Author: Tranks
1. Introduction
Decentralized Perpetual Futures Exchange is a DeFi protocol that allows users to establish leveraged positions on specific assets on the blockchain.
Since the collapse of FTX, the world's second largest centralized exchange, in November 2022, decentralized exchanges have developed steadily under the attention of market participants due to the market's distrust of centralized exchanges.
CEX vs DEX futures trading volume has been steadily increasing since November 2022; Source: The Block
According to its price discovery mechanism, existing PerpDEX can be roughly divided into three models:
Oracle model: A model that operates based on external price data and does not have its own price discovery mechanism. The advantage is that due to its reliance on external oracles, the liquidity scale of the protocol has minimal impact on the transactions of traders (Taker), but the liquidity provider (Maker) will face single-point risks and attacks from oracles, and lacks its own price The discovery mechanism limits its development (such as Jupiter ).
Orderbook model: A model that utilizes traditional capital market buying and selling systems. While traders can specify the desired buy/sell prices, making Maker risk relatively low, there are limitations for brokers who need to trade quickly (such as dYdX ) due to blockchain block time constraints.
AMM model: A model that utilizes CPMM (Constant Product Market Makers) and is also the price discovery mechanism of Uniswap. According to the liquidity provided, the price is determined according to a specific formula (such as X*Y=K). Although the supply and demand of assets can be easily processed without submitting or modifying the Orderbook, all transactions will involve a certain slippage (such as Perpetual Protocol ) .
For detailed information about the price discovery mechanism of PerpDEX, please refer to the " Perpetual DEX " series of articles.
1.1. Development and limitations of Orderbook PerpDEX
In the early development stages of Perpetual DEX, Oracle and AMM models were widely adopted by the market because they were easier to ensure the liquidity required for trading, as Orderbook-based market makers found that due to the slow processing speed and high fees of the blockchain , difficult to operate effectively. However, most of these models face a zero-sum game, competing for limited liquidity while targeting only existing cryptocurrency market participants. Therefore, discussions and efforts to develop PerpDEX based on Orderbook have always existed in order to provide traditional financial traders with a familiar trading environment and achieve larger growth based on their liquidity.
Recently, with the development of blockchain infrastructure such as Layer 2 and Appchains, and the introduction of trading methods for receiving off-chain orders, the trading environment of Orderbook PerpDEX has been significantly improved. Additionally, development of Orderbook PerpDEX and related infrastructure continues, with the following agreements:
Vertex Protocol : The mixed-mode PerpDEX solves the problem of Orderbook being more difficult to activate liquidity than other modes by mixing AMM and Orderbook modes.
Elixir : A protocol that helps anyone easily execute liquidity provision in Orderbook PerpDEX.
Despite these developments, Orderbook PerpDEX is indistinguishable from centralized exchanges other than the fact that the protocol allows users to simply “deposit” funds and create “positions.” This makes them unable to avoid competition with centralized exchanges, and PerpDEX is at a competitive disadvantage due to two factors:
Orderbook PerpDEX, which processes orders off-chain and records results on-chain, has difficulty gaining users' trust in terms of transparency.
Orderbook PerpDEX, which runs entirely on the chain, requires users to sign and pay Gas Fee every time they submit a transaction. Compared with centralized exchanges, the trading experience is quite inconvenient.
Therefore, the current Orderbook PerpDEX needs infrastructure that can both optimize Orderbook-based transactions and build its own ecosystem to create network effects. Against this background, Hyperliquid was born with the vision of becoming a completely transparent and user-friendly "On-chain Binance".
2. Hyperliquid , super-liquidity protocol
Hyperliquid is a high-performance Layer 1 optimized for Orderbook transactions and can handle 2 million transactions per second. It was launched in June 2023 with the team's own capital and no external investment capital.
The core of Hyperliquid is native PerpDEX in the form of Orderbook. All procedures from Orderbook to transaction execution are recorded on the chain. While Hyperliquid DEX records all user activities on the chain, it also provides convenient functions such as creating a trading account via email and submitting transactions without independent signatures or gas fees, providing a user experience similar to that of a centralized exchange.
With these distinctive features, Hyperliquid has grown steadily since its launch, achieving net inflows of US$2.14 billion as of December 11, 2024, monthly trading volume reaching US$77 billion, and open interest as of November reaching US$3.37 billion. US dollars, which is approximately 4 times the amount of Jupiter's open positions, ranks second in trading volume, and is far ahead in Orderbook PerpDEX.
Let's explore the composition and operating mechanism of Hyperliquid in more detail.
2.1. Hyperliquid Network
When Hyperliquid was first launched, considering interoperability with the Cosmos ecosystem and ease of deployment, it adopted Cosmos' consensus algorithm Tendermint to replace HyperBFT. However, the Tendermint consensus algorithm exhibits scalability limitations and can only handle approximately 20,000 instructions per second. To this end, the Hyperliquid team developed and launched HyperBFT in May 2024, which is their consensus mechanism specifically designed for fast, large-volume transaction processing.
HyperBFT is a model designed to further optimize the Hotstuff consensus algorithm for Hyperliquid, and the Hotstuff consensus algorithm is a more efficient and improved version of the Tendermint consensus algorithm. Although HyperBFT alone can theoretically process 2 million transactions per second, in actual operating environments, due to the combination of HyperVM (an execution layer based on the Rust language), it can process up to 200,000 transactions with the second-largest latency in seconds. This is only one-eighth of the TPS of the centralized exchange Binance, but about 8 times higher than Injective, which is based on its own network and executes the on-chain Orderbook protocol.
Therefore, Hyperliquid is designed and built around "transaction efficiency". Its advantage is that all orders submitted by users will be recorded and processed quickly on the chain without Gas Fee. However, without providing rewards to validators, the team currently operates all four nodes to ensure a fast order processing environment, raising questions about decentralization.
Aware of this, the Hyperliquid team is testing trustless node operations to decentralize validators on the test network, and is also testing how to allow users to stake $HYPE (Hyperliquid's Tokens) participate in network verification. In order to ensure decentralization while maintaining a highly efficient network state, Hyperliquid has introduced a mechanism to convert nodes that cannot maintain a certain performance level into a "Jailing" state, restricting them from proposing new blocks and participating in voting.
Nodes in Jailing state; ASXN Dashboard
In addition, the Hyperliquid team also plans to launch HyperEVM to be used with the existing execution layer HyperVM. This is expected to allow EVM-based applications to join the Hyperliquid ecosystem and bridge ERC-20 tokens to expand the ecosystem.
2.1.1. Hyperliquid Bridge
Users can deposit and lock stablecoins through Hyperliquid Bridge, secured by Hyperliquid's validators, and receive the same amount of assets in their personal account on Hyperliquid to use the network and PerpDEX.
Currently, Hyperliquid only supports bridging USDC on the Arbitrum network. Recently, with the increased interest in Hyperliquid following the launch of Hyperliquid’s native token $HYPE, and a significant increase in users depositing assets, it can also be observed that the net inflows into the Arbitrum network are significantly higher compared to other networks.
Weekly net inflows by network as of December 3; Source: Artemis
Currently, withdrawals on the Arbitrum network charge a handling fee of US$1 to cover the Gas Fee. Hyperliquid plans to support various stablecoins on other networks besides USDC in the future. Especially after the launch of HyperEVM, it is likely to be integrated with Circle's CCTP (Cross-Chain Transfer Protocol, cross-chain transfer protocol), which is expected to ensure perfect interoperability between stablecoin transmission and other networks.
2.2. Hyperliquid DEX
As mentioned above, Hyperliquid DEX operates on the Hyperliquid network, has fast transaction processing speed, no signatures and fees, provides almost the same user experience as a centralized exchange, and supports a leveraged trading environment of more than 100 different token pairs.
Hyperliquid DEX provides the following four orders:
Market Order: Immediate execution of a trade at the current market price.
Limit order: Execute a trade at a specified desired price.
Tick Order: Create and execute multiple limit orders within a set price range.
TWAP: Divide an order into multiple orders to execute transactions within a fixed time interval.
Hyperliquid will implement a free transaction policy in the first three months after the launch of the mainnet to attract early users. After that, it will launch a charging policy, charging Takers a 0.25% fee and providing a 0.2% rebate to Makers. However, starting in March 2024, they switched to a tiered fee mechanism based on 14-day trading volume per wallet and reorganized into a system where only market makers who meet certain trading volume thresholds receive rebates.
Hyperliquid fee structure; Hyperliquid Docs
The fee income generated in Hyperliquid is not collected by the team, but distributed to users who deposit liquidity into the HLP Vault (Hyperliquid Liquidity Provider Repository), as well as the assistance fund, which will be described in detail below.
2.2.1. Mark Price mechanism
Since Hyperliquid is based on the Orderbook, the user's buying/selling price is basically determined by the liquidity of the Orderbook. However, when Orderbook's liquidity is insufficient, a price gap will appear with other markets, which may lead to small-scale liquidity attacks and ways to trigger liquidation, TP (Take Profit) and SL (Stop Loss) events.
In addition, due to the nature of perpetual futures trading with no expiry date, in order to control price deviations from the spot price, position holders must pay a certain amount as a funding rate to the counter holder every specific time period (one hour in the case of Hyperliquid). Therefore, Hyperliquid will calculate Mark Price based on price data from external exchanges for calculation of position closing, TP/SL and funding rate. Hyperliquid's criteria for calculating Mark Price are as follows:
Binance:27.27
OKX:18.18
Bybit: 18.18%
Kraken:9.09%
Kucoin:9.09
GateIO:9.09
MEXC:9.09
2.2.2. Derivatives and Spot Trading
In addition to futures trading on specific tokens, Hyperliquid DEX also offers trading in the following types of instruments:
Index Perpetual Contracts: Provides perpetual futures trading on various blockchain ecosystem indices, such as an index tracking the average floor price of a specific blue-chip NFT collection (NFTI-USD), as well as tracking the top 20 influencer accounts on the blockchain social platform Friend Tech Index of the average Key price of the middle 8 accounts (FRIEND-USD).
Hyperps: A product that supports pre-trading of tokens that have not yet been launched on the market, using an 8-hour exponentially weighted moving average (EWMA) every minute of the previous day to determine price, rather than relying on specific prices.
Spot: A native token issued on the Hyperliquid network.
Among them, Hyperliquid has recently been investing a lot of energy in establishing and expanding its own ecosystem, centered on native tokens and their spot transactions. Hyperliquid's native tokens will continue to develop through HIP (Hyperliquid Improvement Proposals).
HIP-1: Hyperliquid’s native token issuance standard proposal, including a token standard format and a 31-hour Dutch Auction auction system to curb the disorderly issuance of tokens. The proposal also includes a Spot Dust feature that will automatically submit sell orders to the Orderbook once a day for tokens worth less than $1 held in a user's wallet.
HIP-2: Solution proposal to automatically provide liquidity for issued native tokens. This solution submits buy/sell orders to the Orderbook every 3 seconds at ±0.3% of the current price. Token issuers must choose whether to execute the liquidity provision solution and deposit the required liquidity when issuing tokens.
As of December 4, 2024, a total of 53 tokens are traded on Hyperliquid DEX through the HIP standard, including the mainnet token $HYPE. After the launch of $HYPE, spot trading volume increased significantly, with daily trading volume reaching $628 million, and as the number of issued tokens increases and more dApps that can utilize these tokens emerge, Hyperliquid’s spot trading volume is expected to will grow further. Currently, Hyperliquid's daily spot trading volume remains at $333 million, slightly decreasing after the issuance of $HYPE.
Hyperliquid native token trading volume trend; Source: Purrburn
In addition, as external liquidity flows into the Hyperliquid ecosystem and spot trading becomes more active after the issuance of $HYPE, the winning bid price of the token auction launched through HIP-1 also shows an upward trend.
Ticker auction winning price trend; Source: Hypurrscan
2.2.3. HLP and User Repositories
In existing Orderbook exchanges, liquidity providers must continuously monitor and submit and modify buy/sell orders according to the situation. This also means that they must rely on a small number of professional market makers to provide liquidity, resulting in the monopoly of these market makers. The profits generated by liquidity provision.
In contrast, Hyperliquid provides a function where users only need to deposit assets into HLP Vault (Hyperliquid Liquidity Provider Vault) to participate in market making and earn profits, and HLP Vault will be directly executed by the team to provide liquidity to the Hyperliquid Orderbook sex. As mentioned previously, the majority of Hyperliquid's revenue is distributed to users who deposit liquidity into HLP.
HLP Vault consists of three strategies: Strategy A, Strategy B and Liquidator Strategy. The working principle of the liquidator strategy is to take over the position when the maintenance margin of the liquidation target is less than 2/3, while the specific operating mechanisms of the other two strategies are not disclosed to prevent exposure of operational details. However, since each strategy's submitted order history and balance status are recorded on the Hyperliquid network, they can be transparently checked through the HLP panel .
As of December 4, 2024, the total size of assets deposited in HLP's vault was US$168 million, with cumulative profits of US$43 million, and the annual interest rate recorded in November was approximately 20%.
HLP vault PNL trend; Source: Stats.hyperliquid
In addition, Hyperliquid provides user treasury functions other than HLP, allowing anyone to establish a treasury, implement trading strategies similar to HLP, and also accept user deposits for operations. Vault operators can charge a fee of 10% of the profits generated from operations and must maintain their own equity ratio in the vault at 5% or higher to maintain alignment with depositors' interests.
User vault list; Source: Hyperliquid
2.3. $HYPE
From the launch date of closed beta in November 2022 until September 2024, Hyperliquid will allocate Hyperliquid points to users based on the following criteria:
Closed Test & First Quarter (2022.1~2024.4): Points are distributed based on Perp transaction volume.
Second Quarter (2024.6~2024.10): Points will be distributed based on participation in the ecosystem (such as Layer 1 and spot trading).
Points will be distributed retroactively for transactions in May, October and November 2024.
After the end of the second quarter, on October 15, 2024, Hyperliquid established a foundation and announced the issuance and airdrop of the network token $HYPE. On November 29, it will be equivalent to approximately 31% of the total supply and the initial circulation. 83% of $HYPE tokens are distributed to users who mine Hyperliquid Points.
The functions of $HYPE announced by the foundation are as follows:
Through the future launch of $HYPE staking (currently being tested on the test network), it will serve as the security budget of HyperBFT.
Used as a network fee token on the upcoming HyperEVM.
Approximately 40% of the total supply will be used for future community rewards and ecosystem subsidies.
Following the token airdrop, $HYPE was listed on Hyperliquid’s HYPE/USDC spot trading pair, with a starting price of $2. In the first seven days after listing, the price increased approximately 7 times, and the upward trend was more or less maintained during the correction phase.
$HYPE price trend; Source:Hyperliquid
Factors driving the rise of $HYPE include: 1) building a solid community that shares the agenda of building Hyperliquid Exchange around the team; 2) no institutional investors can without outside funding Carry out massive sell-offs; 3) Continue $HYPE buybacks using fees accumulated in the Hyperliquid Assistance Fund wallet.
Amount of $HYPE held by Hyperliquid assistance fund wallet; Source: Hypurrscan
3. Hyperliquid Ecosystem
Most PerpDEX based on Orderbook either lacks its own network, or its architecture only focuses on the "trading" function, so it is unable to form a subordinate ecosystem and create synergy with PerpDEX. In contrast, Hyperliquid, as a Layer 1 network, is not limited to PerpDEX. Instead, its vision is to build a huge ecosystem, combining existing on-chain users and centralized exchange users, by listing various The introduction of various dApps, native tokens issued through HIP, and HyperEVM creates network effects that PerpDEX cannot achieve.
3.1. $PURR
$PURR is Hyperliquid's first native token and meme coin, released on April 16, 2024 with the launch of HIP-1.
At the time of issuance, 50% of the total circulation was distributed to Hyperliquid users' Hyperliquid points in proportion. The remaining 50% was originally intended to be used to provide liquidity to the PURR/USDC spot pair in accordance with HIP-2. However, due to the receipt of social funds during the test period, Based on feedback from the group that too much liquidity had been provided, the team decided to burn 80% of the liquidity supply allocation. Additionally, due to the introduction of a burn mechanism that uses a portion of transaction fees, burns have continued, with a total of $401.8 million in PURR burned to date, including the initial burn amount.
$PURR circulation status; Source: purrburn.fun
After the issuance of $PURR, due to other native tokens setting off a trend of providing airdrops to $PURR holders, and rumors of Hyperliquid points being distributed to |_202411111202312_| holders, the price of |_202411111202313_| has increased since its issuance. A growth of approximately 166% was recorded in three days. Recently, with the launch news of $HYPE, external liquidity gathered in Hyperliquid, $PURR has also experienced significant gains, and the market value has remained at $176 million, ranking second after $HYPE.
3.2. Hypurr Fun ($HFUN)
Hypurr Fun is a Telegram bot that helps users trade on Hyperliquid through Telegram. It also recently launched and operates Hypurr Pump, a meme coin issuance platform.
Hypurrfun Dashboard; Source: hypurr.fun
Users can easily open and close positions on Hyperliquid through Telegram robots, and participate in meme coin financing on Hypurr Pump. Meme coin projects that have received more than $100,000 in financing on Hypurr Pump can participate in Hyperliquid’s stock auction, according to Issue your own meme coin in case of financing.
The core of the project is $HFUN, the second native token issued on Hyperliquid after $PURR, and is structured to burn $HFUN using platform revenue generated through Hypurr Fun and Hypurr Pump.
3.3. HyperLend
HyperLend is a lending protocol designed specifically for the Hyperliquid ecosystem. It is expected to be launched together with HyperEVM and is currently only operating on the HyperEVM test network.
Features in the pipeline for HyperLend include:
Leverage yield farming: Provide leveraged yield farming positions using $stHYPE, $stHYPE is the liquid pledge token of $HYPE that Thunderhead (a liquidity pledge token issuance platform) plans to issue in the future.
HLP collateral loan: Loan services are provided using funds deposited in HLP as collateral.
Vault Share Token Issuance: Issue tokens that guarantee funds held in the vault and provide collateral for these tokens.
Cross-chain one-click loan: a bridge function for various Layer 2 network assets, and uses these assets as HyperLend collateral.
HyperLend provides these functions to tokenize various locked liquidity on Hyperliquid and use it as collateral to provide loan services. It is expected to diversify the yield farming paths within the Hyperliquid ecosystem and improve liquidity after launch. .
In addition, the Hyperliquid ecosystem also includes various protocols that are in progress or preparing to join from other networks, such as Abracadabra (providing lending and leverage functions based on stablecoins$MIM), Rage Trade (multi-chain permanent aggregator) and Solv Protocol (Bitcoin Pricing Protocol). The launch of these protocols and the issuance of native tokens are expected to help increase the trading volume of Hyperliquid DEX.
4. Conclusion
While other PerpDEXs are struggling with how to satisfy users' trading experience and liquidity issues at the same time, Hyperliquid has implemented a fast and Orderbook-based on-chain PerDEX that does not require user signatures or Gas Fees, maintaining a good user experience. In addition, with the launch of $HYPE as a turning point, Hyperliquid has received great attention from the market and has shown unprecedented rapid growth among other PerpDEXs.
In particular, the spot token issuance mechanism introduced through HIP-1 as a token issuance platform, similar to Pump.fun on Solana, Clanker on Base, and Virtual Protocol, has greatly contributed to the recent increase in network usage. Hyperliquid aims to be a team-focused community.
In addition, Hyperliquid aims to become a Layer 1 protocol in addition to spot and futures trading functions by integrating other protocols to form an ecosystem. With this, Hyperliquid has established itself as a leader and is expected to bring users of centralized exchanges that existing blockchain projects have struggled to attract into an on-chain environment, allowing them to merge with existing on-chain users.
As we mentioned in the article "Market Comments | 12.06" , due to Hyperliquid's rapid growth after the token issuance, there are opinions that the value of Hyperliquid's tokens may be somewhat overvalued. However, considering that the article did not include the value of other tokens in the Hyperliquid ecosystem (mainly tokens in the spot market), there is room to counter the argument that it is overvalued. As shown in the figure above, when the spot market token value is included in TVL, the FDV/TVL ratio is 5.66, which is still undervalued compared to Jupiter.
This valuation assessment can also be applied between Layer 1 projects. A simple comparison is as follows (the valuation is based on DeFiLlama):
Hyperliquid($HYPE)
FDV: $13.85B / TVL: $2.45B
FDV/TVL: 5.66
Sui($SUI)
FDV: $37B / TVL: $2.74B
FDV/TVL: 13.5
Aptos($APT)
FDV: $13.1B / TVL: $2.48B
FDV/TVL: 5.28
Avalanche($AVAX)
FDV: $31.8B / TVL: $2.57B
FDV/TVL: 12.37
As these comparisons show, Hyperliquid appears to be in the undervalued range compared to Layer 1 with similar TVL metrics. With this in mind, we believe that through the launch of HyperEVM and the expansion of the Layer 1 ecosystem, Hyperliquid's value has the potential to be even higher.
However, for Hyperliquid to realize their vision and increase the value of the project, they must successfully launch |_202411111202321_| staking and decentralize validators, introduce HyperEVM while maintaining existing network performance, and subsequently form a community-centric of organic ecosystems. Therefore, we should pay close attention to the subsequent developments of this agreement to evaluate whether they can prove the vision presented.
