Analyzing the Structure and Ecosystem of Hyperliquid's Hyperliquidity Protocol
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Analyzing the Structure and Ecosystem of Hyperliquid's Hyperliquidity Protocol
Hyperliquid is a high-performance Layer 1 optimized for orderbook trading.
Navigating Web3 tides with focused insightsAuthor: Tranks
1. Introduction
A decentralized perpetual futures exchange (PerpDEX) is a DeFi protocol that enables users to open leveraged positions on specific assets on the blockchain.
Since the collapse of FTX, the world’s second-largest centralized exchange, in November 2022, decentralized exchanges have steadily gained attention from market participants due to declining trust in centralized exchanges.
CEX vs DEX futures trading volume has been steadily increasing since November 2022; Source: The Block
Based on their price discovery mechanisms, existing PerpDEXs can be broadly categorized into three models:
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Oracle Model: Operates based on external price data without its own price discovery mechanism. The advantage is minimal impact from liquidity scale on taker trades due to reliance on external oracles. However, makers face single points of failure and oracle-related attacks, while the lack of intrinsic price discovery limits scalability (e.g., Jupiter).
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Orderbook Model: Uses traditional capital market order-matching systems. While traders can specify desired buy/sell prices—reducing maker risk—the limitations of blockchain block times hinder high-frequency market makers (e.g., dYdX).
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AMM Model: Utilizes CPMM (Constant Product Market Makers), the same mechanism as Uniswap. Prices are determined by formulas like X*Y=K based on provided liquidity. Although it easily handles supply-demand imbalances without requiring order submission, all trades incur slippage (e.g., Perpetual Protocol).
For more detailed information on PerpDEX price discovery mechanisms, see the "Perpetual DEX" series.
1.1. Development and Limitations of Orderbook PerpDEXs
In the early stages of Perpetual DEX development, Oracle and AMM models were widely adopted because they made it easier to ensure sufficient liquidity. Orderbook-based market makers struggled with slow blockchain processing speeds and high transaction fees. Nevertheless, these models mostly engage in zero-sum competition for limited liquidity, primarily targeting existing crypto-native users. As a result, there has long been interest and effort in developing Orderbook-based PerpDEXs to provide a familiar trading environment for traditional financial traders and enable larger-scale growth through improved liquidity.
Recently, with advancements in blockchain infrastructure such as Layer 2s and Appchains, along with off-chain order processing methods, the trading experience on Orderbook PerpDEXs has significantly improved. Moreover, development continues in this space, including protocols such as:
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Vertex Protocol: A hybrid PerpDEX combining AMM and Orderbook models to overcome the challenge of bootstrapping liquidity in pure Orderbook systems.
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Elixir: A protocol enabling anyone to easily provide liquidity on Orderbook PerpDEXs.
Despite these developments, current Orderbook PerpDEXs offer little beyond allowing users to “deposit” funds and create “positions,” offering no meaningful differentiation from centralized exchanges. This puts them at a disadvantage when competing against CEXs due to two key factors:
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Orderbook PerpDEXs that process orders off-chain and settle on-chain struggle to gain user trust regarding transparency.
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Fully on-chain Orderbook PerpDEXs require users to sign every trade and pay gas fees, resulting in a significantly worse user experience compared to CEXs.
Therefore, today's Orderbook PerpDEXs need infrastructure that not only optimizes Orderbook-based trading but also builds an ecosystem to generate network effects. In this context, Hyperliquid emerged with the vision of becoming a fully transparent and user-friendly "on-chain Binance."
2. Hyperliquid, the Hyper Liquidity Protocol
Hyperliquid is a high-performance Layer 1 optimized for Orderbook trading, capable of handling up to 2 million transactions per second. It launched in June 2023 using team capital alone, without any external funding.
The core of Hyperliquid is a native Orderbook-style PerpDEX where every step—from order placement to execution—is recorded on-chain. While recording all user activity on-chain, Hyperliquid offers convenient features such as email-based account creation and transaction submission without separate signatures or gas fees, delivering a user experience comparable to centralized exchanges.
Thanks to these unique features, Hyperliquid has grown steadily since launch, achieving $2.14 billion in net inflows by December 11, 2024, monthly trading volume reaching $77 billion, and $3.37 billion in open interest by November—about four times Jupiter’s open interest—and ranking second in trading volume among Orderbook PerpDEXs, far ahead of its peers.
Let us now explore Hyperliquid’s architecture and operational mechanisms in greater detail.
2.1. Hyperliquid Network
At launch, Hyperliquid used Cosmos’ Tendermint consensus algorithm for interoperability with the Cosmos ecosystem and ease of deployment, instead of its custom HyperBFT. However, Tendermint showed scalability limits, processing only about 20,000 transactions per second. To address this, the Hyperliquid team developed and launched HyperBFT in May 2024—a consensus mechanism specifically designed for fast, large-scale transaction processing.
HyperBFT is an optimization of the Hotstuff consensus algorithm tailored for Hyperliquid, which itself is a more efficient version of Tendermint. While HyperBFT theoretically supports 2 million TPS, real-world performance combined with HyperVM (a Rust-based execution layer) achieves up to 200,000 TPS with sub-second latency. This is one-eighth of Binance’s TPS but approximately eight times higher than Injective, another chain running on-chain Orderbook protocols.
Thus, Hyperliquid is built around “trading efficiency,” offering the benefit that all user orders are recorded and processed quickly on-chain without gas fees. However, currently, the team operates all four validator nodes without rewarding validators, raising concerns about decentralization.
Aware of this, the Hyperliquid team is testing trustless node operation to decentralize validators on testnet and exploring ways for users to participate in network validation via staking $HYPE (Hyperliquid’s token) even without directly operating a node. To maintain both decentralization and high efficiency, Hyperliquid has introduced a mechanism to place underperforming nodes into a “Jailing” state, restricting their ability to propose blocks or vote.
Nodes in Jailing state; ASXN Dashboard
Additionally, the team plans to introduce HyperEVM alongside the existing HyperVM execution layer. This will allow EVM-based applications to join the Hyperliquid ecosystem and bridge ERC-20 tokens, expanding the ecosystem further.
2.1.1. Hyperliquid Bridge
Users can deposit and lock stablecoins via the Hyperliquid Bridge, secured by Hyperliquid validators, and receive equivalent assets in their personal accounts on Hyperliquid to access the network and PerpDEX.
Currently, Hyperliquid only supports bridging USDC on Arbitrum. Recently, following the launch of Hyperliquid’s native token $HYPE, interest in the platform has surged, leading to a significant increase in deposits. Arbitrum has also seen notably higher net inflows compared to other networks.
Weekly net inflows by network as of December 3; Source: Artemis
Currently, withdrawals from Arbitrum incur a $1 fee to cover gas costs. Hyperliquid plans to support various stablecoins across multiple networks beyond USDC. Especially after launching HyperEVM, integration with Circle’s CCTP (Cross-Chain Transfer Protocol) is expected, ensuring seamless interoperability for stablecoin transfers across chains.
2.2. Hyperliquid DEX
As mentioned earlier, the Hyperliquid DEX runs on the Hyperliquid network, offering fast transaction processing without signatures or fees, providing a user experience nearly identical to centralized exchanges, and supporting leveraged trading across over 100 token pairs.
The Hyperliquid DEX supports the following four order types:
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Market Orders: Execute immediately at the current market price.
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Limit Orders: Execute at a specified price set by the user.
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Scale Orders: Automatically place and execute multiple limit orders within a defined price range.
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TWAP (Time-Weighted Average Price): Split a single order into multiple parts executed at fixed time intervals.
During the first three months after mainnet launch, Hyperliquid offered zero-fee trading to attract early users. Afterward, it implemented a fee structure charging takers 0.25% and offering makers a 0.2% rebate. Starting March 2024, however, it shifted to a tiered fee model based on each wallet’s 14-day trading volume, restructuring rebates so only market makers meeting certain volume thresholds qualify.
Hyperliquid fee structure; Hyperliquid Docs
Fees generated on Hyperliquid are not collected by the team but distributed to users who deposit liquidity into the HLP Vault (Hyperliquid Liquidity Provider Vault) and to the assistance fund, discussed below.
2.2.1. Mark Price Mechanism
Since Hyperliquid uses an Orderbook model, buy/sell prices are primarily determined by Orderbook liquidity. However, insufficient liquidity may cause price divergence from other markets, potentially enabling small-scale attacks to trigger liquidations, take-profits (TP), and stop-losses (SL).
Moreover, due to the nature of perpetual contracts (no expiry), holders must pay a funding rate to the opposing side every hour (in Hyperliquid’s case) to keep the contract price aligned with spot prices. Therefore, Hyperliquid calculates the Mark Price using external exchange data for use in liquidation, TP/SL, and funding rate calculations. The weighting for Mark Price calculation is as follows:
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Binance: 27.27%
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OKX: 18.18%
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Bybit: 18.18%
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Kraken: 9.09%
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Kucoin: 9.09%
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Gate IO: 9.09%
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MEXC: 9.09%
2.2.2. Derivatives and Spot Trading
Beyond standard futures trading, Hyperliquid DEX offers several derivative and spot products:
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Index Perpetual Contracts: Perpetual futures tracking indices of blockchain ecosystems—for example, NFTI-USD, which tracks the average floor price of top blue-chip NFT collections, and FRIEND-USD, which tracks the median price of Keys from the middle eight of the top 20 influencer accounts on Friend Tech.
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Hyperps: Products enabling pre-trading of tokens before official launch, priced using an 8-hour exponentially weighted moving average (EWMA) of minute-level prices from the previous day rather than relying on actual market prices.
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Spot: Native tokens issued and traded directly on the Hyperliquid network.
Recently, Hyperliquid has focused heavily on building and expanding its own ecosystem centered around native tokens and spot trading. These native tokens will evolve through HIPs (Hyperliquid Improvement Proposals).
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HIP-1: Proposal for a standard for issuing Hyperliquid-native tokens, including a token format and a Dutch auction system with 31-hour cycles to prevent chaotic launches. It also includes a “Spot Dust” feature that automatically submits sell orders for tokens valued under $1 in user wallets once daily.
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HIP-2: Proposal for automated liquidity provisioning for newly issued native tokens. Every 3 seconds, it places buy/sell orders within ±0.3% of the current price on the Orderbook. Token issuers must opt-in and deposit required liquidity when launching.
As of December 4, 2024, 53 native tokens—including the mainnet token $HYPE—are being traded on Hyperliquid DEX under the HIP standard. Following the $HYPE launch, spot trading volume surged to $628 million daily. With growing numbers of issued tokens and new dApps utilizing them, Hyperliquid’s spot volume is expected to grow further. Currently, daily spot volume remains around $333 million, slightly lower post-$HYPE issuance.
Hyperliquid native token trading volume trend; Source: Purrburn
Furthermore, as external liquidity flows into the Hyperliquid ecosystem and spot trading becomes more active after $HYPE’s release, winning bids for ticker auctions launched via HIP-1 have shown an upward trend.
Ticker auction winning price trend; Source: Hypurrscan
2.2.3. HLP and User Vaults
In traditional Orderbook exchanges, liquidity providers must constantly monitor and manually adjust buy/sell orders, meaning only a few professional market makers provide liquidity, monopolizing the profits.
In contrast, Hyperliquid allows users to simply deposit assets into the HLP Vault (Hyperliquid Liquidity Provider Vault) to participate in market making and earn profits. The HLP Vault is managed directly by the team, which provides liquidity to the Hyperliquid Orderbook. As noted, most of Hyperliquid’s revenue is distributed 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 takes over positions when the maintenance margin falls below 2/3. The exact mechanisms of the other two strategies remain undisclosed to protect operational details. However, since all order history and balance states are recorded on the Hyperliquid network, they can be transparently audited via the HLP Dashboard.
As of December 4, 2024, total assets deposited into the HLP Vault reached $168 million, with cumulative profits of $43 million and a reported annualized return of about 20% in November.
HLP vault PNL trend; Source: Stats.hyperliquid
Additionally, Hyperliquid offers user vault functionality beyond HLP, allowing anyone to create a vault, implement trading strategies similar to HLP, and accept deposits from others. Vault operators earn 10% of profits generated and must maintain at least 5% of their own assets in the vault to align incentives with depositors.
User vault list; Source: Hyperliquid
2.3. $HYPE
From the start of closed beta in November 2022 until September 2024, Hyperliquid distributed Hyperliquid Points to users based on the following criteria:
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Closed Beta & Q1 (2022–April 2024): Points distributed based on perpetual trading volume.
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Q2 (June–October 2024): Points distributed based on participation in the ecosystem (e.g., Layer 1 and spot trading).
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Retroactive distribution for trading activity in May, October, and November 2024.
After Q2 ended, on October 15, 2024, Hyperliquid established its foundation and announced the launch and airdrop of its native token $HYPE. On November 29, approximately 31% of the total supply and 83% of the initial circulating supply of $HYPE was distributed to users who had earned Hyperliquid Points.
The foundation outlined the following utilities for $HYPE:
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Staking $HYPE (currently being tested on testnet) will serve as a security budget for HyperBFT.
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Used as the gas token on the upcoming HyperEVM.
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About 40% of the total supply will be allocated to future community rewards and ecosystem grants.
Following the airdrop, $HYPE began trading on Hyperliquid’s HYPE/USDC spot pair at an initial price of $2. Within the first seven days, the price rose about sevenfold and maintained an upward trend even during correction phases.
$HYPE price trend; Source: Hyperliquid
Factors driving $HYPE’s rise include: 1) Building a strong community aligned with the team-centric vision of Hyperliquid; 2) No institutional investors holding large stakes due to lack of external funding, reducing sell pressure; 3) Ongoing $HYPE buybacks funded by fees accumulated in the Hyperliquid Assistance Fund wallet.
Amount of $HYPE held by Hyperliquid assistance fund wallet; Source: Hypurrscan
3. Hyperliquid Ecosystem
Most Orderbook-based PerpDEXs either lack their own network or focus solely on “trading,” preventing the formation of a dependent ecosystem with synergistic effects. In contrast, Hyperliquid, as a Layer 1, extends beyond just being a PerpDEX. Its vision is to build a broad ecosystem that integrates both on-chain users and centralized exchange users, creating network effects unattainable by standalone PerpDEXs through listing diverse dApps, issuing native tokens via HIP, and introducing HyperEVM.
3.1. $PURR
$PURR is Hyperliquid’s first native and meme token, launched on April 16, 2024, alongside HIP-1.
At launch, 50% of the total supply was proportionally distributed to users based on their Hyperliquid Points, while the remaining 50% was initially intended for liquidity provision on the PURR/USDC spot pair per HIP-2. However, due to community feedback indicating excessive liquidity, the team decided to burn 80% of the allocation. Additionally, a fee-based burn mechanism continuously reduces supply—so far burning $401.8 million worth of PURR, including the initial burn.
$PURR circulation status; Source: purrburn.fun
After its launch, rumors circulated that other native tokens would airdrop to $PURR holders, and that Hyperliquid Points might be distributed to $PURR holders. As a result, $PURR’s price rose about 166% within three days. Recently, with the announcement of $HYPE’s launch attracting external capital to Hyperliquid, $PURR saw significant gains and now maintains the second-largest market cap after $HYPE at $176 million.
3.2. Hypurr Fun ($HFUN)
Hypurr Fun is a Telegram bot enabling users to trade on Hyperliquid via Telegram. It recently launched and operates Hypurr Pump, a meme coin launchpad.
Hypurrfun Dashboard; Source: hypurr.fun
Users can easily open and close positions on Hyperliquid via the Telegram bot and participate in meme coin fundraising on Hypurr Pump. Meme projects raising over $100,000 on Hypurr Pump become eligible for ticker auctions on Hyperliquid, allowing them to launch their own meme coins.
The project centers around $HFUN, the second native token issued on Hyperliquid after $PURR, structured so that platform revenues from Hypurr Fun and Hypurr Pump are used to burn $HFUN.
3.3. HyperLend
HyperLend is a lending protocol designed specifically for the Hyperliquid ecosystem, expected to launch alongside HyperEVM and currently available only on the HyperEVM testnet.
Features under development include:
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Leveraged Yield Farming: Offering leveraged yield farming positions using $stHYPE, a liquid staking derivative of $HYPE planned to be issued by Thunderhead, a liquid staking platform.
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HLP Collateral Loans: Providing loans backed by funds deposited in HLP.
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Vault Share Token Issuance: Minting tokens representing vault holdings and offering collateralized loans against them.
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Cross-chain One-click Lending: Bridging assets from various Layer 2 networks and accepting them as collateral on HyperLend.
By tokenizing locked liquidity across Hyperliquid and using it as collateral, HyperLend aims to diversify yield farming opportunities and boost overall liquidity upon launch.
Additionally, the Hyperliquid ecosystem includes various protocols planning to join from other networks, such as Abracadabra (offering lending and leverage with stablecoin $MIM), Rage Trade (a multi-chain perpetual aggregator), and Solv Protocol (a Bitcoin pricing protocol). The activation of these protocols and issuance of native tokens are expected to drive increased trading volume on Hyperliquid DEX.
4. Conclusion
While other PerpDEXs struggle to balance user experience and liquidity, Hyperliquid has achieved a fast, Orderbook-based on-chain PerpDEX that requires neither user signatures nor gas fees, maintaining a smooth user experience. Furthermore, with the launch of $HYPE as a turning point, Hyperliquid has attracted significant market attention and demonstrated unprecedented growth compared to other PerpDEXs.
Notably, the introduction of the spot token issuance mechanism via HIP-1—as a platform for token launches akin to Solana’s Pump.fun, Base’s Clanker, and Virtual Protocol—has greatly boosted recent network usage. Hyperliquid aims to become a team-centric community.
Moreover, by integrating third-party protocols and expanding beyond just derivatives and spot trading, Hyperliquid aspires to be a full-fledged Layer 1 with a thriving ecosystem. Through this strategy, Hyperliquid has established leadership and raised expectations that it could bring centralized exchange users—historically difficult to attract into on-chain environments—into the blockchain ecosystem, merging them with existing on-chain users.
As discussed in our "Market Commentary | Dec 06" article, some argue that Hyperliquid’s token may be overvalued given its rapid post-launch growth. However, that analysis did not include the value of other tokens within the Hyperliquid ecosystem—especially those in the spot market—leaving room to counter the overvaluation claim. As shown above, when including spot market token values in TVL, the FDV/TVL ratio is 5.66, still within undervalued ranges compared to Jupiter.
This valuation approach can also be applied across Layer 1 projects with a simple comparison (valuations based on DeFiLlama):
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Hyperliquid($HYPE)
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FDV: $13.85B / TVL: $2.45B
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FDV/TVL: 5.66
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Sui($SUI)
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FDV: $37B / TVL: $2.74B
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FDV/TVL: 13.5
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Aptos($APT)
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FDV: $13.1B / TVL: $2.48B
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FDV/TVL: 5.28
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Avalanche($AVAX)
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FDV: $31.8B / TVL: $2.57B
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FDV/TVL: 12.37
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As shown, Hyperliquid appears undervalued relative to other Layer 1s with similar TVL metrics. Considering this, we believe Hyperliquid’s value could receive higher recognition through the successful launch of $HYPE staking, validator decentralization, HyperEVM integration, and the subsequent emergence of a community-driven organic ecosystem.
However, to realize its vision and enhance project value, Hyperliquid must successfully launch $HYPE staking, achieve validator decentralization, integrate HyperEVM without compromising network performance, and ultimately foster a community-centric ecosystem. Therefore, we should closely monitor its ongoing development to assess whether it can fulfill its stated ambitions.
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