This episode breaks down the strategic masterclass behind Hyperliquid's USDH bidding war, revealing how distribution is becoming the new battleground for stablecoins and what new private equity models signal for real-world crypto adoption.
Inversion's Public Launch and Private Equity Strategy
- The episode kicks off with a deep dive into Inversion, a new venture co-founded by host Santi, which recently announced its Series A led by Dragonfly. The firm’s strategy, highlighted in The Wall Street Journal, is to acquire traditional, low-margin companies and integrate blockchain technology to dramatically improve their efficiency and unit economics. This private equity approach aims to bypass the slow, often-failed process of convincing legacy businesses to adopt crypto by instead taking direct control and implementing the changes themselves.
- Rob, a partner at Dragonfly, explains that the investment thesis was compelling because it addresses the long-standing challenge of bringing crypto to the masses. He emphasizes that Inversion’s model creates value not just by cutting costs but by enabling new, blockchain-native revenue streams.
- The strategy was validated by a shout-out from the typically skeptical Matt Levine, who noted the novelty of the approach. As one traditional private equity investor quoted, "Over my 40 years of investing, it's rare to encounter a truly radical new approach to private equity."
The Rationale: Hacking Mainstream Adoption
- Santi explains that Inversion was born from the frustration of seeing innovative DeFi and infrastructure projects fail due to a lack of on-chain users. The core idea is to stop waiting for users to come to crypto and instead bring crypto to existing, high-quality user bases. By acquiring companies, Inversion gains control of management and board decisions, allowing it to accelerate technology adoption at a pace that would otherwise be impossible.
- The current market environment is ideal for this strategy. Rising interest rates have made traditional private equity models reliant on financial engineering less effective, creating an opening for firms that can create value through technological expertise.
- Rob draws a parallel to successful tech-focused private equity firms like Silver Lake and Vista, which have historically generated returns by integrating software into traditional businesses. Inversion aims to do the same with blockchain, stablecoins, and DePIN (Decentralized Physical Infrastructure Networks)—networks that use crypto incentives to build and operate real-world infrastructure.
Inversion's Progress and "Sandwich" Model
- Since its inception as a pitch deck, Inversion has grown to a team of eight, including private equity professionals and a general counsel. The firm has already analyzed over 25 potential acquisitions and submitted two competitive bids. Santi describes their strategy as the "inversion sandwich":
- Top Layer (User Aggregation): Acquiring companies with large, established user bases.
- Bottom Layer (Execution): Building their own chain to control the execution environment.
- Middle Layer (Partnerships): Plugging in best-in-class DeFi and DePIN protocols like Ethena, Maple, and Helium, rather than building these products in-house. This creates a symbiotic ecosystem where partners gain access to real users, and Inversion leverages proven technology.
The Hyperliquid USDH Bidding War
- The conversation shifts to Hyperliquid, which initiated a competitive bidding process for its native stablecoin, USDH. With over $5.5 billion in stablecoin deposits—95% of which is USDC—Hyperliquid recognized a significant value leakage. Circle, the issuer of USDC, captures all the yield from the reserves, offering no economic benefit back to the Hyperliquid protocol.
- To reclaim this value and increase sovereignty, Hyperliquid invited established issuers to submit proposals to build and manage USDH. This move attracted bids from major players, including Paxos, Ethena, Agora, Frax, and a new entity, Native Markets.
- The bidding war quickly became a major event, with PayPal's corporate account even tweeting in support of the Paxos proposal, demonstrating the high stakes involved in securing distribution on a high-volume protocol.
Analysis of the USDH Proposals and Governance Drama
- Rob provides an in-depth analysis, stating that while Native Markets is the clear frontrunner to win, its proposal was not the strongest from a product, infrastructure, or compliance perspective. He notes that established players like Paxos offered guaranteed distribution on platforms like PayPal and Venmo, while Ethena and Agora proposed more favorable revenue-sharing models.
- Rob, acknowledging Dragonfly's investments in Ethena and Agora, suggests the outcome was likely "pre-baked" through prior business discussions, a common challenge in DAO governance where business decisions are made before a public vote.
- The key differentiator for Native Markets was its "Hyperliquid-aligned" positioning, promising to build exclusively for the protocol. This highlights a critical tension in decentralized governance: the conflict between choosing the objectively best product versus a strategically aligned partner.
The Strategic Genius of Hyperliquid's Move
- Regardless of the winner, the hosts agree that Hyperliquid was the biggest beneficiary. The bidding process was a "masterclass in marketing and attention," generating massive buzz, driving up the price of its token, and forcing major financial players to publicly compete for its business.
- This event signals a major power shift. Protocols with significant user distribution can now command favorable terms from infrastructure providers, turning stablecoins into a commodity where issuers must compete on revenue sharing and integration.
- Ethena founder Guy Young's response encapsulated the competitive sentiment: "In short, we will do what we have done or what we have always done since day one. Out compete everyone else on product regardless." This indicates that even the losers of the bid will still deploy on Hyperliquid, further enriching the ecosystem.
Second-Order Effects: Implications for Solana and Circle
- The Hyperliquid case study has immediate implications for other major ecosystems. The hosts discuss the growing sentiment that Solana should "enshrine" a native stablecoin, using its vast distribution to capture yield that currently flows to issuers like Circle.
- Circle (USDC) is identified as the biggest potential loser in this new paradigm. It faces a difficult choice: either share revenue with protocols and compress its margins or risk losing significant market share in DeFi.
- Rob argues that while bank accounts are sticky, money is not. USDC's dominance in DeFi is now vulnerable as protocols realize they can launch their own stablecoins or partner with issuers offering better economic terms.
Figure's Public Listing and Blockchain-Enabled Business
- The discussion concludes with Figure, a financial technology company founded by SoFi co-founder Mike Cagny, which recently went public at a multi-billion dollar valuation. Figure is one of the largest issuers of HELOCs (Home Equity Lines of Credit) in the U.S. and processes all its loans on its proprietary blockchain, Provenance.
- Figure serves as a powerful case study for how blockchain can create tangible efficiencies. By using its own chain for origination, settlement, and reconciliation, the company has significantly lowered its cost structure compared to traditional competitors.
- The successful IPO of a crypto-enabled business like Figure, along with Gemini's recent listing, is seen as the beginning of a new wave of crypto companies going public, signaling growing acceptance from institutional investors and regulators.
This episode highlights a critical market shift from speculation to a strategic battle for distribution and real-world utility. Hyperliquid's leverage over stablecoin issuers and Inversion's acquisition model show that future value will accrue to those who control user relationships. Investors should prioritize protocols with strong user bases and track the integration of blockchain into traditional industries.
