Every dollar of the stablecoin USDC that's in circulation is backed by reserves, mostly short-term U.S. Treasuries, that generate yield. Since it launched in 2018, virtually all of that income has been retained by its issuer, Circle Internet Group, (CRCL 1.47%) and its distribution partner, Coinbase Global, (COIN 3.46%) and the coin's base of holders never saw a cent. But now, Hyperliquid, (HYPE 9.79%) the decentralized crypto exchange, just changed the equation.
Under a deal announced on May 14, Coinbase became the official USDC treasury deployer on the Hyperliquid network, with Circle handling all of the necessary cross-chain infrastructure. Per the agreement, Hyperliquid is now going to capture up to 90% of the yield from USDC deposits on its platform, which will be revenue used for buying back its native coin, Hype. That's going to be a huge gift for Hyperliquid's holders, so let's explore how it changes the investment thesis.
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Free revenue tends to be good for a token's value
Hyperliquid already has one of crypto's most aggressive value capture mechanisms, though the field isn't very competitive. It uses roughly 99% of the trading fees from activity on its exchange to buy Hype coins on the open market, creating steady demand that increases with the platform's activity and thus rewards holders via higher prices.
The deal with Coinbase and Circle adds another stream of demand for Hype. With about $6.8 billion in stablecoins on the network, 95% of which are USDC, the interest income could be quite a tailwind. In fact, Syncracy Capital co-founder Ryan Watkins estimates the yield-sharing arrangement could boost buybacks by between $135 million and $160 million per year. If USDC balances expand further as Hyperliquid's platform gains adoption, he estimates it could even reach $300 million to $500 million in new interest income annually, all requiring zero additional infrastructure or work from the protocol or its developers.
CRYPTO: HYPE
Key Data Points
No new coins will be created to pay holders under this arrangement, which makes it very bullish. The takeaway here is that for holders, Hyperliquid now captures value from two independent sources: its fairly volatile trading fees and a far more stable stream of yield income that's tied to interest rates rather than crypto market sentiment. In other words, this deal just gave the network a new cash flow that could help it survive hard times while also giving investors another reason to keep holding the coin.
What could go wrong
The deal isn't a blank check.
If the Federal Reserve cuts interest rates, Hyperliquid's yield income will shrink. There's also the risk that Hyperliquid's USDC supply could migrate elsewhere if a competing venue, of which there are many, offered better terms or if a security incident erodes trust.
NASDAQ: COIN
Key Data Points
The broader context, though, is highly encouraging for Hyperliquid holders, and it supports the idea that there's a strong investment thesis for buying this coin. In mid-May, two spot Hyperliquid exchange-traded funds (ETFs) launched. The platform also just launched native decentralized prediction markets, building on its recent success of pioneering native decentralized markets for crypto-financial derivatives.
Assuming the deal with Coinbase and Circle holds as described, and there's currently not much reason to assume that it won't, accumulating Hyperliquid coins with the intention of holding them and staking them for the long haul is an easy and direct way to benefit. You can buy Hyperliquid on Coinbase and most crypto exchanges, or via an ETF.
NYSE: CRCL
Key Data Points
Regardless of how you choose to hold it, the yield-sharing arrangement makes the thesis for buying Hyperliquid look even better than it looked a month ago, but it doesn't eliminate the risk of holding a volatile crypto tied to a single relatively new exchange platform that's largely operating in a regulatory gray area. This is a risky investment despite Hyperliquid having very favorable tokenomics and plenty of large markets to compete in. After all, there's nothing stopping any of its many competitors from seeking similar deals with stablecoin issuers and distributors, and some probably will.
