Hyperliquidity Provider (HLP): democratizing market making
What is HLP?
The Hyperliquidity Provider (HLP) vault runs market making strategies on Hyperliquid. Anyone can provide liquidity for HLP and share in the pnl. HLP doesn’t collect any fees, and pnl is shared proportionally based on each depositor’s share of the vault. Like the Liquidator vault, HLP is community owned.
Why open up market making to the community?
Many fledgling defi projects succumb to the pressure of predatory market making deals to bootstrap liquidity. We believe that market making profits in early phases of the project should instead accrue to users.
The core contributors to Hyperliquid come from a market making background and have been providing liquidity during closed alpha. To be very clear: the team is not building Hyperliquid to make quick gains from market making. However, it’s natural to be concerned that the team could have unfair advantages or asymmetric information, given past events in crypto. To assuage those concerns, the team’s market making strategies are in a vault open to the community. By opening up the HLP and Liquidator vaults, we hope to bring a new standard of transparency and equal access to exchanges.
How do the market making strategies work?
At a high level, the strategy computes a fair price based on tick data from Hyperliquid and large centralized exchanges. The vault executes around this fair price by running making and taking strategies with the goal of profitably providing 24/7 liquidity on all assets immediately upon listing.
The strategy itself currently runs offchain but the positions, open orders, trade history, deposits, and withdrawals of HLP are visible in real time onchain for anyone to audit. Everything can be tracked on the explorer. The strategy is written to be robust under this transparency.
Over the long term, we expect external market makers will step in to trade large volumes on Hyperliquid. In fact, one of the earliest priorities was to open source the API and SDK for ease of onboarding. Though counterintuitive, the introduction of other market makers will be positive for HLP. The sharpe ratio of the strategy will increase as HLP no longer needs to warehouse all risk.
Are there any risks to be aware of?
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. Though its actions are transparent, the future performance of HLP is always uncertain, and depositors should not risk more than they are comfortable losing. You can track the historical performance of HLP online; analytics for additional insights are in the works.
How do I participate as a user?
To participate, just deposit USDC in the HLP vault. You can withdraw your initial deposit and rewards in USDC after a brief lock-up period. Compared to liquidity pools on other platforms, the vault is not tokenized. You do not need to claim rewards regularly since they compound automatically.
Conclusion
Market making and liquidations are some of the most consistent ways to make money trading, and they are typically reserved for exchange operators or privileged market makers. On Hyperliquid, they are available to the community via the Liquidator vault and HLP vault.
As always, past performance does not guarantee future returns, and this article is not financial advice. Check out the protocol vaults if you’re looking for a passive way to participate in Hyperliquid: http://app.hyperliquid.xyz/vaults
