Original title: What's the HYPE with Hyperliquid?

Original author: MONK

Original source: x.com

Compiled by: Mars Finance, Eason

What’s all the hype about Hyperliquid? Highlights from my latest Messari report

@HyperliquidX has a narrative problem (which is not a bad thing). We will cover:

  • Hyperliquid L1

  • Hyperliquid as On-Chain Binance

  • How to find exposure

  • Points Valuation

At this point, we should all know that Hyperliquid is a leading CLOB perp DEX. However, it’s important to understand the full potential of its L1. What’s more, not enough people even know it’s an L1. I see Hyperliquid often referred to here as an L3 or an application on Arbitrum because deposits are routed through the Arbitrum bridge. Also, some are still comparing Hyperliquid to other perp DEXs and single-use-case DeFi protocols, and I think the team has now shown that they have bigger plans:

  • Added spot market

  • EVM compatibility coming soon

  • Interest from apps like @rage_trade and @hyperlendx

I think Hyperliquid needs a new consensus narrative that reflects its unique characteristics, and so far I see some similarities to a fully on-chain version of Binance.

Hyperliquid L1

Hyperliquid built a high-performance L1, optimized and configured end-to-end for its order book and perp DEX. Why do they need an L1? In short: - High-frequency trading (HFT) is limited in its profitability if there are other general-purpose transactions taking up demand for block space and competing for gas (by contrast, the Hyperliquid trading experience is gas-free; gas is only incurred on transactions that increase state bloat, i.e. spot listings or transfers to new wallets). - The chain must allow specific order prioritization, such as canceling and posting only limit orders, to ensure that market makers are not subject to too much toxic flow. Additionally, tailored solutions help optimize specific functions, such as atomic liquidations, fund allocation, and verifying solvency.

The @chameleon_jeff team rolled their own custom consensus algorithm (HyperBFT) from first principles to maximize performance. Compare that to $DYDX which uses the Cosmos SDK and Tendermint out of the box (no hate on $DYDX - good project). At some point, the limitations of the technology you outsource become your own limitations. Building all of their technology in-house (including the bridge and oracles) is quite an accomplishment.

Hyperliquid - Binance on Chain?

Let’s look at some narrative comparisons for Hyperliquid. dYdX: The main difference between Hyperliquid and dYdX is that Hyperliquid has built its order book entirely on-chain. It is fully transparent (no front-running or PFOF). Having an off-chain order book/matching engine saves additional validation, but does not provide a meaningful long-term CEX alternative. Hyperliquid is also further along in its ecosystem, with signs that it wants to be a mature network that can offer more than just a perp DEX. High-Performance L1 and Parallel EVM You can also compare it to high-performance L1s like Solana and parallel EVMs like Monad or Sei. I talk more about this in the report, but the EVM is an interesting difference compared to $SOL, and Hyperliquid already has a killer app (perp DEX) and stickier users compared to parallel EVMs like Sei and Monad. See below:

However, Hyperliquid’s biggest moat compared to all other similar offerings is the network’s composability with leading on-chain order books.

With EVM tooling coming soon, you’ll likely see a lot of innovative native DeFi applications interested in integrating this composability. Some examples: - Protocols like Ethena could leverage a native perp DEX to hedge exposure to volatile collateral without having to rely on an off-chain CEX. - Options protocols built on Hyperliquid could leverage Hyperliquid’s native perp assets to create advanced trading strategies. - Lending protocols could use native oracles to value collateral and then execute liquidations on Hyperliquid’s spot market. This could create the following flywheel for Hyperliquid’s ecosystem:

Hyperliquid is not a blank slate, general purpose L1. It is optimized for HFT on an on-chain order book. The combination of its technology and composable order books means it can become a hub for like-minded DeFi applications. The ecosystem also has a unique trading-oriented community that some teams may want to join.

Perhaps Hyperliquid is more like Binance on a full chain.

Keep in mind that CZ also has a background building for TradFi HFT, while Binance started out as an order book before adding the EVM-compatible BSC chain (which is now baked into BNB).

We think this argument could catch on if Hyperliquid starts to gain popularity. I've seen @kelxyz_ take this stance.

How do you get exposure?

You can check out some of Hyperliquid’s impressive on-chain metrics at Hyperliquid Stats. I’ve charted the success of some perp DEXs in the report. It’s still well behind Binance in terms of volume, accounting for about 6% of CEX volume in June. If being on-chain, transparent, and permissionless is important, then HL is poised to gain share as more users join crypto.

Can these metrics be retained after the TGE?

We think so, for the following reasons:

  • Farming points is currently extremely difficult given the opaque distribution rules. The reward weights keep changing and seem quite complicated.

  • Hyperliquid suspended its points program in May, but its volume share relative to Binance has remained relatively stable. This is a good sign.

  • Finally, the HL team has not yet profited from any trading activity on the platform. Their only form of compensation may be vested tokens, which means their incentives are aligned with long-term holders and they don’t care about short-term vanity metrics.

To increase exposure, we highlight emerging spot markets

is a source of opportunity. Its TVL is ~$20M, which is significantly underpenetrated relative to Hyperliquid’s perp TVL. Auction deployments are also limited, which limits where capital can flow (scarce number of tokens), while HIP-2 guarantees that your liquidity will not be siphoned away. Holding spot offers some points that serve as additional income during the points program. If you are betting on Hyperliquid’s growth, continue to watch the spot market for investable opportunities. If Binance Vision starts to play out - auction deployments on the Hyperliquid spot market could be very expensive. This helps screen out potentially high-value teams. Follow chad@0xPasteke for his comprehensive coverage of HL spot. HL

How much are the points worth?

Currently, points are worth $5 on the whale market. I think this is too conservative. This may be because: - The FDV of the Hyperliquid token is still indexed to more limited DeFi platforms, such as other perp DEXs, rather than more comparable protocols, such as other L1s (blue sky scenario, maybe even a % of $BNB). - Airdrop expectations are too low. Hyperliquid has not yet received funding from private investors, and the core team has less than 10 contributors (that I know of). I think they have more supply this year than any other TGE. - The market may still be pricing in future unplanned dilution after the unexpected extension of the first quarter. However, I think with the recent addition of more nodes, a staking asset will soon be needed. We took a wide range of assumptions to come up with the valuation range. We explored what drives them in the report. Here are the results:

The results of some possible scenarios are highlighted that, in my opinion, produce values ​​between $10 and $30 per pip. NFA in summary: I think the market is wrong about Hyperliquid. The high-performance L1 and upcoming EVM compatibility will differentiate it from other DeFi applications, and composable order books may represent a new primitive in DeFi. We have to see what will be built on the network. Hyperliquid has the potential to become an on-chain and permissionless version of Binance + BNB for cryptocurrencies. Pips appear to be undervalued on OTC exchanges, and our valuation range shows positive asymmetry. If you want to participate in the potential upside before the token is launched, the spot market offers some tempting paths. We also discuss Hyperliquid's centralization issues, etc. in the full report.