Dive into Hyperliquid
In today's read, we will dive into Hyperliquid, covering:
Current Landscape of Perp DEXes
Hyperliquid Chain
Breakdown of Hyperliquid Exchange
Hyperliquid Improvement Proposals
Overview of the Points Program
$PURR - Memecoin
Factors Leading to Success
Stats and Figures
Perpetual Exchanges have always been a successful product in the crypto market. Centralized exchanges handle close to $150 billion in volume daily, which highlights the widespread adoption of perpetual swaps. In the decentralized perpetual swap space, according to Defillama, the daily volume hovers around $7-8 billion, which is about 5% of the centralized exchange volume.
Recently, especially this year, we've observed higher trading volumes compared to previous cycles. In the on-chain world, it started with dYdX during the DeFi summer, followed by Perpetual Protocol and GMX in 2022. Initially, everyone thought that DEXes had fully evolved, but from mid-2023 to now, there has been a shift; new perpetual DEXes are leading in the top 5 charts. Among these, Hyperliquid contributes more than 10% to the overall daily volume.
Perpetual DEXes enable Perpetual Swaps, which are a type of derivative product. A Perpetual Swap is a crypto-native concept, originating from Futures Contracts in traditional market setups with a few modifications. Essentially, it allows users to speculate on the price of an asset without holding the equity.
The perpetual space has seen a lot of evolution, as we can observe from the above image. This cycle, the app-chain thesis has gained traction.
Landscape of Perp DEXes
Perp DEXes, as a category, have a total TVL of 3.5 billion USD as of June 5, 2024. This chart helps us understand the interest over time in trading perps. It also reflects crypto cycles well, as we can observe that from mid-2021 to mid-2022, TVL hovered around $3 billion. In 2023, it was down, reflecting the bear market phase, and starting in 2024, the market started to recover, surpassing the peak of the last cycle.
If we look at the top 10 perpetual exchanges by TVL, we can observe that GMX and dYdX have similar TVLs, each close to $500 million. Following them are Jupiter, Hyperliquid, and Drift, each with around $400 million. These top five exchanges hold the majority share, and there is a noticeable drop in TVL by one-third after Drift.
Dive into Hyperliquid
The Hyperliquid team explored various models for trading mechanisms, including MMs, RFQs, and oracle-based systems. Their analysis concluded that order books are the best long-term solution on a larger scale. The second question concerned which blockchain to use for their application. The team evaluated existing environments such as Solana and Arbitrum and after conducting their research, they concluded that a new chain needs to be built from the ground up to solve these problems.
Hyperliquid Chain
Hyperliquid's vision is to develop an on-chain open financial system. At the core of this ecosystem is the Hyperliquid L1. Every interaction—be it an order, a cancellation or a liquidation is executed on-chain.
Hyperliquid's core philosophy is to focus on achieving proper decentralization. It achieves this through Tendermint’s Byzantine fault-tolerant consensus, which guarantees a consistent transaction order across all validators as long as two-thirds (weighted by tokens staked/delegated) remain honest. It supports up to 20,000 operations per second.
The architecture of Hyperliquid is designed from the ground up to enable full-stack optimizations, independent of the Cosmos SDK. The core state transition logic of the L1 is developed in Rust and connects to Tendermint via an ABCI server. Network is secured by proof of stake mechanism. The staking and slashing functions are similar to Cosmos, with additional details set to be unveiled following the launch of the native token.
Hyperliquid is planning to adopt HyperBFT, a new consensus algorithm that will replace Tendermint. Its implementation is currently in the final stage of testing.
Major improvements after HyperBFT:
Currently, Tendermint supports up to 20,000 orders per second. With HyperBFT, the expectation is to support a 100x increase in throughput; however, in practice, it will be around 200,000 orders per second.
The consensus algorithm can continue sequencing transactions without waiting for the hash of the current block to be executed, unlike Ethereum and the current Tendermint.
Blocks are produced as quickly as a quorum of validators can communicate, which will improve and stabilize confirmation latency.
Native EVM Support
The Hyperliquid L1 will feature native EVM support, integrated with native L1 components : HIP-1 assets, spot trading, perpetual trading, and other DeFi primitives. The team views this as a strategic approach to efficiently scaling the L1. This integration will empower builders who are interested in developing on the EVM, offering the advantage of deploying smart contracts using familiar EVM tooling.
HIP-1 assets will feature atomic transfers with their corresponding ERC-20 contracts, showcasing composability of L1. This capability positions the Hyperliquid L1 as the optimal platform for developing, launching, and trading tokens.
Bridge to Hyperliquid L1
Onboarding to HyperLiquid occurs through Arbitrum. HyperLiquid operates a native bridge, secured by the same validator set as the HyperLiquid L1. Deposits are confirmed once signed by L1 validators, and withdrawals are escrowed on the L1, with each withdrawal signed as a separate L1 transaction by the validators. Both deposits and withdrawals require the approval of two-thirds of the staking power to settle. During withdrawals, users are not charged gas fee on Arbitrum. Instead, HyperLiquid charges a flat fee of 1 USDC.
If there is any malicious withdrawal that does not match with the L1, a dispute period is 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 mechanisms have been audited by Zellic.
The Perp Exchange
Hyperliquid perpetuals are derivative products without an 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 hourly at one-eighth of the rate, with a maximum cap of 4% per hour.
Hyperliquid offers a single margining option for these contracts: USDC margining with USDT-denominated linear contracts. This means the contracts are priced in USDT while the collateral is held in USDC. This setup enhances trading ease and liquidity without necessitating currency conversions, effectively treating these as quanto contracts where USDT profits and losses are measured in USDC.
Components of Exchange
Order Book
Hyperliquid’s order book is on-chain, with orders placed at multiples of the tick size and lot size. Orders follow a price-time priority system. Available order types include Market, Limit, Stop Market, and Stop Limit.Margin
Traders on Hyperliquid have two margin options: cross margin and isolated margin. Cross margin is the default setting, allowing collateral to be shared across all positions, maximizing capital efficiency. Isolated margin limits collateral to a specific asset, protecting other positions from being affected by its liquidations.Oracle
The role of the validators is crucial in maintaining the integrity of the market. Hyperliquid oracles publish prices for each perpetual asset every three seconds, which are further used to determine funding rates. Each validator computes the spot oracle prices by considering a weighted median of prices from multiple exchanges—Binance, OKX, Bybit, Kraken, Kucoin, Gate IO, and MEXC—with respective weights of 3, 2, 2, 1, 1, 1, and 1.The final oracle price used by the clearinghouse is the weighted median of the prices submitted by each validator, where the validators' contributions are weighted according to their stakes.
Liquidator Vault
The liquidator vault is essential in Hyperliquid's liquidation process. It liquidates positions that fall below the maintenance margin and takes control of their margins and associated positions.Insurance Fund
An insurance fund, as the term suggests, is a safety net. It is established to be used in the event of any platform malfunction that could result in user losses, serving to compensate for those losses. It is funded through a portion of the trading fees collected. This practice is also followed by centralized exchanges.Fees
On Hyperliquid, all fees are directed towards the community, including HLP and the insurance fund. Referrers earn 10% of the taker fees from their referees.
This image clearly helps understand the fee.
Sub Products
Index Perpetual Contracts
These contracts offer a new approach by tracking a formula-derived index. It operates similar to traditional perpetual contracts. These contracts help users to speculate on basket of assets. There are two contracts to trade: NFTI And FRIEND.
NFTI-USD
It represents an index of premier NFT collections like Bored Ape Yacht Club, Mutant Ape Yacht Club, Azuki, DeGods, Pudgy Penguins, and Milady Maker. The index is a 3-minute EMA of the aggregate floor price. The aggregate floor price is sum of the floor price of each collection, with BAYC divided by 10. Floor prices are computed by aggregating OpenSea and Blur.FRIEND-USD
The Friend-USD is the first index perpetual contract listed by Hyperliquid, based on the social app Friendtech. Friendtech transforms a user’s influence into a tokenized version called Key, which users can trade. The core audience for this is crypto Twitter, where famous ct users have created profiles and trade each other's Keys. This index is rebalanced biweekly and comprises the top 20 profiles on Friend.tech. The selection criteria include price, a minimum of 5,000 Twitter followers, and filtering out outliers in trading activity and the number of holders. FRIEND has been delisted recently.
Uniswap Perpetual Contracts
There are perpetual contracts that use Uniswap V2 or V3 AMM prices as the underlying spot assets. These contracts are isolated-only, meaning they do not allow cross-margining. Uniswap pool prices are always converted to USDT prices based on CEX oracle prices, covering tokens such as RLB, Unibot, etc.
Introduction to Hyperp
Hyperps trade like perpetual contracts but do not require an underlying spot or index oracle price. Hyperps are pre-launch tokens that help in the price discovery of upcoming token launches. This cycle, they have been used extensively, initially started by Binance.
Hyperps function similarly to normal perpetual contracts, except that the external spot/index oracle price is replaced with an 8-hour exponentially weighted moving average of the last day's minutely mark prices. When the pre-launch token officially opens for spot trading on centralized exchanges such as Binance and Bybit, the hyperp is converted to a normal USD perpetual contract.
Hyperliquid's Market Making Approach - HLP
The Hyperliquid team recognized the challenge of bootstrapping liquidity in the initial phases of the project and believes that the best solution is to open up market making to users. Previously, the team handled market making during its closed alpha phase.
Introducing the Hyperliquidity Provider (HLP) vault, which is central to market making strategies on Hyperliquid. This allows anyone to contribute liquidity and share in the profits and losses. Importantly, the HLP operates without fees, distributing profits and losses proportionally based on each contributor's share in the vault. Professional market makers can also participate on Hyperliquid using its SDK.
The market-making strategy utilized by the Hyperliquidity Provider (HLP) involves calculating a fair price based on tick data from both Hyperliquid and major centralized exchanges. This fair price guides the vault's actions, which include both making and taking strategies, to consistently and profitably provide liquidity 24/7 for all listed assets. The strategy is executed off-chain, but anyone can track positions, open orders, trade history, deposits, and withdrawals in real time on-chain via the explorer.
Hyperliquid Improvement Proposals - HIP
Improvement Proposals are standards used to specify new features or changes for a product. This is a common practice where anyone in the community can participate and share their thoughts or ideas on how to improve a product through proposals. In Hyperliquid, these are known as HIPs. Currently, as Hyperliquid is not community-owned, it is operated by the team. However, as it democratizes its operations, anyone will be able to participate.
HIP-1: Native token standard
HIP-1 is a capped supply, fungible token standard that supports on-chain spot order books between pairs of HIP-1 tokens. The deployment transaction of each token generates a globally unique hash, which the L1 uses to index the token. Gas costs, currently paid in USDC, will ultimately be paid in the native Hyperliquid token. Native spot fees follow volume-based fee schedule similar to that of perpetuals.
$PURR was the first HIP-1 token, serving as a native memecoin for Hyperliquid. HIP-1 is now gaining adoption, with more than 10 coins currently deployed. These tokens collectively achieve a daily volume of around $17 million and approximately 93,000 transactions. Most of these 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 phases of price discovery, a new model becomes important to bootstrap liquidity. Hyperliquidity, inspired by Uniswap, interoperates with native on-chain order book to support liquidity. HIP-2 includes a fully decentralized on-chain strategy integrated into the block transition logic of the Hyperliquid L1. The strategy logic is secured by the same consensus that manages the order book.
The resulting strategy consistently maintains a 0.3% spread every 3 seconds. A significant improvement is that Hyperliquidity is part of a general-purpose order book. This allows active liquidity providers to join and contribute to liquidity provision alongside Hyperliquidity at any time, enabling markets to adapt to increasing demands for liquidity.
Points Program Overview
Start of Program: The Hyperliquid Points Program commenced on November 1, 2023.
Duration: Six months, concluding on May 1, 2024.
Weekly Distribution: One million points distributed weekly to engaged Hyperliquid users.
Initial Snapshot: A special snapshot was taken on October 31, 2023, for users in the closed alpha phase.
First Phase Points Distribution: Points from the initial snapshot were distributed on April 15, 2024.
Second Phase Start: Known as 'L1 Season,' began on May 29, continuing weekly for four months.
Second Phase Distribution: 700,000 points distributed each week.
Activity Multiplier: Activities from May 1-28, 2024, will receive an activity multiplier.
First Snapshot for Second Phase: Covers the period from May 29-June 4.
Additional Points: 2 million points distributed for activities from May 1-28 as the new phase started a month after the first ended.
It has also has Affiliate program, where affiliates benefit by earning one point for every four points collected by users they refer. The criteria for point allocation are reviewed regularly, with distributions based on activities recorded weekly, ending each Wednesday and distributed every Thursday.
Memecoin Airdrop - $PURR
PURR was the first spot token on the Hyperliquid native token standard (HIP-1). Hyperliquid took an interesting approach by launching its native memecoin, which it airdropped to users. It went live on April 16. There was no token sale, nor any planned utility for it.
There are a total of 1 billion $PURR tokens. 50% of the $PURR tokens were airdropped proportionally to points holders. The remaining 50% will be permanently committed as Hyperliquidity on the PURR/USDC pair. The community provided feedback 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 turned out to be a great success. Typically, memecoins have a predictable outcome, but PURR's chart tells a different story—it's 'uponly.' As Hyperliquid delays its native token launch, PURR has now become the way to bet on Hyperliquid, as evidenced by its chart.
What have been the factors contributing to Hyperliquid's growth? It's clear that Hyperliquid has done many things right to be where it is now.
- Integrations
Rage Trade
Rage Trade is an aggregator of on-chain perpetual exchanges. Hyperliquid integrated with Rage Trade on February 15 of this year. Rage Trade's total volume is around $641 million, with approximately 57.5% of its volume coming solely from Hyperliquid. Rage Trade also has other perpetual exchanges integrated, such as GMX and Synthetix. However, Hyperliquid surpasses each of them individually in volume, having achieved a total volume of around $370 million to date.
https://dune.com/rage-trade/rage-trade-v2-perp-aggregator Octo
Octo, resembling a super wallet, has integrated Hyperliquid into its mobile app. Octo is a product of the Indian centralized exchange, CoinDCX. While there is no data on its contribution in terms of volume, these go-to-market efforts through integrations offer discovery and add value to Hyperliquid.
- Hyperliquid Market Making
The Hyperliquid Vault is a significant factor contributing to the adoption of Hyperliquid. Initially, providing users the option to participate in profits creates a very positive impression. Additionally, the platform allows both professional and individual market makers to participate and execute their own strategies, which helps to bootstrap liquidity. This, in turn, attracts more traders, setting the flywheel in motion. The vault reached a peak total deposit of $178 million and currently hovers around $150 million.
https://app.hyperliquid.xyz/vaults/0xdfc24b077bc1425ad1dea75bcb6f8158e10df303
- Targeting CEX traders
The majority of derivatives volume in crypto is with centralized exchanges. To attract these users to Hyperliquid, the team offered a 50% discount up to $50 million per user. These go-to-market efforts are worth noting.
https://x.com/HyperliquidX/status/1740029598484648195
Finally, the Hyperliquid Product itself.
Onboarding to Hyperliquid: Onboarding is straightforward, thanks to Privy. Privy is an embedded wallet provider that supports signup through social logins alongside standard wallet logins, which is a significant unlock.
Bridge Choice: Hyperliquid has chosen Arbitrum for its bridge, most major Defi activity occurs on Arbitrum.
Deposits: Hyperliquid accepts USDC as collateral. With its Lifi integration through an in-app widget, it has become very easy for users to convert any other stablecoin they hold into USDC.
Bridge Speed: Getting Funds into Hyperliquid is fast. While there are no official statistics on the time it takes, the process feels instant.
User Experience: Hyperliquid offers a gasless experience and a user interface similar to centralized exchanges, providing an experience that adds value for users.
Stats and figures
As of June 3, 2024, Hyperliquid has achieved a total trading volume of $196.8 billion with an approximate user base of 136,000. More than $2 billion has been deposited into Hyperliquid, and around $1.75 billion has been withdrawn during its operating period to date. It is at the top of the charts in terms of cumulative volume for on-chain exchanges.
Hyperliquid has a total of approximately 8.5 billion cumulative trades. The majority of the significant spikes occurred from January to May this year, coinciding with the early bull market phase. This period saw increased activity due to factors like the BTC ETF approval, which contributed to a general rise in the market.
Hyperliquid has total user base of approx 136k users. Over a year’s period from June last year to 3 June, this averages out at 385 new users per day.
Hyperliquid has executed exceptionally well from both a product and go-to-market perspective. Its product has attracted significant adoption, and further developments such as HIP-1 for spot trading and democratizing market making have excited the community. Also, Hyperliquid does not have any external investors, which is another plus. However, there has been some backlash from the community as it rolled out its second season of the Points Program rather than proceeding with its Token Generation Event (TGE). With stablecoin adoption getting back on track, people are becoming increasingly enthusiastic about trading on-chain. Hyperliquid has expanded from a exchange product to building its own ecosystem.