Title: The Bull Case for Hyperliquid Hyperliquid
Author: fmoulin 7, Crypto Kol
Translated by: zhouzhou, BlockBeats
Editor's Note: Hyperliquid attracts users through low fees and strong incentives, with expected first-year incentives close to $1 billion and an inflation rate of 11.65%. After the launch of EVM, it may become an important platform for driving the growth of demand for HYPE as a new DeFi protocol. The platform generates profits through transaction fees and token auctions, with fee distribution automatically executed to support staking rewards, platform operations, and token burning. Increased capital inflows, especially through Kucoin, could drive the price of HYPE if it can attract more market funds. However, centralization and EVM transition risks may impact the user experience, and investors need to be cautious and do their own research.
The following is the original content (edited for readability):
Hyperliquid is a perpetual trading protocol built on its own L1, aiming to replicate the user experience of centralized trading platforms while providing fully on-chain order books and decentralized trading, supporting spot, derivatives, and pre-listing market trading.
This article will focus more on the market opportunities of Hyperliquid and the basic bullish logic of HYPE.
Currently, the trading price of HYPE has broken through $20, becoming a top 30 asset with a market capitalization of $7.5 billion and a fully diluted valuation (FDV) of over $20 billion. So, where does the heat of Hyperliquid come from? What is the bullish logic?
We will discuss the following:
Trading platform opportunities
EVM ecosystem opportunities
Revenue composition, valuation, and comparative analysis
Risks
I. Trading Platform Opportunities
Hyperliquid dominates the perpetual decentralized trading platform space, accounting for over 50% of trading volume in the past month.
Currently, Hyperliquid's open interest (OI) accounts for about 10% of Binance's.
A few points to note here:
As the bull market deepens and market volatility increases (the current crypto volatility index is only 64), open interest (OI), trading volume, funding rates, and liquidation volumes are expected to continue growing.
The share of perpetual contract decentralized trading platforms versus centralized trading platforms may increase, just as automated market makers (AMMs like Uniswap) have driven the growth of DEXs versus CEXs in spot trading.
With lower fees than CEX competitors and stronger incentives, Hyperliquid has a great opportunity to attract more users and capital to migrate from CEXs. The token generation event (TGE) and the rapid rise in the HYPE price have undoubtedly become the strongest marketing campaigns.
Regarding the incentive mechanism, although the specific structure has not yet been disclosed, it is easy to speculate that perpetual contract and spot trading volume may be incentivized (or already in the incentives), as over 40% of the token supply is reserved for community rewards. Here are the details of the initial airdrop:
Assuming that 10% of the reserved supply will be used for incentives in the first year, the situation will be as follows:
At the current price, nearly $1 billion in incentives will be distributed in the first year, far exceeding the amount distributed at the $2 opening price during the airdrop. The resulting incentive inflation rate is about 11.65% (including staking rewards, or additional calculation may be needed).
More users will bring more trading volume, revenue, burning, and buybacks, so in this case, the actual dilution cost to token holders from the incentives will be less than 11.65%.
The team can also choose a higher inflation rate and incentive level to attract more users. This is the dynamic difference in HYPE's fully diluted valuation (FDV) that blknoiz 06 mentioned.
In summary, the perpetual contract segment:
A growing market (cyclical + gradual dominance of DEX over CEX)
Hyperliquid's market share is expected to grow (thanks to incentive measures)
Additionally:
The spot market may also continue to grow, and in the short term, Hyperliquid is likely to become one of the top three spot DEXs. Yesterday's trading volume was around $500 million, enough to make Hyperliquid the fifth-largest spot DEX on the entire chain.
With the addition of EVM, more interesting assets may enter the spot market for trading, such as the issuance of functional tokens and native assets (such as native USDC and spot trading pairs for SOL/ETH/BTC).
More trading tools are being developed based on the open infrastructure and builder codes of Hyperliquid, and teams like InsilicoTrading, KatoshiAI, and pvp.trade have already launched many cool applications to improve the user experience and attract more traffic to the trading platform.
These factors alone have great bullish potential.
Trading platforms and stablecoins are the most profitable and valuable businesses in the crypto space. Directly competing with mainstream players (Binance, Coinbase, Bybit, OKX) in perpetual contracts and spot trading is a bullish logic in itself.
The most optimistic scenario is:
1. Major trading platforms use Hyperliquid as a decentralized backend;
2. Trading platforms incorporate HYPE into their balance sheets for hedging (reference the proposal by ThinkingUSD).
Although the short-term likelihood of these two points is unclear, who would have thought that Trump would buy $ENA? Anything is possible.
II. EVM Ecosystem Opportunities
What is HyperEVM?
According to the description by hyperdrivedefi, "The Hyperliquid stack consists of two chains, Hyperliquid L1 and HyperEVM (EVM). These two chains exist as a unified state under the same consensus mechanism but run in separate execution environments.
L1 is a permissioned chain running native components like perpetual contracts and spot order books, aiming to meet the high-performance requirements of running these native components. L1 provides programmable APIs, and operations submitted through these APIs need to be signed like submitting transactions to the EVM chain.
EVM is a general-purpose EVM-compatible chain that supports the common Ethereum tooling. EVM is permissionless, and anyone can deploy smart contracts, which can directly access the on-chain perpetual contracts and spot liquidity on L1."
HyperEVM is planned to launch in the coming months, and many teams are already preparing for it. Why is this bullish?
A New Home for DeFi?
Many DeFi teams are preparing to launch alongside the EVM. Most "well-known" DeFi protocol types (AMMs, lending, liquidity staking, CDPs) are expected to launch with the EVM.
These projects will enhance the overall capital efficiency by allowing HYPE holders to use HYPE as collateral in lending and money market protocols.
With the application of existing protocols, whether directly on-chaining order book liquidity will unlock new DeFi primitives is worth looking forward to. I wouldn't be surprised if entirely new DeFi primitives first emerge on Hyperliquid.
For example, ethena labs will reduce their reliance on centralized exchanges, improving their system resilience, and potentially diversify and reduce counterparty risk by partially integrating Hyperliquid into their hedging process. [Reference link]
The Market Wants "Utility Projects"
Whether it's the AI hype on Base and Solana, the performance of Hyena, or the trading volume of $HFUN and $FARM on Hyperliquid, market participants are showing that they are eager to see projects with real value.
With the upcoming launch of numerous DeFi projects, Hyperliquid is likely to become a platform for the rise of "utility projects" in the near to medium term. At the same time, it is highly probable that the AI infrastructure currently being built on Solana by AI16Z, Zerebro, and others will expand to Hyperliquid.
Unique Features of Hyperliquid
Hyperliquid natively supports the creation of vaults. The strategies running on these vaults can leverage the same advanced features as DEXs, such as efficient liquidation of over-leveraged accounts and high-throughput market-making strategies. Anyone can deposit into the vaults to share in the profits, including DAOs, protocols, institutions, or individuals. The vault owners, in turn, can receive 10% of the total profits.
This primitive provides an ideal competitive landscape for attracting capital to AI agents.
Why is the EVM Launch a Bullish Signal?
The launch of the EVM will bring in more fee revenue, which can be used for staking rewards, token burns, and other purposes. For example, Base has generated $15 million in fees over the past 30 days. I believe that HyperEVM's activity levels could match Base's in the coming months.
The EVM also unlocks more use cases for the HYPE token within the ecosystem. HYPE will become a necessary asset for paying gas fees, and can also be used for lending, staking, and locked staking to earn yields. This will significantly increase the buy-side demand.
We can look at the examples of SOL in 2024 (Meme) and ETH in 2020 and 2021 (DeFi and NFT) - on-chain activity directly drove demand for the native assets.
Higher market cap utility projects + more native asset bridging options (like native USDC, spot BTC, SOL, ETH, etc.) will drive up spot trading volume, leading to more revenue.
As more teams launch on the EVM, the auction prices for token tickers will continue to rise, further increasing revenue.
Additionally, the EVM will make Hyperliquid a "formal" L1 network in more people's minds and attract more attention to its ecosystem. This could unlock capital that is currently on the sidelines.
Revenue Breakdown, Valuation, and Comparable Companies
How Does Hyperliquid Make Money?
Hyperliquid's main revenue sources are platform fees and ticker auctions.
Platform Fees:
Ticker Auctions:
Hyperliquid earns revenue from token ticker auctions. In these auctions, projects bid to purchase specific token tickers, which are the key identifiers they use to display and trade on the platform. As more projects come online on the EVM, the competition for token tickers will become more intense, and the prices will gradually rise, bringing in more revenue for Hyperliquid.
Fee Flow on-chain:
As of the time of writing, the Assistance Fund holds 10,761,181.28 HYPE (over 3% of the circulating supply) and 3,143,786.73 USDC. The Insurance Fund has also accumulated 7,071,990.99 USDC, which has not yet been transferred to the Assistance Fund. In total, there is over $10 million in USDC that has not yet been deployed to buy HYPE.
So, how much revenue is Hyperliquid generating? Over the past 30 days, Hyperliquid has generated around $26.5 million in USDC revenue. $2 million of this came from ticker auctions, with the rest coming from platform fees. This revenue is primarily being re-allocated to the Insurance Fund.
Additionally, approximately 79,600 HYPE tokens have been burned from transaction fees since the launch of HYPE. At today's prices, this equates to around $1.75 million in additional revenue. So, Hyperliquid's total revenue over the past 30 days exceeds $28 million, which translates to over $336 million annualized.
Currently, only 3 Layer 1 blockchains (L1s) have revenue exceeding Hyperliquid: Ethereum, Solana, and TRON, all of which have much higher market caps. In fact, Hyperliquid's profitability (annualized revenue/circulating market cap) is the highest among all L1 and L2 platforms.
Potential Revenue Growth
Where can it go from here? The main drivers of revenue include:
Platform Fees
Auctions
Future Revenue Mechanisms (EVM Fees?)
Let's analyze these factors one by one.
Platform Fees
Trading volume in December has already matched November. If the second half of the month maintains similar levels, this would imply a 100% month-over-month increase.
Auctions
Auction prices have recently spiked, exhibiting a significant upward trend.
Auctions
The latest auction settled at close to $500,000 today.
As more projects seek to secure their positions (only 282 slots per year), auction prices may continue to rise.
EVM Fees
Base has generated around $15 million in fees over the past 30 days. Given that Hyperliquid's TVL has already surpassed Base's according to DeFiLlama data, and considering the current trends, the economic activity on the EVM at Hyperliquid's launch could be on par with or even exceed Base's.
Scenarios and Valuation
Based on the above, we can propose a base case scenario and a bull case scenario. This article is focused on the bull case, so there is no bear case, but the risks will be discussed in the final section.
Base Case
Trading volume 1/3 higher than the past 30 days
Auction prices remain stable
EVM activity similar to Base
Bull Case
Trading volume 2x the past 30 days
Auction prices double, then remain stable ($1 million per auction)
EVM activity 2x Base
In the base case, 30-day revenue is $59 million, while in the bull case it is $102 million. To arrive at a valuation, we can use different price-to-earnings (P/E) multiples, based on observations of major Layer 1 chains and applied to the annualized revenue.
Next, we calculate the market capitalization under the base case and bull case scenarios, using the revenue and P/E multiples. To arrive at the HYPE price, we use the current circulating supply, plus 11.6% inflation (for incentives and rewards), as calculated in the first section.
Under these conditions, we can see the HYPE price range from $41.93 (base case, lowest multiple) to $651.48 (bull case, highest multiple).
Considering HYPE's relative immaturity compared to Solana and Ethereum, as well as its higher risk, a lower P/E multiple for HYPE is reasonable. Additionally, HYPE's revenue is primarily from a decentralized exchange (DEX), whereas Solana and Ethereum have not captured this revenue stream. Therefore, HYPE's P/E ratio is more akin to DeFi protocols, which is also logical.
That said, considering the price-to-earnings ratios of other Layer 1 (L1) and Layer 2 (L2) chains, the current price-to-earnings ratio of Hyperliquid may be relatively low. A "reasonable" scenario could be:
A price-to-earnings ratio of 40x
Between the base case and bull case: an annualized revenue of $1 billion
This would result in a valuation of $40 billion (fully diluted $100 billion), with the price of HYPE slightly above $100.
Comparison to the previous cycle
Although a $40 billion market cap and a $100 billion fully diluted valuation may seem high, bull markets tend to be even more extreme.
In 2021:
BNB's market cap grew from $5 billion to $100 billion (20x growth)
ADA's market cap grew from $5 billion to $95 billion (19x growth)
SOL's market cap grew from $86 million to $77 billion (900x growth)
AVAX's market cap grew from $282 million to $30 billion (100x growth)
MATIC's market cap grew from $85 million to $20 billion (235x growth)
FIL's fully diluted valuation reached $373 billion, 16 times the current HYPE valuation.
Capital Inflows
We have already seen significant capital inflows into Hyperliquid.
Although the number of holders is increasing, the current number of HYPE holders is still relatively small, especially considering that HYPE is currently only listed on Kucoin.
Comparative Data:
HYPE: 60,000 holders
KMNO: 55,000 holders
WIF: 211,000 holders
BONK: 861,000 holders
In an old Messari report, robustus calculated that for an asset, the "capital inflow multiplier" could be as high as 10x, meaning that $1 billion in net inflows could increase an asset's market cap by $10 billion. While it's impossible to calculate precisely, this is particularly important given HYPE's potential as the third-largest most active L1. If HYPE were to capture 5% of Solana's market cap and 1% of Ethereum's market cap as inflows, this would represent $10 billion in inflows and have a significant impact on the price.
We have already seen some of this inflow since the TGE, but as fiskantes said, there is still a significant amount of capital waiting on the sidelines to be allocated to HYPE once HyperEVM is released and the transition to decentralized validators occurs.
Risks
While this article paints a fairly optimistic picture of Hyperliquid's future, it is not without risks.
One major risk is the validator set, with the current mainnet validators being completely centralized (4 validators operated by a team based in Tokyo). Although the testnet has now launched with a decentralized validator set (over 60 validators), including some experienced validators (such as Chorus One, ValiDAO, B Harvest, Nansen, etc.), the transition still carries risks. If performance degrades, user experience and trust will be threatened.
Another risk is the unrealized potential of the EVM ecosystem. Quality projects need to launch on the EVM for the ecosystem to thrive. If the majority of projects are of low quality or merely copied from other chains, it will attract less capital and activity. Therefore, attracting high-quality developers rather than speculative ones will be key.
On the EVM side, we may see increasing capital efficiency for HYPE (such as liquidity staking, lending, etc.). Depending on the content of the build-out and its interactions with the L1, we may see some new risks that have not appeared in existing DeFi protocols, which could pose a threat to HYPE or the entire trading platform.
Regulatory risk still exists, but as Fiskantes said (quoting again), geo-fencing and Trump-era policies can mitigate these risks.
Like all assets, especially as a trading platform, HYPE's performance should be highly correlated with the overall market. The team needs to deliver results before the market becomes fatigued.
The crypto market is uncertain, and anything can go to zero. I hold HYPE, and the above is not financial advice; investors should do their own research (DYOR).
