How are the new stablecoins eating into the empires of Tether and Circle?

Tether and Circle's moat is being eroded: distribution channels outperform network effects. The market share of stablecoins occupied by Tether and Circle may have peaked in relative terms—even as the overall supply of stablecoins continues to grow. By 2027, the total market capitalization of stablecoins is expected to exceed $1 trillion, but the benefits of this expansion will not primarily flow to the existing giants as they did in the previous cycle. Instead, an increasing share will go to “ecosystem-native stablecoins” and “white label issuance” strategies, as blockchain 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 USD.

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

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

First, 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 exclusively captures the yield from all USDC on its platform. In 2024, Circle's reserve yield is approximately $1.7 billion, of which about $908 million is paid to Coinbase. This shows that stablecoin distribution partners 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 to let issuers profit.

Coinbase receives 50% of the earnings from Circle's USDC reserves and exclusively holds the earnings from USDC on the platform.

Secondly, cross-chain infrastructure makes stablecoins interchangeable. The official bridging 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 nearly costless, while providing a native user experience. Nowadays, it no longer matters which stablecoin you use, as you can quickly switch according to liquidity needs. Just a short while ago, this was still a cumbersome task.

Third, 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 coins. At the same time, more and more white label issuers are driving down fixed issuance costs, while treasury yields provide strong incentives for “float monetization.” The result is that the stablecoin stack is being commoditized and increasingly homogenized.

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

DeFi is precisely where this trend is most evident and is also the most far-reaching scenario.

From “Loss” to “Profit”: The New Script of DeFi's Stablecoins

This transformation is already beginning to take shape in the on-chain economy. Compared to Circle and Tether, many public chains and applications with stronger network effects are starting to adopt white label stablecoin solutions (based on metrics such as product-market fit, user stickiness, and distribution efficiency) to fully leverage existing user bases and capture profits 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 in Hyperliquid. At that time, about 5.5 billion USDC was stored on the platform — which meant that approximately 220 million additional earnings flowed to Circle and Coinbase, rather than staying in Hyperliquid itself.

Before the validators vote to determine the ownership of the USDH code, Hyperliquid announced the launch of a natively issued product centered around itself.

For Circle, becoming the main trading pair in Hyperliquid's core markets has brought considerable revenue. They have directly benefited from the explosive growth of the exchange but have hardly given back any value to the ecosystem itself. For Hyperliquid, this means a significant loss of value to third parties that contribute almost nothing, which is seriously inconsistent with its community-first and ecosystem-synergy philosophy.

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

In the end, Native won the issuance rights for USDH—its proposal is more consistent with the Hyperliquid ecosystem incentives. This model features neutrality and compliance from the issuer, with reserve assets managed offline by BlackRock, while the on-chain portion is supported by Superstate. The key point is: 50% of the reserve income will be directly injected into the Hyperliquid 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 of power: in the DeFi space, the moat and returns are gradually shifting towards applications and ecosystems that have 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 holders. The yield of USDe comes from basis trading. Although the yield has been compressed to about 5.5% as the total supply exceeds 12.5 billion USD, it is still higher than the yield on U.S. Treasuries (around 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. If the interest rate cut cycle continues, the basis trading spread will widen again, thereby enhancing the appeal of such “yield models”.

You may wonder whether this violates the GENIUS Act, which prohibits stablecoin issuers from directly paying returns to users. In fact, this restriction may not be as strict as imagined. The Act does not explicitly prohibit third-party platforms or intermediaries from distributing rewards to stablecoin holders—as long as the funding source is provided by the issuer. This gray area has not been fully 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 doing so in the future. What is more important than legal texts is the underlying economic reality.

Stablecoin Tax: Revenue Loss of Mainstream Public Chains

Currently, approximately $30 billion of USDC and USDT is idle on Solana, BSC, Arbitrum, Avalanche, and Aptos. At a 4% reserve yield rate, this could generate about $1.1 billion in interest income for Circle and Tether each year. 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.

Taking Solana, BSC, Arbitrum, Avalanche, and Aptos as examples, Circle and Tether earn approximately $1.1 billion annually, while these ecosystems only generate $800 million in transaction fees.

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

What prevents 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 also initiate competitive bidding to white label issuers like Hyperliquid; or they can launch a native stablecoin with the help of “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, which have endured multiple market cycles and maintained trust during extreme stress tests; issuing a native stablecoin, on the other hand, 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 Public Chain Economics: Stablecoins Become a New Income Engine

Stablecoins have the potential to become the largest source of income for certain public chains and applications. Nowadays, when the blockchain economy relies solely on transaction fees, there is a structural limit to the rise — network revenue can only increase when users “pay more fees,” which conflicts with the goal of “lowering the barriers to use.”

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 revenues, MegaETH can operate the sequencer at cost price and reinvest the profits into community programs. This model provides the ecosystem with a sustainable, low-cost, innovation-oriented economic structure.

The leading DEX aggregator Jupiter on Solana is promoting a similar strategy through JupUSD. It plans to deeply integrate JupUSD into its product system—from the collateral assets of Jupiter Perpetual Contracts (Jupiter Perps) (where approximately 750 million USD of stablecoin reserves will be gradually replaced) to the liquidity pools of Jupiter Lend, Jupiter is attempting to ensure that the returns from these stablecoins flow back into its own ecosystem, rather than to external issuers. Whether these returns are used for rewarding users, buying back coins, or funding incentive programs, the value accumulation they bring far exceeds simply handing over all returns to external stablecoin issuers.

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

Valuation Mismatch of Applications and Public Chains

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

Most people still use the valuation framework mainly from the perspective of “the total economic activity occurring above it” to view these two layers. In this model, on-chain transaction fees represent the total cost borne by users, while the income of the chain is the portion of these fees that flows to the protocol itself or 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, public chains will inevitably capture value, even if the actual economic benefits have long flowed elsewhere.

Nowadays, this model is beginning to transform - and at the forefront are the application layer. The most intuitive examples are the two star projects of this cycle: Pump.fun and Hyperliquid. Both of these applications use almost 100% of their revenue (note, not transaction fees) to buy back their own tokens, while their valuation multiples are far lower than the main infrastructure layer. In other words, these applications are generating real and transparent cash flow, rather than imaginary implied earnings.

In contrast, the price-to-sales ratio of most mainstream public chains is still as high as hundreds or even thousands of times, while leading applications create higher returns with lower valuations.

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

In contrast, Hyperliquid generated $667 million in revenue, with an FDV of $38 billion, corresponding to a multiple of 57 times; according to 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 capitalization multiple is only 2 times. Both of these prove that: applications that are highly aligned with the market and have strong distribution capabilities are creating considerable revenue at multiples far below the underlying layer.

This is an ongoing transfer of power. 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 reclaim some value - transforming the originally passive “currency channels” into active revenue streams.

Coordination Issues: Why Some Public Blockchains Run Faster

The shift towards “stablecoins aligned with ecosystem interests” is already happening; the pace of progress among different public chains varies significantly, and the key lies in their coordination capabilities and execution urgency.

For example, Sui - although the ecosystem is still not as mature as Solana's, the actions are extremely rapid. 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 a strategic decision at the public chain level: to “internalize” the stablecoin economy as early as possible before path dependence is formed. Although these products are expected to officially launch in Q4, Sui is the first mainstream public chain to actively implement this strategy.

In contrast, the situation faced by Solana 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 significant portion of which flows back to Coinbase through revenue-sharing agreements.

And where is Coinbase using these profits? — To subsidize Base, one of Solana's direct competitors. Part of the liquidity incentives, developer grants, and ecosystem investments for Base is coming 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 long 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 profits be used for SOL buybacks and burns. Some stablecoin issuers (such as Agora) have also proposed similar plans, but compared to the active promotion by Sui, the official response from Solana has been relatively lukewarm.

The reason is actually not complicated: as regulatory frameworks such as the GENIUS Act become clearer, stablecoins have increasingly tended toward “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 default to using a stablecoin that is currently delivering profits to competitors?

The reason Solana appears hesitant on this issue is partly due to its desire to maintain “credible neutrality.” This is particularly important in the foundation's efforts to pursue institutional-level legitimacy—after all, currently, only Bitcoin and Ethereum truly gain recognition in this regard. If it wants to attract heavyweight issuers like BlackRock—such “institutional endorsement” can not only bring real capital inflow but also grant the asset a “commoditized” status 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 may put Solana in trouble on its way to this level, and even be seen as favoring certain ecological participants.

At the same time, the scale and diversity of the Solana ecosystem make the situation even more complicated. 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. But 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 comes at a cost, and that cost will increasingly grow.

Path dependence accumulates daily. Every new user who defaults to using USDC is increasing the future switching costs. 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 has taken the lead by launching JupUSD and has pledged to reinvest the profits back into the Solana ecosystem, deeply integrating it into its own product system. The question now is: Will other leading applications follow suit? Will platforms like Pump.fun also adopt similar strategies to internalize stablecoin profits? When will Solana be left with no choice but to intervene from the top down, or will it simply allow the applications built on its level to collect these profits themselves? From the perspective of public chains, if applications can retain the economic benefits of stablecoins, although it is not the most ideal outcome, it is certainly better than these profits flowing out of the chain or even to enemy camps.

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

Conclusion: The Transfer of Power from Issuers to Ecosystems

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 more quickly.

Circle and Tether are able to establish a huge business empire through “first-mover advantage” and “liquidity building”. However, as the stablecoin stack gradually becomes commoditized, their moat is being weakened. Cross-chain infrastructure allows for almost interchangeable stablecoins; clearer regulations lower the entry barriers; white label issuers drive down issuance costs. Most importantly, 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 operate its sequencer at close to cost; Sui has collaborated with Ethena to launch an ecosystem-aligned stablecoin before path dependence forms. These are just the pioneers. Now, every public blockchain that bleeds hundreds of millions of dollars annually to Circle and Tether has a template to follow.

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

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