Source: SWASTIK GARG
Compiled by: TechFlow
In today’s reading, we’ll take a deep dive into Hyperliquid, including:
The current status of perpetual exchanges
Hyperliquid Chain
Hyperliquid Improvement Proposal
Points Program Overview
$PURR - Memecoin
Success Factor Analysis
Statistics
Perpetual contract trading has been a very successful product in the crypto market. Centralized exchanges process about $150 billion in trading volume every day, highlighting the widespread adoption of perpetual contracts. In the decentralized perpetual contract market, according to Deflama data, daily trading volume is about $7-8 billion, accounting for about 5% of the trading volume of centralized exchanges.
Recently, and especially this year, we have observed higher volumes than in previous cycles. In the on-chain world, this started with dYdX in the DeFi summer, followed by Perpetual Protocol and GMX in 2022. At first, it was believed that decentralized exchanges (DEX) had fully evolved, but a shift began in mid-2023; new perpetual contract DEXs took the lead in the top five. Among them, Hyperliquid contributed more than 10% of the daily trading volume of on-chain perpetual contracts.
Perpetual DEX supports Perpetual Swap, a derivative product. Perpetual Swap is a crypto-native concept that is derived from futures contracts in traditional markets with several modifications. Essentially, it allows users to speculate on the price of an asset without holding equity.
As can be seen from the above figure, there have been many evolutions in the perpetual space. During this cycle, the app-chain theory has received more attention.
The current landscape of decentralized perpetual contract exchanges
As of June 5, 2024, the total TVL of Perp DEX as a category is $3.5 billion. This chart helps us understand the interest in trading perpetual contracts over time. This also reflects the cryptocurrency cycle very well, as we can observe that from mid-2021 to mid-2022, the TVL hovered around $3 billion. It fell in 2023, reflecting the bear market phase, and in 2024, the market began to recover, exceeding the peak of the previous cycle.
If we look at the top 10 perpetual exchanges by TVL, we can observe that GMX and dYdX have similar TVL, close to $500 million each. They are followed by Jupiter, Hyperliquid, and Drift, each with around $400 million. These five exchanges account for the majority of the share, with TVL clearly dropping by a third after Drift.
Learn more about Hyperliquid
The Hyperliquid team explored various trading mechanism models, including MM, RFQ, and oracle-based systems. Their analysis concluded that the order book is the best long-term solution for larger scale. The second question involves which blockchain to use for the application. The team evaluated existing environments such as Solana and Arbitrum, and after conducting research, they concluded that a new chain needed to be built from scratch to solve these problems.
Hyperliquid Chain
Hyperliquid's vision is to develop an open financial system on the chain. The core of this ecosystem is Hyperliquid L1. Every interaction, whether it is an order, cancellation or liquidation, is executed on the chain.
The core idea of Hyperliquid is to achieve true decentralization. It guarantees consistent transaction order through Tendermint's Byzantine Fault Tolerant consensus mechanism, as long as two-thirds (weighted by staked/delegated tokens) of the validators remain honest. It supports up to 20,000 operations per second.
Hyperliquid's architecture was designed from scratch to allow full-stack optimizations, independent of the Cosmos SDK. The core state transition logic of L1 is developed in Rust and connected to Tendermint via the ABCI server. The network is secured by a proof-of-stake mechanism (PoS). The staking and penalty functions are similar to Cosmos, and more details will be announced after the native token is released.
Hyperliquid plans to adopt HyperBFT, a new consensus algorithm that will replace Tendermint. Currently, the implementation of HyperBFT is in the final stages of testing.
The main improvements brought by HyperBFT are:
Currently, Tendermint supports up to 20,000 orders per second. With HyperBFT, the expected throughput will increase 100 times, but in practice it is around 200,000 orders per second.
Unlike Ethereum and the current Tendermint, HyperBFT can continue to order transactions without waiting for the current block hash to execute.
The speed at which blocks are generated depends on the speed at which validators can communicate to reach a quorum, which will improve and stabilize confirmation latency.
Native EVM support
Hyperliquid L1 will provide native EVM support and integrate with native L1 components such as HIP-1 assets, spot trading, perpetual contract trading, and other DeFi primitives. The team believes this is a strategic approach to effectively expand L1. This integration will provide advantages for builders who want to develop on the EVM, allowing them to deploy smart contracts using familiar EVM tools.
HIP-1 assets will be atomically transferred to their corresponding ERC-20 contracts, demonstrating the composability of L1. This feature makes Hyperliquid L1 the best platform for developing, launching, and trading tokens.
Bridge to Hyperliquid L1
HyperLiquid onboarding is done through Arbitrum. HyperLiquid runs a native bridge secured by the same validator set as HyperLiquid L1. Deposits are confirmed after being signed by L1 validators, withdrawals are escrowed on L1, and each withdrawal is signed by a validator as a separate L1 transaction. Both deposits and withdrawals require approval from two-thirds of the staking power to settle. During the withdrawal process, users do not pay gas fees on Arbitrum. Instead, HyperLiquid charges a fixed fee of 1 USDC.
In the event of a malicious withdrawal that does not match L1, a dispute period will be initiated during which the bridge can be locked. Unlocking the bridge requires cold wallet signatures from two-thirds of the stake-weighted validator set. The bridge and its integration with the L1 staking mechanism has been audited by Zellic.
Perpetual Exchange
Hyperliquid perpetual contracts are derivatives with no expiration date. Their prices are regulated by a funding rate mechanism to closely track the price of the underlying asset. The funding rate is recalculated every eight hours and paid at one-eighth of the rate per hour, with a maximum cap of 4% per hour.
Hyperliquid offers a single margin option for these contracts: USDC-margined, USDT-denominated linear contracts. This means that the contract is denominated in USDT, while the collateral is held in USDC. This setup enhances ease of trading and liquidity, eliminating the need for currency conversions, and essentially treats these contracts as quanto contracts where the P&L of USDT is calculated in USDC.
Exchanges form order books
Hyperliquid's order book is on-chain, and orders are placed in multiples of tick size and lot size. Orders follow a price-time priority system. Available order types include market orders, limit orders, stop market orders, and stop limit orders.
Margin
Hyperliquid traders have two margin options: cross margin and isolated margin. Cross margin is the default setting and allows collateral to be shared across all positions, maximizing capital efficiency. Isolated margin limits collateral to a specific asset, protecting other positions from its liquidation.
Oracle
Validators play a key role in maintaining market integrity. The Hyperliquid oracle publishes the price of each perpetual asset every three seconds, and these prices are used to determine the funding rate. Each validator calculates the spot oracle price by considering the weighted median price across multiple exchanges - Binance, OKX, Bybit, Kraken, Kucoin, Gate IO, and MEXC, with weights of 3, 2, 2, 1, 1, 1, and 1, respectively.
The final oracle price used for liquidation is the weighted median of the prices submitted by each validator, where the validator’s contribution is weighted by its staked weight.
Liquidator Vault
The Liquidator Vault is crucial in Hyperliquid’s liquidation process. It liquidates positions that fall below the maintenance margin and keeps their margin and associated positions in check.
Insurance Fund
As the name suggests, the insurance fund is a safety net. It is used to compensate users for losses in the event of any failure on the platform that may cause losses. It is funded by collecting a portion of the transaction fees. This practice is also adopted by centralized exchanges.
cost
At Hyperliquid, all fees are distributed to the community, including HLP and insurance funds. Referrers earn 10% from the transaction fees of their referred users.
This picture clearly helps to understand the cost
Sub-products
Index Perpetual Contract
These contracts offer a new approach by tracking a formula-derived index. They are similar to traditional perpetual contracts. Users can speculate on a basket of assets through these contracts. There are two contracts available for trading: NFTI and FRIEND.
NFTI-USD
It represents the index of top NFT series such as Bored Ape Yacht Club, Mutated Ape Yacht Club, Azuki, DeGods, Pudgy Penguins, and Milady Maker. The index is a three-minute EMA of the total floor price. The total floor price is the sum of each series floor price, where BAYC is divided by 10. The floor price is calculated by aggregating OpenSea and Blur.
FRIEND-USD
Friend-USD is the first index perpetual contract listed by Hyperliquid, based on the social app Friendtech. Friendtech converts users' influence into a tokenized version called Key, which users can trade. Its core audience is crypto Twitter, where famous CT users create profiles and trade Key with each other. The index is rebalanced every two weeks and includes the top 20 profiles on Friend.tech. Selection criteria include price, at least 5,000 Twitter followers, and filtering out outliers in trading activity and number of holders. FRIEND has recently been delisted.
Uniswap Perpetual Contract
These perpetual contracts use Uniswap V2 or V3 AMM prices as the underlying spot asset. These contracts are limited to isolated margin, i.e. cross margin is not allowed. Uniswap pool prices are always converted to USDT prices based on CEX oracle prices, covering tokens such as RLB, Unibot, etc.
Hyperp Introduction
Hyperps trade like perpetual contracts, but do not require an underlying spot or index oracle price. Hyperps are pre-launch tokens that help discover prices for upcoming tokens. This cycle, they are widely used, initially launched by Binance.
Hyperps operate similarly to regular perpetual contracts, except that the external spot/index oracle price is replaced by an 8-hour exponentially weighted moving average of the last day’s minute-by-minute mark price. When the pre-launch tokens are officially available for spot trading on centralized exchanges such as Binance and Bybit, Hyperps convert to normal USD perpetual contracts.
Hyperliquid’s Market Making Method - HLP
The Hyperliquid team recognized the challenges of bootstrapping liquidity in the early stages of a project and believed that the best solution was to open market making to users. Previously, the team handled market making in its closed alpha phase.
Introducing the Hyperliquidity Provider (HLP) vault, the core of Hyperliquid’s market making strategy. It allows anyone to contribute liquidity and share in profits and losses. Importantly, HLP has no fees and distributes profits and losses proportionally to each contributor’s share in the vault. Professional market makers can also participate in Hyperliquid using its SDK.
The market making strategy used by Hyperliquidity Provider (HLP) involves calculating a fair price based on tick data from Hyperliquid and major centralized exchanges. This fair price guides the vault's actions, including market making and market taking strategies, to continuously and profitably provide liquidity across all listed assets. The strategy is executed off-chain, but anyone can track positions, open orders, trading history, deposits, and withdrawals in real time through a browser.
Hyperliquid Improvement Proposal - HIP
Improvement Proposals are a standard for specifying new features or changes to a product. It is a common practice that any community member can participate through proposals and share their ideas on how to improve the product. In Hyperliquid, these are called HIPs. Currently, as Hyperliquid is not community owned, it is run by a team. However, as its operation is democratized, anyone can participate.
HIP-1: Native Token Standards
HIP-1 is a limited supply fungible token standard that supports on-chain spot order books between HIP-1 token pairs. Each token's deployment transaction generates a globally unique hash, which L1 uses to index the token. Gas fees currently paid in USDC will eventually be paid in Hyperliquid native tokens. Native spot fees follow a similar volume-based fee schedule as perpetual contracts.
$PURR is the first HIP-1 token, serving as Hyperliquid’s native meme coin. HIP-1 is now being adopted, with over 10 tokens deployed. These tokens have a daily trading volume of ~$17M and ~93K transactions. Most are meme coins.
HIP-2：Hyperliquidity
One of Hyperliquid’s core design principles is that liquidity should be democratized. For HIP-1 tokens in the early stages of price discovery, a new model becomes important in bootstrapping liquidity. Hyperliquidity is inspired by Uniswap and interoperates with native on-chain order books to support liquidity. HIP-2 includes a fully decentralized on-chain policy that is integrated into the block transition logic of Hyperliquid L1. The policy logic is protected by the same consensus that governs the order book.
The final strategy maintains a 0.3% spread every three seconds. A significant improvement is that Hyperliquidity is part of the universal order book. This allows active liquidity providers to join and contribute liquidity at any time, allowing the market to adapt to growing liquidity needs.
Points Program Overview
Program Starts: Hyperliquid Points Program starts on November 1, 2023.
Duration: Six months, ending May 1, 2024.
Weekly Distribution: One million points will be distributed every week to active Hyperliquid users.
Initial snapshot: A special snapshot will be taken on October 31, 2023 for users in the closed alpha phase.
Phase 1 Points Distribution: Points for the initial snapshot will be distributed on April 15, 2024.
The second phase begins: called the “L1 Season,” it begins on May 29 and lasts four months, weekly.
Second phase distribution: 700,000 points will be distributed every week.
Event Multiplier: Events from May 1 to 28, 2024 will receive an event multiplier.
First snapshot of Phase 2: covers the period from 29 May to 4 June.
Extra points: 2 million points were distributed during the May 1-28 event, as the new phase began a month after the first ended.
It also has an affiliate program where affiliates benefit by earning one point for every four points their referred users earn. The points allocation criteria is reviewed regularly and allocation is based on weekly recorded activity, ending every Wednesday and allocation every Thursday.
Meme Coin Airdrop - $PURR
PURR is the first spot token on the Hyperliquid Native Token Standard (HIP-1). Hyperliquid took an interesting approach by airdropping its native meme coin to users. It went live on April 16th. There was no token sale and no planned use.
There are 1 billion $PURR tokens in total. 50% of $PURR tokens are airdropped proportionally to points holders. The remaining 50% will be permanently provided as Hyperliquidity for the PURR/USDC pair. Community feedback felt that 50% was too much of the total supply, so the team decided to burn 40% of the total supply originally allocated to HIP2.
PURR has been a huge success. Usually, meme coins have predictable results, but PURR’s chart tells a different story — it’s “all up, no down.” With Hyperliquid delaying the launch of its native token, PURR has now become the way to bet on Hyperliquid, as its chart shows.
What factors have contributed to Hyperliquid's growth? Clearly, Hyperliquid has done a lot of things right to get to where it is today.
integrated
Rage Trade
Rage Trade is an aggregator of on-chain perpetual exchanges. Hyperliquid integrated with Rage Trade on February 15th of this year. Rage Trade has a total trading volume of about $641 million, of which about 57.5% of the volume comes from Hyperliquid alone. Rage Trade also integrates other perpetual exchanges such as GMX and Synthetix. However, Hyperliquid's trading volume alone exceeds them, with a total trading volume of about $370 million to date.
Octo
Octo, similar to Super Wallet, has integrated Hyperliquid into its mobile app. Octo is a product of CoinDCX, an Indian centralized exchange. While there is no data on its trading volume contribution, these marketing efforts provide discovery opportunities and add value to Hyperliquid through integration.
Hyperliquid Market Making
The Hyperliquid Vault was a big factor in driving adoption of Hyperliquid. Initially, offering users the option to participate in profits created a very positive impression. Additionally, the platform allowed professional and individual market makers to participate and execute their own strategies, which helped to bootstrap liquidity. This in turn attracted more traders, creating a virtuous cycle. The Vault’s highest total deposit reached $178 million and currently stands at around $150 million.
For traders on centralized exchanges
The majority of cryptocurrency derivatives trading volume comes from centralized exchanges. To attract these users to Hyperliquid, the team offered a 50% discount of up to $50 million. These marketing efforts are noteworthy.
Finally, the Hyperliquid product itself.
Onboarding Hyperliquid: Onboarding was easy thanks to Privy, an embedded wallet provider that supports registration via social login as well as standard wallet login, which is a major breakthrough.
Bridge selection: Hyperliquid has chosen Arbitrum as its bridge, and most major Defi activities take place on Arbitrum.
Deposits: Hyperliquid accepts USDC as collateral. Through its Lifi integration through the in-app widget, it becomes very easy for users to convert any other stablecoin to USDC.
Bridging Speed: Getting funds into Hyperliquid is fast. While there are no official statistics on how long it takes, the process feels instantaneous.
User experience: Hyperliquid provides a gas-free experience, and its user interface is similar to that of centralized exchanges, providing users with a value-added experience.
Statistical data
As of June 3, 2024, Hyperliquid has a total trading volume of $196.8 billion and about 136,000 users. During its operation, deposits exceeded $2 billion and withdrawals were about $1.75 billion. It ranks first in the cumulative trading volume ranking of on-chain exchanges.
Hyperliquid’s total number of transactions is approximately 8.5 billion. Most notable volume spikes occurred between January and May of this year, coinciding with the early bull market phase. This period saw a general rise in the market and increased activity due to factors such as the approval of the BTC ETF.
Hyperliquid has a total of approximately 136,000 users. The average annual number of new users from June last year to June 3 this year was 385.
Hyperliquid has done a great job with their product and marketing. Its product has attracted significant adoption, and further developments such as HIP-1’s spot trading and democratized market making have the community excited. Additionally, Hyperliquid does not have any outside investors, which is also a plus. However, there has been some pushback from the community as it launches a second season points program instead of a token generation event (TGE). With stablecoin adoption back on track, more and more people are getting enthusiastic about on-chain transactions. Hyperliquid has expanded from a trading product to building its own ecosystem.
