Hyperliquid: A New Model for Decentralization Order Book Trading Platform

Since 2014, the corruption and market manipulation issues of centralized trading platforms have troubled participants in the cryptocurrency industry. After the 2022 FTX bankruptcy incident, there has been a noticeable increase in focus on decentralized order book platforms. Although on-chain order book platforms like dydx and DeGate have achieved remarkable results, they have not become phenomenon-level large platforms due to policy and technical reasons.

By the end of 2024, Hyperliquid has rapidly gained popularity in the Web3 field due to its product and marketing efforts, attracting widespread attention. With billions of dollars in locked assets, Hyperliquid is expected to usher in a new chapter for decentralized trading platforms and become a phenomenal application.

Hyperliquid has designed an application chain specifically for high-performance order book systems and has established a bridge on Arbitrum. Currently, there are only 4 validator nodes, and the bridge contract poses extremely high risks, sacrificing decentralization and security, but improving trading matching efficiency to achieve a centralized exchange-level user experience. This reflects the style of the Hyperliquid team: prioritizing user experience and rapid user acquisition as core goals, even at the cost of security risks. Once the product scale reaches a certain level, they will gradually address decentralization and security issues. This operational mindset is commonly seen in high-performance infrastructures like Solana and Optimism, often achieving good commercial results.

Hyperliquid faces the same cold start problem as other trading platforms. Trading platforms have strong network effects, making it difficult for new platforms to break through oligopolistic monopolies. Observing Hyperliquid's large-scale airdrop and KOL matrix operations, it is clear that they have put a lot of effort into market operations.

This article will explore Hyperliquid's design philosophy from three perspectives: HIP, Vaults, and Token models, helping readers gain a deeper understanding of this trending project.

HIP-1 and HIP-2

Hyperliquid named its proposal HIP and introduced two core proposals, HIP-1 and HIP-2, to address the listing and circulation of Tokens. HIP-1 mainly addresses the issuance and management of Tokens on the Hyperliquid chain, similar to Ethereum's ERC-20 standard.

Compared to the token listing process of Ethereum DEX, Hyperliquid's token listing process is more simplified. When issuing new tokens on the Hyperliquid application chain using the HIP-1 standard, the system will automatically create a trading pair between the new token and USDC. When deploying the token contract, the hyperliquidityInit parameter can be set to determine the number of tokens to be injected as initial liquidity into the decentralized order book market, eliminating the need for manual initial liquidity injection.

HIP-2 utilizes the initial liquidity mentioned above for automated market making, addressing the initial circulation issue of the Token. HIP-2 proposes to conduct "linear market making" within a predefined price range. Token deployers need to set a price range in advance, and then the Hyperliquid system automatically publishes buy and sell orders based on that range, ensuring that the market always has liquidity.

The main details of the HIP-2 automated market-making scheme include:

1. Set the price range and order frequency: Specify the upper and lower limits of the market-making price and the boundary point for buy and sell orders. Each price point increases by 0.3% relative to the previous point and is updated approximately every 3 seconds.

2. Order Generation: When the price range is updated, calculate the number of orders to be placed at different price levels based on the spot quantity provided by the Token issuer.

3. Automatic reverse market making: After the full sell order is executed, the system automatically places a reverse limit buy order using the executed funds to maintain market liquidity.

Hyperliquid officially reduced market making costs through the HIP-2 plan and received user deposits for market making in a decentralized manner, which involves its Vaults module.

Hyperliquid uses a Dutch auction mechanism to handle the token listing issue. Each auction cycle lasts 31 hours, during which one token listing spot is publicly auctioned, with an annual limit of 280 listing spots. Each cycle starts at twice the price of last week's transaction price; if there was no transaction the previous week, it starts at $10,000. The price decreases gradually until someone accepts it. This mechanism ensures that the token listing process is open and transparent, avoiding human intervention and price manipulation, and gives the decision-making power to the market.

HIP-2 mainly helps small projects to quickly cold start by providing initial liquidity support, while also assisting in the cold start of the Hyperliquid platform. The Dutch auction method hands over the listing rights to market pricing, with full transparency throughout the process. Hyperliquid has created a new model for decentralized order book trading platforms, and after addressing underlying security vulnerabilities in the future, it is expected to become a phenomenal platform that can compete with Binance.

Vaults

The Hyperliquid platform provides basic functions such as leverage and contract trading, and its corresponding clearing mechanism adopts a more decentralized and open form.

Vaults are the core primitives of Hyperliquid, written at the L1 chain level. Market making and clearing activities on the platform are executed by Vaults, and users can provide funds to the Vaults to share in the profits or bear the losses.

The maximum leverage multiple supported by each asset in Hyperliquid is between 3-50 times, and the liquidation line is calculated based on the leverage multiple. Liquidation is triggered when the account net value falls below the liquidation line, which can be divided into two methods: order book liquidation and backup liquidation.

The order book liquidation is automatically executed when the account net value first falls below the liquidation line, attempting to close positions through market order instructions, with the remaining collateral still belonging to the trader. If the net value falls below 2/3 of the liquidation line and is not processed in time, the Vaults will perform backup liquidation, taking over the trader's positions and margin.

Currently, Vaults support deposits of three stablecoin assets: USDC, USDT, and USDC.e.

Potential sources of income for Vaults participants include: market-making profits ( price fluctuations and funding rates ), order rewards ( 0.002% ), and liquidation profits. However, there is a risk of losses due to market-making strategy losses and delayed liquidations.

In addition to the official HLP market-making treasury and Liquidator clearing treasury, anyone can create a custom "User vault" on the Hyperquid chain, formulate quantitative strategies, and bear their own profits and losses. Users can also join vaults created by others to share in the profits, and creators can receive 10% profit sharing from their followers.

The design of Vaults aims to address the cold start problem by sharing market making and liquidation profits with the community, achieving "decentralization". Currently, the TVL of Vaults remains at several hundred million dollars, with certain Vaults offering an APR of nearly 9000%, demonstrating a significant wealth creation effect. However, regarding the assurance of fund security, the official has not disclosed detailed information.

Token Empowerment

Hyperliquid airdropped 70% of $HYPE to the community, but $HYPE did not experience significant selling pressure; instead, it rose from $2 to approximately $30, which is closely related to its strong token empowerment.

Hyperliquid shares a large portion of its business revenue with $HYPE holders as an incentive. The platform's revenue mainly comes from transaction fees and listing fees. About 50% of the transaction fees are used for the repurchase and destruction of $HYPE; a considerable portion of the listing fees, approximately 50%, is also used for the repurchase and destruction of $HYPE.

As of early February, Hyperliquid's market share in the on-chain derivatives trading platform is close to 75%, and the business revenue has a significant empowering effect on the Token. Currently, 152,000 $HYPE tokens have been burned, worth approximately $3.426 million.

In addition, Hyperliquid L1 uses $HYPE as the Gas fee. Although it claims to offer gasless transactions, in reality, the system includes the Gas fee in the transaction fees. As the HyperEVM ecosystem matures, $HYPE may play a role in lending, staking, and other scenarios in the future.

Controversy of Hyperliquid

Hyperliquid主要面临两大争议:

1. Capital security issues: Hyperliquid operates on an independent public chain that is not open source, and user transactions are equivalent to depositing into its L1 bridge. Although the bridge contract has been audited, the associated node code is not open source and may pose risks. The nodes of the multi-signature bridge may be controlled by the project team.

2. Trading volume issue: The open interest data of Hyperliquid is unusually high for DEX. The funding rates for most tokens remain at 0.01%, raising market suspicions that the actual trading volume may be exaggerated. Since Hyperliquid is not open source, it cannot be verified through the original trading data.

Order brushing is a common means to solve the cold start of trading platforms, prevalent in both the Web2 and Web3 fields. Hyperliquid's approach aligns with its consistent style: focusing on solving the cold start and user experience, even if it may bring controversy.

Overall, Hyperliquid's product design revolves around the core goal of rapidly overcoming the cold start period and providing a CEX-level user experience. Despite the controversies, the results show that its strategy has achieved significant success, which is worth deeper study and reference.