Hyperliquid — Purrfecting the onchain experience
Introducing Hyperliquid
Hyperliquid (HL) is a decentralized order book based, spot and perpetual futures exchange, characterized by high throughput and sub second latency. The L1 was initially based on @cosmos Tendermint consensus, but eventually migrated to HyperBFT, a custom consensus mechanism to optimize performance supporting nearly 100k orders / second.
Hyperliquid is 4th largest Derivatives platform (at the time of writing) with TVL over $641.54M and has consistently positioned itself in the top 5 Derivatives platforms by volume since its launch.
Hyperliquid has identified and capitalized on a far-fetching issue in the current DeFi ecosystem as opposed to its centralized counterparts. With the existing platforms being troubled with the poor technological implementation, limited liquidity and chunky user experience, the Hyperliquid team intends to address these issues and deliver a seamless trading experience for users.
Technical Overview of Hyperliquid
• Hyperliquid L1
The Hyperliquid L1 is a highly performant chain based on the HyperBFT consensus mechanism with a native derivatives exchange at its core. The chain is optimized to reduce end-to-end latency and maximize throughput which is crucial to build an onchain DEX that can handle the next million crypto users. The L1 maintains the state of users balances and positions on the DEX.
Token Standards
- HIP-1 — The native token standard for HL allowing spot orderbooks between HIP-1 tokens. Transaction fees are in HIP-1 tokens.
- HIP-2 — Hyperliquidity
HIP-2 is designed to bootstrap liquidity for new tokens on the Hyperliquid platform. Inspired by Uniswap and integrated with an on-chain order book, Hyperliquidity is a decentralized strategy that operates as part of the Hyperliquid L1 block transition logic. It ensures a 0.3% spread, updating every 3 seconds, and allows for interaction with other liquidity providers. The system aims to democratize liquidity provision, especially for tokens in early price discovery phases, without requiring active management from operators.
Hyperliquid does not rely on an external oracle to fetch prices of assets. The validators push spot price feeds onchain by taking a weighted price from sources such as Binance, Kraken, Bybit and OKX. The validators are weighted by their stake and the clearinghouse uses the weighted median price from each validator.
• Bridging assets
Hyperliquid operates an EVM bridge secured by the same validators as its L1. Deposits are validated when over 2/3rd of the staking power signs off. Withdrawals are escrowed on the L1 and require similar validator consensus before an EVM transaction can request them. A dispute period follows, allowing for bridge locks if malicious activity is detected, requiring cold wallet signatures from 2/3rd of the validators to unlock. After this period, USDC is sent to destination addresses. Validator activity and stakes are managed on the bridge contract, and users pay a 1 USDC fee on the L1 for withdrawal to cover Arbitrum gas costs.
• Hyperliquid EVM
Hyperliquid announced that their L1 will support a native EVM in May 2024. This will allow composability between HIP-1 assets,spot, perps and unlock new DeFi primitives by leveraging the high throughput of the base layer. Hyperlend is the first lending protocol launching on the EVM that will allow users to lend/borrow assets and take flash loans.
• Clearing house
The clearinghouse is a crucial piece of the exchange state on the Hyperliquid L1 that manages the perps margin state for each address, which includes balance and positions. User deposits are credited to their account in Cross Margin mode by default offering up to 50X leverage depending on the market.
•Vaults
Vaults let users provide liquidity for onchain trading strategies that could be automated or managed by a trader. The ‘Vault Leader’ earns a share of the profits generated. HL also has Protocol vaults for market-making (MM) such as the HLP Vault and Liquidation Vault. Users can deposit USDC into these vaults and receive a share of the PnL. This democratizes access to opportunities, as the barrier to becoming a market maker on a CEX is very high and requires substantial capital. Any user can create their own Vault and become an onchain fund manager (Vault Leader) with as little as $100. To ensure that the Leader has some stakes in the performance of the vault, they have to represent at least 5% of the vault’s TVL at all times.
Trading perps and spot on Hyperliquid
Hyperliquid supports both spot and perpetual contracts, catering to diverse trading preferences and strategies.
Trading Perpetual Contracts:
HL enables trading perpetual contracts, allowing traders to speculate on the price action of various cryptocurrencies.
- Leverage and Margin: Users can set leverage levels considering their risk appetite, ranging from 1x to a maximum leverage (50x) determined by the underlying. Initial margin requirements depend on the leverage and position size.
- Cross and Isolated Margin: Traders can choose between cross margin, which shares collateral across all positions for maximum capital efficiency, and isolated margin, which restricts collateral to individual positions to limit risk.
- Liquidation Mechanism: Positions are liquidated if account equity falls below maintenance margin levels. Liquidations are managed through market orders and a liquidator vault, ensuring efficient and transparent processes.
- Funding Rates: To ensure contract prices converge with the underlying asset’s spot prices, funding rates are periodically paid between long and short positions, with rates calculated based on the difference between contract and spot prices.
Trading Spot Assets:
Trading spot assets implies buying and selling cryptocurrencies at current market prices. This straightforward trading method is ideal for those looking to own the underlying assets directly without leverage.
- Low Fees: HL offers competitive trading fees for spot transactions, making it cost-effective for traders.
- Direct Ownership: Spot trading allows traders to own actual cryptocurrencies, providing the opportunity for long-term investment.
- Immediate Settlement: Spot trades are settled immediately, ensuring prompt execution and ownership transfer.
Currently, HL offers a select number of token pairs for spot trading, but the team is hopeful on expanding this selection to enhance trading opportunities for users.
Metrics
A well-designed exchange matches trades where both parties are satisfied with the price. The main problem with traditional order books is the interaction between HFT takers and makers, leading to “toxic flow” that deteriorates liquidity and execution quality for retail users. HL has a novel design that prioritizes cancels and post-only orders over Good-Til-Canceled (GTC) and Immediate-Or-Cancel (IOC) orders, minimizing high-frequency trading (HFT) interactions and “toxic flow.”
A GTC order is a type of order that remains active until it is either executed or explicitly canceled by the trader. An IOC order requires that any part of the order that can be executed immediately must be executed at the current market price. Any portion of the order that cannot be filled immediately is canceled. This design enhances liquidity and execution quality for retail users, ensuring tighter spreads and reduced slippage. Despite the focus on user experience over traditional metrics like fees and volume, Hyperliquid has seen substantial growth, with a significant portion of its trading volume coming from retail users.
Total Volume
Retail Volume
Hyperliquid’s TVL has grown 33% over the past month and is ranked #39 on Defillama in terms of Protocol TVL.
TVL
USDC Daily Deposits
User Growth
$PURR token
$PURR, a governance meme deployed by the core team of HL was the first token to be listed on the DEX. It is by far the only leveraged bet in the thriving ecosystem considering the native token, $HYPE launches in the near future. $PURR has a total supply of 1 billion tokens, 50% of which is proportionately distributed to the points holders and the rest is provisioned as liquidity to the liquidity pool. The $PURR tokens burned as trading fee, makes up >0.166% of total supply.
The wallets with $PURR positions have been airdropped other spot meme tokens on HL. This positive flywheel spun up by the HL team incentivizes the users to diversify further into the ecosystem and expand their exposure to the other tokens. Furthermore, the spot trading of the listed pairs accumulates points, paramount for the $HYPE airdrop.
Points Program
The phase 1 of Hyperliquid points program, lasted for six months from November 2023, with 1 million points distributed weekly. The second phase, L1 Launch, kicked off in late May and is currently running, distributing more than 700k points weekly.
A brief guide to earn points:
- Trade and Provide Liquidity: Engaging in trading and providing liquidity on the platform will earn points based on the trading volume and liquidity contributions.
- Refer Users: The referral affiliate program helps to amass points for each user onboarded via the referral link.
- Stay Active: Continuous engagement with the platform by trading, participating in community events, and contributing to HL’s growth can maximize points.
The program’s focus shifted from incentivizing perpetual volume to spot volume with the introduction of spot HL tokens in May 2024. HL’s attempt at deterring short-term participants and airdrop farmers by deliberately avoiding point boosters, and project partnerships is appreciable and speaks volumes of the team’s integrity and long-term perspective.
The dynamic points program is updated at recurring intervals by the team with distributions rolling out every Friday. At present, there is a 1:5 matching for affiliate points.
It is vividly speculated that 50% of the total supply at minimum, will be rewarded to the core users of the platform in recognition of their participation in the rigorous 18-month point accumulation program. The other part would likely be put aside for the long-term initiatives. This is owing to the revelation of having no insider allocations.
Risks associated
While being an innovative utility platform presenting a plethora of opportunities for DeFi, HL comes with an inherent set of risks that need careful consideration like the Smart Contract Risks and Oracle Manipulation risk that every DEX and CEX succumbs to. As an onchain perp DEX dependent on the Arbitrum bridge for the initial fund inflow, HL is subjected to fund losses due to vulnerabilities in the smart contracts. Manipulation of validator-maintained price oracles is also a concern as it distorts mark prices and trigger premature liquidations.
The HL ecosystem also faces the L1 risk and market liquidity risk, due to the lack of extensive scrutiny of the protocol (where the market tests the protocol across multiple edge cases possible in real time) and low initial liquidity causing price slippages and losses for the traders.
The above-mentioned risks are mitigated broadly using a few measures stated below:
- Open Interest Caps: Limiting new positions when an asset hits its cap.
- Order Restrictions: Preventing orders from resting more than 1% from the oracle price.
- Liquidity Maintenance: Ensuring the liquidity pool is at equilibrium by continuous liquidity quoting.
A brief comparison with other DEX’s
Over the past few years, DeFi has made great strides, and the market is now home to a plethora of DEXs. Here, we compare Hyperliquid, GMX and dYdX, highlighting the metrics, market performance, and strengths.
Hyperliquid
Hyperliquid is a decentralized exchange that allows trading both spot and perpetual contracts. It stands out with its high liquidity, extensive trading pairs, and competitive fees.
Key Metrics:
- TVL: $626.37 million
- Number of Trading Pairs: 109
Features:
- High leverage options for perpetual contracts.
- Comprehensive risk mitigation strategies.
- Active points reward program to incentivize traders.
Strengths:
- Superior liquidity and trading volume.
- Robust risk management and liquidation mechanisms.
- Strong market positioning among decentralized derivative exchanges.
dYdX
dYdX is a perpetual exchange and a proof-of-stake blockchain network built using the Cosmos SDK and leveraging CometBFT for consensus.
Key Metrics:
- TVL: $435 million
- Number of Trading Pairs: 12 (Arbitrum network)
Features:
- Offers high leverage trading for perpetual contracts.
- Includes limit orders, stop losses, and margin trading.
- Incentivizes traders with an active points reward system.
Strengths:
- Superior liquidity and trading volume.
- Strong risk management and liquidation mechanisms.
- Strong Market Position in the decentralized derivatives market.
GMX
GMX is a decentralized exchange that supports trading of spot and perpetual contracts. It operates on the Arbitrum and Avalanche networks and focuses on providing liquidity through user-supplied pools. GMX has been a significant protocol in the Arbitrum ecosystem offering a limited number of trading pairs.
Key Metrics:
- TVL: $574 million
- Number of Trading Pairs: 12 (Arbitrum network)
Features:
- Users can provide assets to liquidity pools to become market makers.
- Supports both spot and perpetual trading.
- Reputation for reliability and trust within the Arbitrum ecosystem.
Strengths:
- Large TVL indicating strong user trust and liquidity.
- Established presence and good reputation in the market.
Hyperliquid and dYdX are both established as blockchain ecosystems (Layer 1) governed by custom consensus mechanisms. However, HL stands out by offering both spot and perpetual trading options, whereas dYdX focuses solely on perpetual futures trading. In contrast, GMX, a significant protocol in the Arbitrum and Avalanche ecosystems, facilitates both spot and perpetual trading, positioning itself similarly to HL in terms of trading options.
A few compelling reasons to remain invested in the Hyperliquid ecosystem:
- No VC. It is a bootstrapped project driven by a strong community engagement.
- Founders with technical expertise who grasp the intricacies better than current competitors.
- Minimal competitors considering the niched approach of providing both spot and perp trading options.
- Strategic Incentive Programs
- Evolving ecosystem facilitating innovation and advancement
- Rapidly expanding vocal community
Hyperliquid’s true moat lies in its ability to perform like a centralized exchange (CEX) while functioning as a fully decentralized, on-chain DEX. The platform demonstrates strong growth in TVL, trading volume, and user adoption, indicating substantial growth potential. Its user-friendly, high-performance trading terminal, coupled with copy-trading options, effectively addresses many common issues faced by decentralized exchanges. This positions HL as a promising contender in the DeFi space, making it a project worth watching closely.
