees.

What is stopping them from reclaiming these profits? The answer is: nothing. In fact, there are many paths to take. They can negotiate revenue sharing with Circle and Tether (as Coinbase does); they can launch competitive bids to white-label issuers like Hyperliquid; or they can launch native stablecoins using “stablecoin as a service” platforms like Ethena.

Of course, every path has its trade-offs: collaborating with traditional issuers can maintain the familiarity, liquidity, and stability of USDC or USDT, assets that have withstood multiple market cycles and maintained trust under extreme stress tests; issuing native stablecoins enhances control and offers higher returns but faces cold start issues. Both methods have corresponding infrastructures, and each chain can choose its path based on its own priorities.

Redefining the Economics of Public Chains: Stablecoins Become a New Revenue Engine

Stablecoins have the potential to become the largest source of revenue for certain public chains and applications. Today, when the blockchain economy relies solely on transaction fees, growth faces structural limits—the network's revenue can only increase when users “pay more fees,” which inherently conflicts with “lowering the barriers to entry.”

The USDm project of MegaETH is a response to this. It issues the white-label stablecoin USDm in collaboration with Ethena, using BlackRock's on-chain treasury product BUIDL as the reserve asset. By internalizing the USDm revenue, MegaETH can operate the sequencer at cost and reinvest the profits into community programs. This model allows the ecosystem to have a sustainable, low-cost, innovation-oriented economic structure.

The leading DEX aggregator on Solana, Jupiter, is implementing a similar strategy through JupUSD. It plans to deeply integrate JupUSD into its own product ecosystem—from the collateral assets of Jupiter perpetual contracts (where approximately $750 million in stablecoin reserves will be gradually replaced) to the liquidity pools of Jupiter Lend, Jupiter is aiming to redirect the returns from these stablecoins back into its own ecosystem rather than letting them flow to external issuers. Whether these returns are used to reward users, buy back tokens, or fund incentive programs, the value accumulation they bring far exceeds simply handing over all returns to external stablecoin issuers.

This is precisely the core transformation at present: the profits that were originally passively flowing to old issuers are now being actively reclaimed by applications and public chains.

Valuation mismatch between applications and public chains

As all of this gradually unfolds, I believe that both public chains and applications are heading down a credible path that can generate more sustainable income, and this income will gradually break free from the cyclical fluctuations of the “internet capital market” and on-chain speculative activities. If that is the case, they may finally find justification for those high valuations that are often questioned as being “out of touch with reality.”

Most people still use the valuation framework that mainly views these two levels from the perspective of “the total economic activity occurring on it.” In this model, on-chain fees represent the total cost borne by users, while the chain's revenue is the portion of these fees that flows to the protocol itself or to token holders (for example, through mechanisms such as burning, treasury inflows, etc.). However, this model has had problems from the very beginning—it assumes that as long as there is activity, the public chain will necessarily capture value, even if the actual economic benefits have long since flowed elsewhere.

Today, this model is beginning to shift - and leading the way are the application layers. The most intuitive examples are the two star projects of this cycle: Pump.fun and Hyperliquid. Both applications use almost 100% of their revenue (note, not transaction fees) for repurchasing their own tokens, while their valuation multiples are far lower than the major infrastructure layers. In other words, these applications are generating real and transparent cash flows, rather than imaginary implied earnings.

Taking Solana as an example, over the past year, the total transaction fees on the chain were approximately $632 million, with revenue around $1.3 billion and a market capitalization of about $105 billion. The fully diluted valuation (FDV) was approximately $118.5 billion. This means that Solana's market cap to transaction fee ratio is about 166 times, and the market cap to revenue ratio is about 80 times—already a relatively conservative valuation among large L1s. Many other public chains have FDV valuation multiples that are even as high as thousands of times.

In contrast, Hyperliquid generated $667 million in revenue, with an FDV of $38 billion, corresponding to a multiple of 57 times; based on circulating market capitalization, it is only 19 times. Pump.fun's revenue is $724 million, with an FDV multiple of only 5.6 times, and the market cap multiple is even only 2 times. Both of these prove that applications with a high degree of alignment with the product and strong distribution capabilities are generating considerable revenue at multiples far lower than the underlying layer.

This is a power transfer that is currently underway. The valuation of application layers is increasingly dependent on the real income they create and return to the ecosystem, while the public chain layer is still struggling to find the rationale for its own valuation. The continuously weakening L1 premium is the clearest signal.

Unless public chains can find ways to “internalize” more value within their ecosystems, these inflated valuations will continue to be compressed. “White-label stablecoins” may be the first step for public chains to attempt to reclaim some value—transforming the originally passive “currency channels” into active income streams.

Coordination Issue: Why Do Some Public Chains Run Faster?

The shift towards “stablecoins aligned with ecosystem interests” is already occurring; there are significant differences in the pace of advancement among different public chains, with the key being their coordination capabilities and the urgency of execution.

For example, Sui—although its ecosystem is still not as mature as Solana's, its actions are extremely swift. Sui is collaborating with Ethena to simultaneously introduce two stablecoins, sUSDe and USDi (the latter is similar to the BUIDL-supported stablecoin mechanism being explored by Jupiter and MegaETH). This is not a spontaneous action at the application layer, but rather a strategic decision at the blockchain layer: to “internalize” the stablecoin economy as early as possible before path dependence is established. Although these products are expected to officially launch in Q4, Sui is the first mainstream blockchain to actively implement this strategy.

In contrast, the situation that Solana faces is more complex and painful. Currently, there are about $15 billion in stablecoin assets on the Solana chain, of which over $10 billion is USDC. These funds generate approximately $500 million in interest income for Circle each year, a substantial portion of which flows back to Coinbase through profit-sharing agreements.

And where does Coinbase use these earnings? - To subsidize Base, one of Solana's direct competitors. Part of the funds for Base's liquidity incentives, developer grants, and ecosystem investments comes from the 10 billion USDC on Solana. In other words, Solana is not only losing revenue but even providing blood transfusions for its competitors.

This issue has already attracted strong attention within the Solana community. For example, Helius founder @0xMert_ called for Solana to launch a stablecoin tied to ecological interests and suggested that 50% of the revenue be used for SOL buybacks and burns. Some stablecoin issuers (such as Agora) have also proposed similar plans, but compared to Sui's proactive advancement, the official response from Solana has been relatively tepid.

The reason is actually not complicated: as regulatory frameworks like the GENIUS Act gradually become clearer, stablecoins have increasingly tended towards “commoditization.” Users do not care whether they hold USDC, JupUSD, or any other compliant stablecoin—as long as the price is stable and liquidity is sufficient. So, if that's the case, why should we default to using a stablecoin that is currently delivering profits to competitors?

One reason Solana appears hesitant on this issue is its desire to maintain “trustworthy neutrality.” This is particularly important as the foundation strives for institutional-level legitimacy—after all, currently, only Bitcoin and Ethereum have truly gained recognition in this regard. To attract heavyweight issuers like BlackRock—whose “institutional endorsement” can not only bring real capital inflows but also confer a “commoditized” status on assets in the eyes of traditional finance—Solana must keep a certain distance from ecological politics. Once it publicly supports a specific stablecoin, even if it is “eco-friendly,” it could potentially cause Solana trouble in the process of reaching this level, and it might even be seen as favoring certain ecological participants.

At the same time, the scale and diversity of the Solana ecosystem complicate the situation further. Hundreds of protocols, thousands of developers, and tens of billions in TVL. At this scale, coordinating the entire ecosystem to “abandon USDC” becomes exponentially more difficult. However, this complexity is ultimately a characteristic that reflects the maturity of the network and the depth of its ecosystem. The real issue is: inaction also has a cost, and that cost will only grow.

Path dependence accumulates daily. Every new user who defaults to using USDC is increasing the switching costs for the future. Every protocol that optimizes liquidity around USDC makes alternatives harder to launch. From a technical perspective, the existing infrastructure allows migration to be completed almost overnight—the real challenge lies in coordination.

Currently, within Solana, Jupiter is taking the lead by launching JupUSD and promising to reinvest the profits back into the Solana ecosystem, deeply integrating it into its product system. The question now is: will other leading applications follow suit? Will platforms like Pump.fun also adopt a similar strategy to internalize stablecoin profits? At what point will Solana have no choice but to intervene from the top down, or will it simply allow the applications built on its layer to collect these profits themselves? From a public chain perspective, if applications can retain the economic benefits of stablecoins, although not the ideal outcome, it is still better than these profits flowing out of the chain or even to the enemy camp.

Ultimately, from the perspective of public chains or a broader ecosystem, this game requires collective action: protocols need to channel their liquidity towards consistent stablecoins, treasuries must make thoughtful allocation decisions, developers should change the default user experience, and users need to “vote” with their own funds. The $500 million subsidy that Solana provides to Base each year will not disappear because of a statement from the foundation; it will only truly vanish the moment ecosystem participants “refuse to continue funding competitors.”

Conclusion: The transfer of power from the issuer to the ecosystem

The dominance of the next round of stablecoin economy will no longer depend on who issues the tokens, but rather on who controls the distribution channels and who can coordinate resources and seize the market at a faster pace.

Circle and Tether are able to establish a massive business empire, relying on “first-mover advantage” and “liquidity creation.” However, as the stablecoin stack gradually commoditizes, their moat is being weakened. Cross-chain infrastructure allows for almost interchangeable stablecoins; the clarification of regulations lowers the entry barrier; white-label issuers reduce issuance costs. Most importantly, those platforms with the strongest distribution capabilities, high user stickiness, and mature monetization models have begun to internalize profits—no longer paying interest and profits to third parties.

This transformation is already underway. Hyperliquid is recovering the annual revenue of $220 million that originally flowed to Circle and Coinbase by shifting to USDH; Jupiter has deeply integrated JupUSD into its entire product system; MegaETH uses stablecoin revenue to run its sequencer at close to cost; Sui has partnered with Ethena to launch an ecosystem-aligned stablecoin before path dependence forms. These are just the pioneers. Now, every public chain that “bleeds” hundreds of millions of dollars annually to Circle and Tether has a template to follow.

For investors, this trend offers a new perspective on ecological assessment. The key question is no longer: “How much activity is there on this chain?” but rather: “Can it overcome coordination challenges, realize the monetization of the liquidity pool, and capture stablecoin yields at scale?” As public chains and applications start to “incorporate” hundreds of millions in annualized returns into their systems for token buybacks, ecological incentives, or protocol revenue, market participants can directly “receive” these cash flows through the native tokens of these platforms. Protocols and applications that can internalize this portion of revenue will have more robust economic models, lower user costs, and a more aligned interest with the community; while projects that cannot do so will continue to pay the “stablecoin tax” and watch helplessly as their valuations are compressed.

The most interesting opportunities in the future lie not in holding equity in Circle, nor in betting on those tokens from issuers with high FDV. The real value lies in identifying which chains and applications can accomplish this transition, transforming “passive financial pipelines” into “active revenue engines.” Distribution is the new moat. Those who control the “flow of funds,” rather than just laying out “funding channels,” will define the landscape of the next stage of the stablecoin economy.