Is Hyperliquid's valuation reasonable? A quick overview of its product status and economic model

1. Introduction

Hyperliquid is one of the biggest highlights in the recent crypto market aside from AI and Memes. Its strategy of not accepting venture capital, allocating 70% of tokens to the community, and returning all income to platform users has attracted market attention. Its income directly repurchases HYPE, causing HYPE's circulating market value to quickly surpass UNI and rank among the top 25 cryptocurrencies, while also leading to a surge in all its platform business data.

This article aims to describe the current development status of Hyperliquid, analyze its economic model, and evaluate the current valuation of HYPE, providing an answer to the question of whether "HYPE is really expensive."

This article represents the author's interim thoughts as of the time of publication, which may change in the future. The viewpoints expressed are highly subjective and may contain errors in facts, data, or logical reasoning. Criticism and further discussion are welcome, but this article does not constitute any investment advice.

A considerable part of this article references the Hyperliquid research report published by a certain investment research institution in September. This is also the most comprehensive and in-depth Hyperliquid report I have read. If readers want to know more about the mechanism details of Hyperliquid, they can refer to this report.

The following is the main text.

2. Hyperliquid Business Overview

Hyperliquid's current business mainly includes two parts: derivatives exchange and spot exchange. They also plan to launch a universal EVM - HyperEVM in the future.

2.1 Derivatives Exchange

The derivatives exchange is the first product launched by Hyperliquid and is its flagship product, occupying a core position in its entire product ecosystem.

At the core product mechanism level of derivatives, Hyperliquid did not adopt other innovative product logic due to on-chain performance bottlenecks, such as some decentralized exchanges, but instead chose the Central Limit Order Book (CLOB), which is the most widely used mechanism by various exchanges worldwide and is also the most familiar to all trading users and market makers, while putting effort into performance.

The decentralized derivatives exchange they built operates on Hyperliquid L1, which is a PoS chain composed of the consensus layer HyperBFT and the execution layer RustVM.

HyperBFT is a consensus algorithm modified by the Hyperliquid team based on LibraBFT developed by a well-known technology company's previous blockchain team, which can support up to 2 million TPS. With strong performance support at the underlying level, Hyperliquid has put core components of derivative exchanges, such as order books and clearinghouses, on-chain, ultimately forming its decentralized derivative exchange architecture.

For end users, the experience of Hyperliquid is almost identical to that of certain centralized exchanges, not only in terms of trading experience and product structure, but also in aspects such as trading fees and discount rules. The only difference from centralized exchanges is that Hyperliquid does not require KYC.

In addition to trading products, Hyperliquid has provided the Vault feature since the initial establishment of the product. The Vault is similar to "copy trading" in centralized exchanges, where anyone can invest funds into any Vault, and the Vault manager will make investments. 10% of the profits will be allocated to the Vault manager, and to maintain alignment of interests, the manager must ensure they hold at least 5% of the Vault.

However, based on the current TVL, 95% of the TVL is in the official Vault HLP.

Unlike a typical Vault, HLP serves as the counterparty for many transactions on the platform because it is the official Vault. Therefore, HLP can receive a portion of various fees from the platform, such as ( transaction fees, funding fees, and liquidation fees ). From this perspective, HLP is relatively similar to the GLP of a certain decentralized exchange, with the distinction that: GLP acts as the counterparty for all transactions on the platform, and its strategy is passive and public; while HLP's strategy is non-public, and the counterparty for user transactions could be either HLP or other users, with HLP's strategy also subject to adjustment at any time.

Since its launch in July 23, HLP has almost consistently held a net short position, providing liquidity for retail traders, maintaining profitability with a net short position during a long-term bull market. The current TVL is $350 million, and the PNL is $50 million. From the overall PNL curve of HLP and the PNL of the three strategy addresses, the Hyperliquid team is using fees to maintain its relatively positive APR for HLP.

In terms of trading volume and open interest, Hyperliquid has developed rapidly, especially in the last two months. With the $HYPE airdrop and the continuous price increase, various data of the platform peaked between December 17-20.

In the field of decentralized derivatives markets, Hyperliquid has held a leading position in terms of trading volume since June of this year. In the past two months, the gap between Hyperliquid and other decentralized derivatives exchanges has further widened, and there is now an order-of-magnitude difference.

From the perspective of valuation and trading volume, the more suitable comparable for Hyperliquid at present is centralized exchanges.

Hyperliquid has seen a significant decline in data recently (, with a peak daily trading volume of 10.4 billion USD, and the trading volume in recent days has been less than 5 billion USD ). However, its open interest still accounts for about 10% of a leading exchange, while its trading volume is 6% of that exchange; the open interest and trading volume are roughly equivalent to about 15% of certain second-tier exchanges. During its peak popularity ( from December 17-20 ), Hyperliquid's open interest could reach 12% of a leading exchange, and its trading volume could reach 9% of that exchange; both open interest and trading volume data are close to 20% of certain second-tier exchanges.

Overall, Hyperliquid's derivatives exchange has developed rapidly and has already established a relatively solid leading advantage in the field of decentralized derivatives exchanges. Compared to leading centralized exchanges, the gap has now narrowed to within 10 times.

( 2.2 spot trading exchange

The spot exchange of Hyperliquid also adopts an order book model, consistent with the product architecture and fee standards of the derivatives exchange.

Currently, Hyperliquid's spot exchange only supports native assets of Hyperliquid that meet the HIP-1 standard and does not list tokens from other chains.

HIP-1) Decentralized Token Listing (

HIP-1 is similar to ERC-20 or SPL-20, and it is the token standard of the Hyperliquid network. However, unlike ERC-20 and SPL-20, the cost of creating a HIP-1 token is quite high, as the successful creation of a HIP-1 token also means eligibility for listing on Hyperliquid's spot exchange.

Hyperliquid's HIP-1 is publicly conducted in the manner of a Dutch auction, specifically:

Everyone can participate in the auction, with the initial bidding price set at twice the last auction's closing price, and it will linearly decrease to 10000U) within 31 hours. This value is adjustable, previously lower, recently adjusted to 10000U###. The first developer to successfully bid will gain the qualification to create a TICKER, which can be listed on Hyperliquid's spot exchange. The auction amount is paid in USDC.

SOLV can roughly be seen as a dividing point for the HIP-1 auction, previously largely revolving around meme and domain logic, with tickers often holding symbolic significance, and the focus of speculation being the uniqueness within the ecosystem.

After SOLV, most of the project parties are competing for ecological positions & listing qualifications, and prices have gradually risen, with the highest GOD selling for nearly 1 million dollars. The project parties are mainly focused on pan-entertainment, with games and NFTs accounting for a large portion, but there are also DeFi projects such as Solv, Swell, and Cream.

Additionally, it can be seen that as an exchange, Hyperliquid's spot "listing fee" has remained stable at over $100,000 in the past month, which is already quite close to the listing fees of some second-tier centralized exchanges.

Through HIP1, Hyperliquid has established a public "decentralized listing" mechanism, where the listing fees are determined by market participants themselves, avoiding the issues associated with centralized exchanges. On the other hand, the collected listing fees will be used for HYPE buybacks and burns, which is also beneficial for HYPE's price performance and valuation metrics.

HIP-2( Hyperliquid's AMM )

Since Hyperliquid's spot trading operates in the form of an order book, it is difficult to ensure liquidity for new tokens. Hyperliquid has proposed HIP-2 to address the initial liquidity issue of tokens created through HIP-1.

In simple terms, HIP2 provides an automated market-making system that allows developers to automatically market-make with tokens generated by HIP-1. The market-making logic is linear within a specified range, where developers set the upper and lower price limits of the market-making range, as well as the buy-sell boundary. The system automatically market-makes within the range at every 0.3% price change, creating a grid.

After the launch of HIP-2, many newly created Hyperliquid ecosystem tokens chose to use this Hyperliquid AMM mechanism. Currently, the total amount of USDC for HIP-2 has exceeded 25 million USDC.

Hyperliquid's average daily spot trading volume in the last 30 days is around 400 million USD, ranking it among the top ten in DEX, similar to the trading volumes of certain other DEX.

( 2.3 HyperEVM

HyperEVM is not yet online. In the official documentation of Hyperliquid, the current derivatives and spot exchange running on RustVM is referred to as Hyperliquid L1, while HyperEVM is referred to as EVM. According to the definition in its official documentation, HyperEVM is not an independent chain:

Hyperliquid L1 features a universal EVM as part of the blockchain state. Importantly, the HyperEVM is not a standalone chain, but is secured by the same HyperBFT consensus mechanism as the other parts of L1. This enables the EVM to interact directly with L1's native components, such as spot and perpetual order books.

Hyperliquid is built on a consensus layer ) HyperBFT ( with two execution layers ) RustVM and HyperEVM ###. The core functionalities for contracts and spot trading are implemented on RustVM, which will focus on these two core dAPPs, while the remaining dAPPs will be built on HyperEVM.

Regarding HyperEVM, according to the team's documentation, we know:

• Unlike Hyperliquid's current spot and exchange located on RustVM, HyperEVM is permissionless, meaning any developer can build applications and issue assets (FT or NFT ) on it.
• HyperEVM is interoperable with the L1 of Hyperliquid, such that the L1 oracles can be utilized by HyperEVM, and some cryptocurrency transfers can be conducted between the two VMs. ( cannot be fully interoperable, as the assets on L1 are "permissioned," only including USDC and assets generated through HIP-1, while HyperEVM has a much larger variety of assets ).
• HyperEVM will use Hyperliquid's native token $HYPE as Gas, while Hyperliquid's current L1 does not require users to pay Gas.

The author has not previously seen a similar product architecture in the crypto world, and we are also unclear how, under the current structure, a typical case of DeFi composability on a public blockchain network—"depositing ETH into Lido to obtain stETH, then depositing stETH into Aave to borrow USDC, and then using USDC to purchase Meme token PEPE"—is actually realized on HyperEVM and Hyperliquid L1. This could be a criterion for defining whether it is one chain or two chains. However, based on my current understanding, the relationship between HyperEVM and Hyperliquid L1 may be more akin to that of "an L2 with certain interoperability and an L1," or the relationship between a centralized exchange and its exchange EVM chain, similar to that of a certain exchange and its public chain.

The HyperEVM testnet is currently running normally, and there are already quite a few validators.