Four dimensions to analyze Hyperliquid's growth potential

Author: Flo

Translator: Yuliya, PANews

Hyperliquid is a perpetual contract trading protocol built on its own L1 public chain, aiming to provide users with a trading experience comparable to centralized exchanges while offering fully on-chain order books and decentralized trading functionality. The protocol supports spot, derivatives, and pre-launch market trading.

This article will not delve into the specific operational mechanisms of Hyperliquid or its differences from other perpetual contract DEXs. Instead, it will focus on the market opportunities of Hyperliquid and the fundamental investment logic of the $HYPE token.

As of the time of writing, the trading price of $HYPE has surpassed $20, with a market capitalization of $7.5 billion and a fully diluted valuation (FDV) exceeding $20 billion, placing it among the top 30 cryptocurrencies by market value. What factors have driven such a strong market performance?

This article will provide an in-depth analysis from the following four perspectives:

• Exchange development opportunities

• EVM ecosystem opportunities

• Revenue composition, valuation, and industry comparisons

• Potential risks

Exchange Development Opportunities

Hyperliquid dominates the perpetual contract DEX market, with its recent trading volume accounting for over 50%.

Currently, according to data from Coinalyze and CVI.Finance, its open interest (OI) is around 10% of Binance's. As the bull market deepens and market volatility increases (the cryptocurrency volatility index is only 64), the open interest, trading volume, funding rates, and liquidation volumes are expected to continue to rise.

The market share of DEXs in the perpetual contract market is expected to gradually increase, similar to the process of AMMs and Uniswap driving the increase in DEX market share in the spot trading market.

Hyperliquid, with lower fees than CEXs and more attractive incentive mechanisms, is expected to attract more users and capital from CEXs. Its token generation event (TGE) and the rapid rise in the $HYPE price can be considered the best marketing campaign.

Although the specific incentive structure has not yet been announced, it can be expected that perpetual contract and spot trading volumes will receive incentives, as over 40% of the token supply is reserved for community rewards.

The initial airdrop situation is as follows:

Now, assuming that 10% of the reserved supply for the first year is allocated for incentives, the situation would be as follows:

Based on the current price, nearly $1 billion in incentives will be distributed in the first year, exceeding the allocation at the initial airdrop price of $2.

This will result in an inflation rate of around 11.65% (including staking rewards). However, with the increase in users, trading volume, revenue, token burning, and buybacks, the actual dilution cost may be lower than this level. The team may also adopt a higher inflation rate and incentives to attract users, which is the reason for the unique dynamics of the $HYPE fully diluted valuation (FDV).

In the spot trading area, Hyperliquid is expected to become one of the top three spot DEXs in the short term. Yesterday's trading volume was around $500 million, ranking fifth among all on-chain platforms. With the development of the EVM ecosystem, the addition of more utility tokens and native assets will bring more trading pairs.

Trading tools based on Hyperliquid's open infrastructure and builder code are constantly emerging, with projects like Insilico Terminal, Katoshi AI, and pvp.trade showing promising prospects. This will further improve the user experience and attract more capital inflows.

Exchanges and stablecoins are the most profitable businesses in the cryptocurrency industry. Hyperliquid's direct competition with mainstream exchanges like Binance, Coinbase, Bybit, and OKX is itself a bullish factor.

The most optimistic scenario is:

• Other exchanges use Hyperliquid as a decentralized backend

• Exchanges hedge their risks by increasing their holdings of $HYPE

Although these scenarios may have a low probability in the short term, in the cryptocurrency market, anything is possible.

EVM Ecosystem Opportunities

HyperEVM is an essential component of the Hyperliquid ecosystem, sharing a unified state and consensus mechanism with the Hyperliquid L1, but running as an independent execution environment. Specifically:

• The L1 is a permissioned chain responsible for running the core components, such as perpetual contracts and spot order books, and provides programmability through APIs

• The EVM is a general-purpose Ethereum-compatible chain that supports standard Ethereum development tools, and smart contracts can directly access the on-chain liquidity of the L1 layer

HyperEVM is planned to be launched in the coming months, and a large number of teams have already started active preparations. Why is this development trend seen as bullish? It is mainly reflected in the following aspects:

New DeFi Ecosystem

Many DeFi projects are preparing for the launch of HyperEVM. Mainstream DeFi protocol types, including Automated Market Makers (AMMs), lending platforms, liquidity staking, and CDPs (collateralized debt positions), will be deployed on the EVM at launch.

These projects will significantly improve the overall capital efficiency by allowing $HYPE holders to use $HYPE as collateral in lending and money market protocols.

In addition to traditional DeFi protocols, the on-chain order book liquidity feature is likely to give birth to a batch of innovative applications. This provides fertile ground for the emergence of entirely new DeFi native protocols, and Hyperliquid is expected to become the preferred platform for these innovative protocols.

For example, Ethena Labs plans to integrate Hyperliquid to reduce its dependence on CEXs. This not only can improve system resilience but may also reduce and diversify counterparty risk through a decentralized hedging process, as detailed in its governance proposal.

Market Demand for Utility-Driven Projects

Recent market trends clearly show that investors are highly interested in projects with real-world application value. This trend is reflected in the AI hype on Base and Solana, the excellent performance of Hyena, and the strong demand for $HFUN and $FARM on the Hyperliquid platform.

As the DeFi ecosystem is about to expand, Hyperliquid is likely to become the main battlefield for utility-focused investments in the near to medium term. It is worth noting that the current AI infrastructure building on Solana by projects like AI16Z and Zerebro may extend to the Hyperliquid platform.

Hyperliquid's native vault functionality is particularly noteworthy. The strategies running in these vaults can enjoy the same advanced features as the DEX, including the liquidation mechanism for over-leveraged accounts and high-throughput market-making strategies. The inclusiveness of this mechanism is reflected in the fact that any entity - be it a DAO, protocol, institution, or individual - can share the profits by depositing funds, and the vault owners can receive 10% of the total earnings as a reward.

Other Positive Factors for the HyperEVM Launch

• Revenue growth potential: The operation of HyperEVM will generate more fee revenue, which can be used for staking rewards, token burning, and other purposes. For example, Base has generated $15 million in fees in the last 30 days. It is expected that the activity on HyperEVM will reach a level comparable to Base in the coming months.

• Increased $HYPE token utility: The launch of the EVM will significantly expand the application scenarios of the $HYPE token within the ecosystem. Users will need $HYPE to pay gas fees, and they can also engage in lending, staking, and locking to earn rewards. These new use cases will bring stronger buying pressure. Referencing the meme coin craze on Solana in 2024 and the DeFi and NFT waves on Ethereum in 2020-2021, the impact of on-chain activity on native token demand should not be overlooked.

The superimposed effect of these positive factors is expected to bring significant value appreciation and ecosystem prosperity to Hyperliquid.

Revenue Composition, Valuation and Peer Comparison

Hyperliquid primarily generates revenue through platform fees and token auctions.

(The flow of fees on-chain)

Currently, the aid fund holds about 10.76 million $HYPE (more than 3% of the circulating supply) and 3.14 million USDC, and the insurance fund has accumulated about 7.07 million USDC to be transferred to the aid fund. In total, more than $10 million in USDC may be used for market buybacks of $HYPE.

Recent Performance

Over the past 30 days, Hyperliquid has generated approximately $26.5 million in USDC revenue, of which:

• Token auction revenue of $2 million

• Platform fee revenue of $24.5 million

• An additional 79,600 $HYPE (worth $1.75 million) burned

The annualized revenue exceeds $336 million, ranking second among all public chains only after Ethereum, Solana and TRON, but the market capitalization is significantly lower than these public chains. In terms of yield (annualized revenue / circulating market cap), Hyperliquid far exceeds other L1 and L2 chains.

Revenue Growth Potential

• Platform Fees: Trading volume in December has reached the level of November, and is expected to grow by 100% month-over-month.

• Auction Revenue: The latest round of auctions had a price close to $500,000, and as the competition for available slots (282 per year) intensifies, the price may continue to rise.

• EVM Revenue: Referencing Base's monthly $15 million fee revenue, and considering that Hyperliquid has exceeded Base's TVL, it is expected to achieve similar or higher economic activity after the EVM launch.

Valuation Scenario Analysis

Baseline Scenario:

• Trading volume increases by 1/3 compared to the recent 30 days

• Auction revenue remains stable

• EVM activity is on par with Base

Optimistic Scenario:

• Trading volume doubles compared to the recent 30 days

• Auction prices double (to $1 million per auction)

• EVM activity is 2x that of Base

In the baseline scenario, 30-day revenue can reach $59 million; in the optimistic scenario, it can reach $102 million. The valuation uses the mainstream P/E multiples of L1 public chains, combined with the annualized revenue.

Considering the current circulating supply and 11.6% inflation rate (for incentives and rewards), the $HYPE price range is:

• Baseline scenario lower bound: $41.93 (minimum multiple)

• Optimistic scenario upper bound: $651.48 (maximum multiple)

Reasonable Valuation Analysis

Compared to Solana and Ethereum, the valuation multiple of HYPE should be relatively lower, for the following reasons:

• The project is relatively immature

• There are more risk factors

• Revenue mainly comes from DEX, which is different from Solana and Ethereum

"Reasonable" valuation reference:

• Use a 40x P/E ratio

• Annualized revenue of $10 billion (between baseline and optimistic scenarios)

• Resulting in a market cap of $40 billion (fully diluted $100 billion)

• $HYPE price around $100

Historical Cycle Comparison

Although a market cap of $40 billion and an FDV of $100 billion may seem high, the bull market could be even crazier.

In the 2021 bull market:

• BNB: $5 billion to $100 billion (20x)

• ADA: $5 billion to $95 billion (19x)

• SOL: $86 million to $77 billion (900x)

• AVAX: $282 million to $30 billion (100x)

• MATIC: $85 million to $20 billion (235x)

FIL's FDV reached $373 billion, which is 16 times today's $HYPE.

Potential Capital Inflow

Currently, there are only about 60,000 $HYPE holders, which is relatively few:

• $KMNO: 55,000 holders

• $WIF: 211,000 holders

• $BONK: 861,000 holders

Calculated using the capital inflow multiplier effect (10x) from Messari research, if $HYPE can attract capital inflows of 5% of SOL's market cap and 1% of ETH's market cap (about $10 billion), it will have a significant impact on the price.

Potential Risks

Although this article has made quite an optimistic forecast for Hyperliquid's future prospects, it is not without risks.

Validator Centralization Risk

Currently, the validator nodes of Hyperliquid's mainnet are still highly centralized, with only 4 validator nodes operated by the team in Tokyo. Although the testnet has more than 60 decentralized validators (including well-known institutions like Chorus One, ValiDAO, B Harvest, Nansen, etc.), the transition to a decentralized architecture still faces challenges. If the validator performance declines, it may affect the user experience and credibility.

EVM Ecosystem Risk

The quality of the ecosystem will directly affect the development of HyperEVM:

• High-quality projects need to be onboarded to maintain ecosystem vitality

• Low-quality projects or simple copies of other chain projects will reduce capital inflow and activity

• Attracting true builders rather than speculators is crucial

DeFi Innovation Risk

With the launch of the EVM, the capital efficiency of $HYPE will be enhanced through liquidity staking, lending, and other means. New DeFi innovations may bring unprecedented risks:

• Innovative financial products interacting with the L1 layer may generate unknown risks

• New DeFi protocols may impact the value of the $HYPE token

• Exchange operations may also be affected

Regulatory Risk

Although there are regulatory risks, geographical restrictions and the attitude of the Trump administration have to some extent reduced this risk. However, as a trading platform, it still needs to closely monitor changes in the regulatory environment.

Market Correlation Risk

As an exchange token, the performance of $HYPE is highly correlated with the overall cryptocurrency market:

• The team needs to complete key milestones before the end of the market cycle

• Market sentiment fluctuations may significantly impact the token price

• It is necessary to seize development opportunities during the bull market cycle

Investment Reminder

Cryptocurrency investment is high-risk, and any token, including $HYPE, has the risk of becoming worthless. Investors should:

• Conduct thorough independent research

• Rationally evaluate their risk tolerance

• Not treat this as investment advice

• Be cautious about market volatility