How are new stablecoins eroding the empires of Tether and Circle?

Tether and Circle's moats are eroding: distribution channels trump network effects. Tether and Circle's stablecoin market share may have peaked in relative terms—even as the overall stablecoin supply continues to grow. The total stablecoin market capitalization is projected to exceed $1 trillion by 2027, but the benefits of this expansion will not primarily accrue to established giants as in the previous cycle. Instead, a growing share will flow to "ecosystem-native stablecoins" and "white label issuance" strategies as blockchains and applications begin to internalize revenue and distribution channels. Currently, Tether and Circle control approximately 85% of the circulating stablecoin supply, totaling approximately $265 billion. For context: Tether is reportedly raising $20 billion at a $500 billion valuation, with approximately $185 billion in circulation; Circle is valued at approximately $35 billion and has approximately $80 billion in circulation. The network effects that once supported their monopoly are weakening. Three forces are driving this shift: First, the importance of distribution channels has surpassed so-called network effects. Circle's relationship with Coinbase illustrates this point perfectly. Coinbase receives 50% of the residual yield from Circle's USDC reserves and exclusively receives all USDC earnings on its platform. In 2024, Circle's reserve earnings were approximately $1.7 billion, of which approximately $908 million went to Coinbase. This demonstrates that stablecoin distribution partners can capture a significant portion of the economic benefits—which explains why players with significant distribution power are now more inclined to issue their own stablecoins rather than continue to pass profits on to issuers. Coinbase receives 50% of Circle's USDC reserve revenue and receives an exclusive share of any USDC earned on the platform. Secondly, cross-chain infrastructure is making stablecoins interchangeable. Official bridge upgrades from major Layer 2 platforms, the universal messaging protocol launched by LayerZero and Chainlink, and the maturity of smart routing aggregators have made stablecoin swaps within and across chains virtually cost-free and user-friendly. It no longer matters which stablecoin you use, as you can quickly switch based on liquidity needs. Until recently, this was a cumbersome process. Third, regulatory clarity is removing barriers to entry. Legislation such as the GENIUS Act establishes a unified framework for domestic stablecoins in the United States, reducing the risk faced by infrastructure providers when holding the coins. Meanwhile, a growing number of white-label issuers are driving down fixed issuance costs, while Treasury yields provide strong incentives for "float monetization." The result: the stablecoin stack is becoming commoditized and increasingly homogenized. This commoditization eliminates the structural advantages of major players. Now, any platform with effective distribution capabilities can choose to "endogenize" the stablecoin economy—rather than paying the benefits to others. Early adopters include fintech wallets, centralized exchanges, and a growing number of DeFi protocols. DeFi is precisely where this trend is most evident and where its impact is most profound. From "Churn" to "Yield": DeFi's New Stablecoin Playbook This shift is already evident in the on-chain economy. Compared to Circle and Tether, many public chains and applications with stronger network effects (as measured by product-market fit, user stickiness, and distribution efficiency) have begun adopting white-label stablecoin solutions to leverage their existing user base and capture the profits that would otherwise have accrued to established issuers. This shift is creating new opportunities for on-chain investors who have long ignored stablecoins. Hyperliquid: The First Defection from DeFi This trend first emerged at Hyperliquid. At the time, approximately $5.5 billion in USDC was held on the platform—meaning that approximately $220 million in additional annual revenue was flowing to Circle and Coinbase rather than remaining with Hyperliquid itself. Before validators voted to determine the ownership of the USDH ticker, Hyperliquid announced it would launch a natively issued token, centered around itself. For Circle, becoming the primary trading pair in Hyperliquid's core markets generated significant revenue. They directly benefited from the exchange's explosive growth while providing little value back to the ecosystem. For Hyperliquid, this meant a significant loss of value to third parties who contributed little, a stark contradiction to its commitment to community-first, ecosystem-wide collaboration. Nearly all major white-label stablecoin issuers participated in the USDH bidding process, including Native Markets, Paxos, Frax, Agora, MakerDAO (Sky), Curve Finance, and Ethena Labs. This was the first large-scale competition at the application layer of the stablecoin economy, marking a redefinition of the value of "distribution rights." Ultimately, Native won the right to issue USDH—its approach was more aligned with the incentives of the Hyperliquid ecosystem. This model is issuer-neutral and compliant, with reserve assets managed offline by BlackRock and on-chain support provided by Superstate. Crucially, 50% of reserve income will be directly invested in Hyperliquid's rescue fund, with the remaining 50% used to expand USDH liquidity. While USDH won't replace USDC in the short term, this decision reflects a deeper power shift: in DeFi, moats and returns are increasingly shifting toward applications and ecosystems with stable user bases and strong distribution capabilities, rather than traditional issuers like Circle and Tether. The Proliferation of White-Label Stablecoins: The Rise of the SaaS Model Over the past few months, a growing number of ecosystems have adopted the "white-label stablecoin" model. Ethena Labs' "stablecoin-as-a-service" solution is at the center of this trend. On-chain projects such as Sui, MegaETH, and Jupiter are all using or planning to issue their own stablecoins through Ethena's infrastructure. Ethena's appeal lies in its protocol's direct return of returns to holders. USDe's returns come from basis trades. Although the yield has compressed to approximately 5.5% as the total supply has exceeded $12.5 billion, it is still higher than the US Treasury yield (approximately 4%) and far better than the zero yield of USDT and USDC. However, as other issuers begin to pass on government bond returns directly to users, Ethena's relative advantage is declining—government-backed stablecoins offer a more attractive risk-reward ratio. If the interest rate cut cycle continues, basis trading spreads will widen again, further strengthening the appeal of this type of "yield-based model." You might ask, does this violate the GENIUS Act, which prohibits stablecoin issuers from paying returns directly to users? In reality, this restriction may not be as strict as one might imagine. The act does not explicitly prohibit third-party platforms or intermediaries from distributing rewards to stablecoin holders—as long as the funding comes from the issuer. This gray area remains unclarified, but many believe this "loophole" still exists. Regardless of regulatory evolution, DeFi has always operated in a permissionless, fringe state and is likely to continue to do so. More important than the letter of the law is the underlying economic reality. Stablecoin Tax: Revenue Leakage for Mainstream Public Chains Currently, approximately $30 billion in USDC and USDT sit idle on Solana, BSC, Arbitrum, Avalanche, and Aptos. Based on a 4% reserve yield, this could generate approximately $1.1 billion in interest income annually for Circle and Tether. This figure is approximately 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 proposition across Layer 1, Layer 2, and various applications. Taking Solana, BSC, Arbitrum, Avalanche, and Aptos as examples, Circle and Tether generate approximately $1.1 billion in revenue annually, while these ecosystems only earn $800 million in transaction fees. Simply put, these ecosystems are losing hundreds of millions of dollars in stablecoin revenue annually. Leaving even a small portion of this revenue on-chain and capturing it themselves could be enough to reshape their economic structure—providing a revenue base for public chains that's more robust and resilient than transaction fees. What prevents them from reclaiming these profits? The answer is: nothing. There are actually many paths they could take. They could negotiate revenue sharing with Circle or Tether (as Coinbase has done); they could, like Hyperliquid, launch a competitive bidding process for white-label issuers; or they could leverage a "stablecoin-as-a-service" platform like Ethena to launch a native stablecoin. Of course, each path has trade-offs: partnering with traditional issuers maintains the familiarity, liquidity, and stability of USDC or USDT, assets that have weathered multiple market cycles and maintained trust under extreme stress tests; issuing native stablecoins offers greater control and higher returns, but also faces the challenge of a cold start. Both approaches have corresponding infrastructure, and each chain can choose a path based on its priorities. Redefining Public Chain Economics: Stablecoins Become a New Revenue Engine: Stablecoins have the potential to become the largest source of revenue for some public chains and applications. Today, when the blockchain economy relies solely on transaction fees, there's a structural cap on growth—network revenue can only increase if users pay more, which inherently conflicts with the goal of lowering barriers to entry. MegaETH's USDm project is a response to this. It partners with Ethena to issue a white-label stablecoin, USDm, using BlackRock's on-chain treasury bond product, BUIDL, as a reserve asset. By internalizing USDm revenue, MegaETH can operate its sequencer at cost and reinvest the proceeds into community initiatives. This model fosters a sustainable, low-cost, and innovation-oriented economic structure for the ecosystem.

Solana’s top DEX aggregator, Jupiter, is pursuing a similar strategy through JupUSD. It plans to deeply integrate JupUSD into its own product system, from the collateral assets of Jupiter Perps (of which approximately $750 million in stablecoin reserves will be gradually replaced) to the liquidity pool of Jupiter Lend. Jupiter aims to return these stablecoin profits to its own ecosystem rather than to external issuers. Whether these profits are used to reward users, repurchase tokens, or fund incentive programs, the value they bring is far greater than handing all the profits to external stablecoin issuers. This is the core shift at play: the revenue that once passively flowed to legacy issuers is now being actively recaptured by applications and public chains. The Valuation Mismatch Between Applications and Public Chains As this unfolds, I believe both public chains and applications are on a credible path to generating more sustainable revenue, gradually freeing themselves from the cyclical fluctuations of the "internet capital markets" and on-chain speculation. If so, they may finally justify their often-criticized, "out-of-touch" valuations. The valuation framework most people still use primarily views these two layers from the perspective of "the total amount of economic activity occurring within them." In this model, on-chain fees represent the total costs borne by users, while chain revenue is the portion of these fees that flows to the protocol itself or to token holders (e.g., through burns, treasury inflows, and other mechanisms). However, this model has been flawed from the outset—it assumes that as long as activity occurs, the public chain will capture value, even if the true economic benefits have already flowed elsewhere. Today, this model is beginning to shift—led by the application layer. The most striking examples are two star projects of this cycle: Pump.fun and Hyperliquid. Both applications use nearly 100% of their revenue (note, not fees) to repurchase their own tokens, while achieving valuation multiples far below those of the primary infrastructure layer. In other words, these applications are generating real and transparent cash flows, rather than imaginary, implied returns.

In contrast, most mainstream public chains still have price-to-sales ratios of hundreds or even thousands of times, while leading applications are generating higher returns at lower valuations.

Take Solana as an example. Over the past year, the chain's total fees were approximately $632 million, its revenue was approximately $1.3 billion, its market capitalization was approximately $105 billion, and its fully diluted valuation (FDV) was approximately $118.5 billion.

This means Solana's market capitalization to fees is approximately 166 times, and its market capitalization to revenue is approximately 80 times—which is already a relatively conservative valuation among large L1s. Many other public chains boast valuation multiples of thousands of times their FDV. By comparison, Hyperliquid generated $667 million in revenue and $38 billion in FDV, corresponding to a multiple of 57x; based on market capitalization, it's only 19x. Pump.fun generated $724 million in revenue, yet boasts a FDV multiple of just 5.6x and a market capitalization multiple of just 2x. Both of these demonstrate that applications with strong product-market fit and robust distribution capabilities are generating significant revenue at multiples far lower than those of the base layer. This is an ongoing power shift. The valuation of the application layer is increasingly determined by the real revenue they generate and return to the ecosystem, while the public chain layer is still struggling to justify its own valuation. The eroding L1 premium is the clearest signal. Unless public chains find ways to internalize more of the ecosystem's value, these inflated valuations will continue to decline. "White-label stablecoins" may be the first step for public chains to reclaim some of this value—transforming what was once a passive "monetary channel" into an active revenue stream. The Coordination Problem: Why Some Public Chains Move Faster The shift toward "stablecoins aligned with the interests of the ecosystem" is already underway; the pace of advancement varies significantly among public chains, and the key lies in their coordination capabilities and the urgency of their execution. Take Sui, for example. While its ecosystem is far less mature than Solana's, it's moving incredibly quickly. Partnering with Ethena, Sui plans to simultaneously launch two stablecoins: sUSDe and USDi (the latter is similar to the BUIDL-backed stablecoin mechanism being explored by Jupiter and MegaETH). This isn't a spontaneous move at the application layer, but a strategic decision at the public chain level: to internalize the stablecoin economy as soon as possible, before path dependency sets in. While these products aren't expected to officially launch until Q4, Sui is the first mainstream public chain to proactively pursue this strategy. By comparison, Solana faces a more complex and painful situation. Currently, approximately $15 billion in stablecoin assets are held on the Solana chain, with over $10 billion in USDC. These funds generate approximately $500 million in interest income for Circle annually, a significant portion of which flows back to Coinbase through a profit-sharing agreement. So where does Coinbase use these profits? — To subsidize Base, one of Solana's direct competitors. Base's liquidity incentives, developer grants, and ecosystem investments are partially funded by the $10 billion in USDC on Solana. In other words, Solana is not only losing revenue but even providing financial support to its competitors. This issue has long been a source of strong concern within the Solana community. For example, Helius founder @0xMert_ has called for Solana to launch a stablecoin tied to ecosystem interests and proposed using 50% of its profits for the repurchase and destruction of SOL tokens. Executives at some stablecoin issuers, such as Agora, have also proposed similar proposals, but compared to Sui's aggressive push, Solana's official response has been relatively muted. The reason is simple: with regulatory frameworks like the GENIUS Act gaining clarity, stablecoins have become increasingly commoditized. Users don't care whether they hold USDC, JupUSD, or any other compliant stablecoin—as long as the price peg is stable and liquidity is sufficient. So, why default to a stablecoin that's profiting competitors? Solana's hesitation stems in part from its desire to maintain "trusted neutrality." This is particularly crucial as the foundation strives for institutional legitimacy—after all, only Bitcoin and Ethereum currently hold true legitimacy in this regard. If Solana hopes to attract a major issuer like BlackRock—institutional backing that not only brings real capital inflows but also commoditizes the asset in the eyes of traditional finance—it must maintain a certain distance from ecosystem politics. Publicly endorsing a particular stablecoin, even one deemed "eco-friendly," could jeopardize Solana's progress toward this tier, potentially even leading to perceptions of favoritism among certain ecosystem participants. Furthermore, the scale and diversity of the Solana ecosystem complicate matters. Hundreds of protocols, thousands of developers, and billions of dollars in TVL. At this scale, coordinating an ecosystem-wide shift away from USDC becomes exponentially more difficult. Ultimately, however, this complexity is a characteristic, a reflection of the maturity of the network and the depth of its ecosystem. The real issue is this: inaction carries a cost, and it's a growing one. Path dependency accumulates daily. Every new user who defaults to USDC increases future switching costs. Every protocol that optimizes liquidity around USDC makes it harder to launch alternatives. From a technical perspective, the existing infrastructure makes migration virtually overnight—the real challenge lies in coordination. Within Solana, Jupiter is leading the charge, launching JupUSD and promising to funnel revenue back into the Solana ecosystem, deeply integrating it into its product offerings. The question now is: Will other leading applications follow suit? Will platforms like Pump.fun adopt a similar strategy, internalizing stablecoin profits? At what point will Solana be forced to intervene top-down, or will it simply allow applications built on top of it to collect these profits themselves? From the perspective of public chains, if applications can retain the economic benefits of stablecoins, while not ideal, it's better than having those benefits flow off-chain or even to the enemy camp. Ultimately, from the perspective of public chains and the broader ecosystem, this game requires collective action: protocols need to tilt their liquidity toward a consistent stablecoin, treasuries need to make thoughtful allocation decisions, developers should change the default user experience, and users should "vote" with their own funds. Solana's $500 million annual subsidy to Base won't disappear with a single announcement from the foundation; it will only truly disappear when ecosystem participants "refuse to continue funding competitors." Conclusion: The Power Shift from Issuers to Ecosystems The next wave of dominance in the stablecoin economy will no longer hinge on who issues the tokens, but rather on who controls the distribution channels and who can more quickly coordinate resources and seize market share. Circle and Tether built their vast commercial empires by leveraging first-mover advantage and liquidity. However, as the stablecoin stack becomes increasingly commoditized, their defensive moats are eroding. Cross-chain infrastructure makes stablecoins virtually interchangeable; regulatory clarity lowers barriers to entry; and white-label issuers drive down issuance costs. Most importantly, platforms with the strongest distribution capabilities, highly engaged users, and mature monetization models have begun to internalize their revenue, eliminating interest and profits payments to third parties. This shift is already underway. Hyperliquid is reclaiming $220 million annually in revenue that previously went to Circle and Coinbase by switching to USDH; Jupiter is deeply integrating JupUSD into its entire product ecosystem; MegaETH is leveraging stablecoin revenue to keep its sequencer operating near cost; and Sui is partnering with Ethena to launch an ecosystem-aligned stablecoin before path dependency sets in. These are just the first movers. 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 fresh perspective on ecosystem assessment. The key question is no longer, "How much activity is there on this chain?" but rather, "Can it overcome coordination challenges, monetize its capital pool, and capture stablecoin returns at scale?" As public chains and applications begin to "integrate" hundreds of millions of dollars in annualized revenue into their ecosystems for token buybacks, ecosystem incentives, or protocol revenue, market participants can directly "undertake" this cash flow through these platforms' native tokens. Protocols and applications that can internalize this revenue will have more robust economic models, lower user costs, and more aligned interests with their communities. Those that fail will continue to pay a "stablecoin tax" and see their valuations compressed. The most interesting opportunities ahead lie not in holding Circle equity or betting on high-FDV issuer tokens. The real value lies in identifying which chains and applications can make this transition, transforming from "passive financial conduits" into "active revenue engines." Distribution is the new moat. Those who control the "flow of funds," rather than simply paving the "funding channels," will define the next phase of the stablecoin economy.