Author: Tranks
1. Introduction
Decentralized Perpetual Futures Exchange (Perpetual Futures Exchange) is a DeFi protocol that allows users to establish leveraged positions on the blockchain for specific assets.
Since the collapse of FTX, the world's second-largest centralized exchange, in November 2022, decentralized exchanges have steadily developed under the attention of market participants due to distrust in centralized exchanges.
CEX vs DEX futures trading volume has been steadily increasing since November 2022; Source: The Block
Based on its price discovery mechanism, existing PerpDEX can generally be divided into three models:
Oracle model: A model that operates based on external price data, lacking its own price discovery mechanism. The advantage is that, due to reliance on external oracles, the liquidity scale of the protocol has minimal impact on traders (Takers), but liquidity providers (Makers) face single-point risks and attacks from oracles, and the lack of a self-price discovery mechanism limits its development (e.g., Jupiter).
Orderbook model: A model that utilizes the trading system of traditional capital markets. Although traders can specify the desired buy/sell price, making Maker risks relatively low, the limitations of blockchain block time restrict market makers who need to act quickly (e.g., dYdX).
AMM model: A model that utilizes CPMM (Constant Product Market Makers), also the price discovery mechanism of Uniswap. The price is determined based on provided liquidity according to a specific formula (e.g., X*Y=K), and while it allows for easy asset supply and demand management without the need to submit or modify an Orderbook, all trades will involve a certain degree of slippage (e.g., Perpetual Protocol).
For detailed information on PerpDEX price discovery mechanisms, please refer to the 'Perpetual DEX' series articles.
1.1. Development and limitations of Orderbook PerpDEX
In the early development phase of Perpetual DEX, Oracle and AMM models were widely adopted in the market as they made it easier to ensure the liquidity required for trading, as market makers based on Orderbook found it challenging to operate effectively due to blockchain's slow processing speeds and high costs. However, these models mostly faced zero-sum games, competing for limited liquidity, while only targeting existing cryptocurrency market participants. Therefore, discussions and efforts to develop Orderbook-based PerpDEX have always existed to provide a familiar trading environment for traditional financial traders and achieve larger scale growth based on their liquidity.
Recently, with the development of blockchain infrastructure such as Layer 2 and Appchains, and the introduction of trading methods accepting off-chain orders, the trading environment for Orderbook PerpDEX has significantly improved. Furthermore, the development of Orderbook PerpDEX and related infrastructure continues, including the following protocols:
Vertex Protocol: A hybrid model PerpDEX that solves the liquidity initiation challenge faced by the Orderbook compared to other models by blending AMM and Orderbook models.
Elixir: A protocol that helps anyone easily execute liquidity provision in Orderbook PerpDEX.
Despite these developments, Orderbook PerpDEX does not differ from centralized exchanges beyond enabling users to simply 'deposit' funds and create 'positions' within the protocols. This makes them unable to avoid competition with centralized exchanges, and due to the following two factors, PerpDEX finds itself at a disadvantage in this competition:
Orderbook PerpDEX that processes orders off-chain and records results on-chain finds it challenging to gain user trust in terms of transparency.
Fully on-chain Orderbook PerpDEX requires signatures and Gas Fees for every trade submission from users, making the trading experience relatively inconvenient compared to centralized exchanges.
Therefore, the current Orderbook PerpDEX needs to optimize Orderbook-based trading while establishing its own ecosystem to create a network effect. Against this backdrop, Hyperliquid was born with the vision of becoming a fully transparent and user-friendly 'On-chain Binance'.
2. Hyperliquid, the Ultra-Liquid Protocol
Hyperliquid is an efficient Layer 1 optimized for Orderbook trading, capable of processing 2 million transactions per second, launched in June 2023 with the team's own capital and no external investment.
At the core of Hyperliquid is an Orderbook-based native PerpDEX, with all procedures from Orderbook to trade execution recorded on-chain. Hyperliquid DEX records all user activities on-chain while also providing convenient features such as creating trading accounts via email and submitting trades without requiring independent signatures or Gas Fees, offering a user experience similar to that of centralized exchanges.
With these distinctive features, Hyperliquid has grown steadily since its launch, achieving a net inflow of $2.14 billion as of December 11, 2024, with a monthly trading volume reaching $77 billion, and an open interest amounting to $3.37 billion as of November, approximately four times that of Jupiter, ranking second in trading volume and far ahead among Orderbook PerpDEX.
Let's explore the composition and operational mechanisms of Hyperliquid in more detail.
2.1. Hyperliquid Network
At its inception, Hyperliquid adopted the Tendermint consensus algorithm from Cosmos for ease of deployment and interoperability with the Cosmos ecosystem. However, the Tendermint consensus algorithm showed scalability limitations, handling only about 20,000 instructions per second. To address this, the Hyperliquid team developed and launched HyperBFT in May 2024, a consensus mechanism specifically designed for fast, high-volume transaction processing.
HyperBFT is a model designed to further optimize the Hotstuff consensus algorithm for Hyperliquid, while the Hotstuff consensus algorithm is a more efficient improved version of the Tendermint consensus algorithm. Although HyperBFT theoretically can handle 2 million transactions per second, in a practical operating environment, it can process up to 200,000 transactions due to its integration with HyperVM (execution layer based on Rust), with latency times only trailing behind seconds. This is only one-eighth of the TPS of the centralized exchange Binance, but is about 8 times higher than Injective, which operates an on-chain Orderbook protocol based on its own network.
Thus, Hyperliquid is designed and built around 'trading efficiency', with the advantage that all orders submitted by users are recorded and processed quickly on-chain without Gas Fees. However, without providing rewards to validators, the team currently operates all four nodes to ensure a fast order processing environment, raising external doubts about decentralization.
Recognizing this, the Hyperliquid team is testing trustless node operations to achieve validator decentralization on the test network while also exploring how users can participate in network validation through staking $HYPE (Hyperliquid's token) even if they do not operate nodes directly. To maintain a high-efficiency network state while ensuring decentralization, Hyperliquid has introduced a mechanism to convert nodes that cannot maintain a certain performance level into a 'Jailing' state, restricting their ability to propose new blocks and participate in voting.
Nodes in Jailing state; ASXN Dashboard
Additionally, the Hyperliquid team plans to launch HyperEVM, to be used in conjunction 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 the Hyperliquid Bridge, secured by Hyperliquid's validators, and receive an equivalent amount of assets in their personal accounts on Hyperliquid to use the network and PerpDEX.
Currently, Hyperliquid only supports bridging USDC on the Arbitrum network. Recently, with the launch of Hyperliquid's native token $HYPE, interest in Hyperliquid has increased, and there has been a significant rise in users depositing assets, also observing a notably higher net inflow in the Arbitrum network compared to others.
Weekly net inflows by network as of December 3; Source: Artemis
Currently, withdrawals on the Arbitrum network incur a $1 fee to cover Gas Fees, and Hyperliquid plans to support various stablecoins beyond USDC on other networks in the future. Especially after the launch of HyperEVM, integration with Circle's CCTP (Cross-Chain Transfer Protocol) is likely to ensure perfect interoperability for stablecoin transfers with other networks.
2.2. Hyperliquid DEX
As mentioned earlier, Hyperliquid DEX operates on the Hyperliquid network, offering fast transaction processing without signatures and fees, providing a user experience nearly identical to that of centralized exchanges, and supporting leveraged trading environments for over 100 different token pairs.
Hyperliquid DEX provides the following four types of orders:
Market orders: Transactions executed immediately at the current market price.
Limit orders: Transactions executed at a specified expected price.
Scale orders: Establishing and executing multiple limit orders within a set price range.
TWAP: Splitting an order into multiple orders executed at fixed time intervals.
Hyperliquid implemented a free trading policy in the first three months after the mainnet launch to attract early users, and afterward will introduce a fee policy, charging 0.25% for Takers and providing a 0.2% rebate for Makers. However, starting March 2024, they switched to a tiered fee mechanism based on the trading volume of each wallet over a 14-day period, reorganizing it so that only market makers meeting specific trading volume thresholds can receive rebates.
Hyperliquid fee structure; Hyperliquid Docs
The fee income generated within Hyperliquid is not collected by the team but is distributed to users who deposit liquidity into the HLP Vault (Hyperliquid Liquidity Provider Vault) and the assistance fund, which will be detailed in the following sections.
2.2.1. Mark Price Mechanism
Since Hyperliquid is based on Orderbook, the buy/sell prices set by users are essentially determined by the liquidity of the Orderbook. However, when the liquidity of the Orderbook is insufficient, price discrepancies with other markets may arise, potentially triggering liquidation, TP (Take Profit), and SL (Stop Loss) events through small-scale liquidity attacks.
Additionally, due to the nature of perpetual futures trading with no expiration date, to control the deviation of prices from spot prices, holders must pay a certain amount to counterparties as funding rates during each specific time period (Hyperliquid's is one hour). Therefore, Hyperliquid calculates Mark Price based on price data from external exchanges for liquidation, TP/SL, and funding rate calculations. The criteria for calculating Mark Price in Hyperliquid are as follows:
Binance: 27.27
OKX: 18.18
Bybit: 18.18%
Kraken: 9.09%
Kucoin: 9.09
Gate IO: 9.09
MEXC: 9.09
2.2.2. Derivatives and Spot Trading
In addition to specific token futures trading, Hyperliquid DEX also provides the following types of tool trading:
Index perpetual contracts: Provide perpetual futures trading for various blockchain ecosystem indices, such as an index tracking the average floor price of specific blue-chip NFT collections (NFTI-USD), and an index tracking the average Key prices of the middle 8 accounts among the top 20 influencer accounts on the blockchain social platform Friend Tech (FRIEND-USD).
Hyperps: A product supporting pre-trading of tokens not yet launched in the market, using the weighted moving average of the previous day's prices per minute over 8 hours (EWMA) to determine prices, rather than relying on specific prices.
Spot: Native tokens issued on the Hyperliquid network.
Among them, Hyperliquid has recently been investing significant effort into building and expanding its ecosystem, centered around its native token and spot trading; Hyperliquid's native token will continue to evolve through HIP (Hyperliquid Improvement Proposals).
HIP-1: Hyperliquid native token issuance standard proposal, including token standard format and a Dutch Auction system with a 31-hour cycle to curb disorderly token issuance. This proposal also includes a Spot Dust feature that automatically submits sell orders to the Orderbook for tokens held in user wallets valued at less than $1 once a day.
HIP-2: Proposal for automatically providing liquidity to 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 select whether to execute the liquidity provision solution and must deposit the required liquidity when issuing tokens.
As of December 4, 2024, a total of 53 types of tokens, including the mainnet token $HYPE, are traded on Hyperliquid DEX through HIP standards. After the launch of $HYPE, spot trading volume increased significantly, reaching daily volumes of $628 million, and with the increase in the number of issued tokens and the emergence of more dApps that can utilize these tokens, Hyperliquid's spot trading volume is expected to further grow. Currently, Hyperliquid's daily spot trading volume is maintained at $333 million, slightly reduced after the issuance of $HYPE.
Hyperliquid native token trading volume trend; Source: Purrburn
Additionally, with the inflow of external liquidity into the Hyperliquid ecosystem and the increased activity in spot trading following the issuance of $HYPE, the winning bid prices of token auctions launched through HIP-1 have also shown an upward trend.
Ticker auction winning price trend; Source: Hypurrscan
2.2.3. HLP and User Vaults
In existing Orderbook exchanges, liquidity providers must continuously monitor and submit and modify buy/sell orders as necessary, which means relying on a few professional market makers to provide liquidity, leading to these market makers monopolizing the profits generated from liquidity provision.
In contrast, Hyperliquid offers a feature where users only need to deposit assets into the HLP Vault (Hyperliquid Liquidity Provider Vault) to participate in market making and earn profits, with the HLP Vault directly executed by the team to provide liquidity to the Hyperliquid Orderbook. As mentioned, most of Hyperliquid's revenue is allocated to users who deposit liquidity into HLP.
The HLP vault consists of three strategies: Strategy A, Strategy B, and the liquidator strategy. The liquidator strategy operates by taking over positions when the maintenance margin of the liquidation target falls below 2/3, while the specific operational mechanisms of the other two strategies are not disclosed to prevent exposure of operational details. However, since the order submission history and balance status of each strategy 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 the HLP vault is $168 million, with total profits of $43 million, and the annual interest rate recorded in November is approximately 20%.
HLP vault PNL trend; Source: Stats.hyperliquid
Additionally, Hyperliquid provides user vault features beyond HLP, allowing anyone to create vaults, execute trading strategies similar to HLP, and also accept user deposits for operation. Vault operators can charge a fee of 10% from the profits generated from operations and must maintain their asset ratio in the vault at 5% or higher to align with depositors' interests.
User vault list; Source: Hyperliquid
2.3. $HYPE
Since the closed testing launch on November 2022 until September 2024, Hyperliquid allocates Hyperliquid points to users based on the following criteria:
Closed testing & Q1 (2022.1~2024.4): Points distributed based on Perp trading volume.
Q2 (2024.6~2024.10): Points distributed based on participation in the ecosystem (such as Layer 1 and spot trading).
Retrospective points distribution for trading in May, October, and November 2024.
After the end of Q2, on October 15, 2024, Hyperliquid established a foundation and announced the issuance and airdrop of the network token $HYPE, distributing approximately 31% of the total supply and 83% of the initial circulation of $HYPE tokens to users who mined Hyperliquid points on November 29.
The foundation has announced the following utilities for $HYPE:
Through the upcoming $HYPE staking (currently being tested on the test network), as a security budget for HyperBFT.
To be used as the network fee token on the upcoming HyperEVM.
Approximately 40% of the total supply will be used for future community rewards and ecosystem subsidies.
After the token airdrop, $HYPE was listed on Hyperliquid's HYPE/USDC spot trading pair, starting at a price of $2. In the first 7 days post-listing, the price surged by approximately 7 times and maintained an upward trend even during the correction phase.
$HYPE price trend; Source: Hyperliquid
Factors driving the rise of $HYPE include: 1) Establishing a solid community that shares the agenda of the Hyperliquid exchange centered around the team; 2) No institutional investors can perform large-scale sell-offs without external funding; 3) Continuous $HYPE buybacks using accumulated fees in the Hyperliquid assistance fund wallet.
Amount of $HYPE held by Hyperliquid assistance fund wallet; Source: Hypurrscan
3. Hyperliquid Ecosystem
Most Orderbook-based PerpDEX either lack their own networks or focus solely on 'trading' functions in their architecture, making it difficult to form a subordinate ecosystem that generates synergies with PerpDEX. In contrast, Hyperliquid, as a Layer 1 network, is not limited to PerpDEX but aims to build a vast ecosystem that combines existing on-chain users with centralized exchange users, creating a network effect that PerpDEX cannot achieve through the listing of various dApps, the issuance of native tokens through HIP, and the introduction of HyperEVM.
3.1. $PURR
$PURR is Hyperliquid's first native token and meme coin, issued on April 16, 2024, alongside the launch of HIP-1.
At issuance, 50% of the total circulating supply was proportionally distributed to Hyperliquid users' Hyperliquid points, while the remaining 50% was originally intended to provide liquidity to the PURR/USDC spot pair per HIP-2, but following community feedback during testing indicating that too much liquidity had already been provided, the team decided to burn 80% of the liquidity supply allocation. Additionally, due to the introduction of a burn mechanism using part of the trading fees, continued burning has been carried out, with a total of $401.8 million of PURR burned to date, including the initial burn amount.
$PURR circulation status; Source: purrburn.fun
$PURR saw an approximately 166% growth within three days of its issuance due to a trend among other native tokens to offer airdrops to $PURR holders, coupled with rumors of Hyperliquid points being distributed to $PURR holders. Recently, with the announcement of $HYPE, external liquidity has gathered in Hyperliquid, leading to a significant increase in $PURR's price, maintaining a market cap of $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, recently launching and operating Hypurr Pump, a meme coin issuance platform.
Hypurrfun Dashboard; Source: hypurr.fun
Users can effortlessly establish and close positions on Hyperliquid through a Telegram bot, participate in meme coin financing on Hypurr Pump, and projects that raise over $100,000 in financing on Hypurr Pump can participate in Hyperliquid's stock auctions, issuing their own meme coins based on the financing situation.
The core of the project is $HFUN, the second native token issued on Hyperliquid after $PURR, structured to burn $HFUN using platform revenues generated through Hypurr Fun and Hypurr Pump.
3.3. HyperLend
HyperLend is a lending protocol designed specifically for the Hyperliquid ecosystem, expected to launch alongside HyperEVM, and currently operates only on the HyperEVM test network.
Features that HyperLend is preparing include:
Leveraged yield farming: Providing leveraged yield farming positions using $stHYPE, which is the liquid staking token that Thunderhead (a liquid staking token issuance platform) plans to issue in the future.
HLP collateral loans: Providing loan services using funds deposited in HLP as collateral.
Vault Share token issuance: Issuing tokens that can be collateralized against funds stored in vaults and providing loans for these tokens.
One-click cross-chain loans: Bridge functionality for various Layer 2 network assets, using these assets as collateral for HyperLend.
HyperLend provides these features to tokenize various locked liquidity on Hyperliquid and use it as collateral for loan services, expected to diversify yield farming paths within the Hyperliquid ecosystem after launch and enhance liquidity.
Additionally, the Hyperliquid ecosystem includes various protocols that are underway or preparing to join from other networks, such as Abracadabra (which provides lending and leverage features based on stablecoin $MIM), Rage Trade (a multichain perpetual aggregator), and Solv Protocol (a Bitcoin pricing protocol). The activation of these protocols and the issuance of native tokens are expected to help increase trading volume on Hyperliquid DEX.
4. Conclusion
While other PerpDEX grappled with how to meet user trading experience and liquidity issues simultaneously, Hyperliquid achieved a fast, Orderbook-based on-chain PerpDEX that does not require user signatures or Gas Fees, maintaining a good user experience. Additionally, with the launch of $HYPE as a turning point, Hyperliquid has gained significant market attention and demonstrated unprecedented rapid growth among other PerpDEX.
Especially through the spot token issuance mechanism introduced by HIP-1 as a platform for token issuance, similar to Pump.fun on Solana, Clanker on Base, and Virtual Protocol, greatly facilitating the recent increase in network usage. Hyperliquid aims to become a community-centered ecosystem.
Additionally, Hyperliquid aims to become a Layer 1 protocol by integrating other protocols beyond spot and futures trading functionalities to form an ecosystem. In doing so, Hyperliquid has established its leadership position and gained expectations to attract centralized exchange users, who find it difficult to engage with existing blockchain projects, into the on-chain environment, merging them with existing on-chain users.
As noted in our 'Market Commentary | 12.06' article, due to Hyperliquid's rapid growth post-token issuance, there are opinions that the value of Hyperliquid's token may be somewhat overvalued. However, considering that the article did not include the values of other tokens in the Hyperliquid ecosystem (primarily those in the spot market), there is room to refute the argument of overvaluation. As shown in the above figure, when incorporating the value of spot market tokens into TVL, the FDV/TVL ratio is 5.66, still in the undervalued range compared to Jupiter.
This valuation assessment can also be applied to Layer 1 projects, simply comparing as follows (valuations based on DeFiLlama):
Hyperliquid($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 indicate, Hyperliquid seems to be undervalued when compared to Layer 1 projects with similar TVL metrics. Considering this, we believe that with the launch of HyperEVM and the expansion of the Layer 1 ecosystem, Hyperliquid's value could gain a higher evaluation.
However, for Hyperliquid to realize its vision and enhance project value, it must successfully launch $HYPE staking and achieve validator decentralization while maintaining existing network performance and introducing HyperEVM, subsequently forming a community-centered organic ecosystem. Therefore, we should closely monitor the subsequent developments of the protocol to assess whether they can prove the proposed vision.
