HLP update: 3 months in
HLP launched in May 2023 as Hyperliquid’s approach to community-owned liquidity. Now that it’s been running market making strategies for a quarter, it seemed time for a brief retrospective.
First, what is HLP?
The Hyperliquidity Provider (HLP) vault runs market making strategies on Hyperliquid and has been the primary source of liquidity during the protocol’s early days. Anyone can provide liquidity for HLP and share in the pnl. HLP doesn’t charge any fees, and pnl is shared proportionally based on each depositor’s share of the vault. HLP is Hyperliquid’s take on community owned liquidity.
The original blog post explaining HLP also discusses why the platform chose to open up market making to the community and how the market making strategies work: https://hyperliquid.xyz/blog/hyperliquidity-provider-hlp-democratizing-market-making/
HLP’s alpha
The source of HLP’s alpha to date has been market making, funding, and fee accrual. Market making involves making many trades with profitable short term markouts. Funding is the price paid for holding one-sided positions. Trading fees are 0.025% taker minus 0.002% maker per trade.
When HLP first launched, trading on Hyperliquid was zero gas and zero fee. Trading fees were implemented on June 13, 2023 and began accruing to HLP. On August 12, fees will begin accruing to the insurance fund and open interest incentive program in addition to HLP. The new breakdown will be 40% of net fees to the insurance fund, 40% to open interest rewards, and 20% to HLP.
In addition, HLP began performing liquidations on August 9, so market making and liquidation strategies are under the same protocol vault. Because HLP and the Liquidator were previously trading against each other to exit liquidated positions, it became arbitrary whether pnl was attributed to one vault over another. Consolidating the two strategies leads to more consistent outcomes for depositors and a more efficient use of capital.
The Liquidator vault is now deprecated. Liquidator depositors are free to withdraw their funds at any time. If HLP’s risk profile is acceptable to them, they can choose to move their funds to HLP.
HLP’s performance and trends
Hyperliquid traders are bulls, which means HLP has been net short 7 figures for over a month. As such, the raw pnl graph often looks like an upside down crypto index plus an alpha component.
The Stats page shows HLP’s performance across different cuts: raw pnl, hedged pnl (hedge each day’s returns by holding the previous day’s ending positions for each asset), net position, and position by coin.
Risks
The primary risk of HLP is that the strategy could take on losing trades. Like with GLP or Uniswap pools, there is no guarantee that vault counterparties lose money in aggregate. In addition, now that HLP is performing liquidations, it runs the risk of not exiting liquidated positions fast enough.
Though its actions are transparent, the future performance of HLP is always uncertain, and depositors should not risk more than they are comfortable losing. This post is neither financial advice nor an endorsement. You can track the historical performance of HLP online and see all open positions.
How to participate
To participate, deposit USDC in the HLP vault. You can withdraw after a brief lock-up period. The vault is not tokenized; you do not need to claim rewards regularly since they compound automatically.
As always, past performance does not guarantee future returns. This article is not financial advice. You can view HLP’s performance live here: https://app.hyperliquid.xyz/vaults/0xdfc24b077bc1425ad1dea75bcb6f8158e10df303.
