Is Hyperliquid's valuation reasonable? An overview of its product status and economic model.

1. Introduction

Hyperliquid is one of the biggest highlights in the recent cryptocurrency market, aside from AI and Memes. Its strategy of not accepting VC investments, allocating 70% of tokens to the community, and returning all income to platform users has attracted market attention. The income is directly used to buy back HYPE, which has quickly pushed its circulating market value beyond UNI, placing it among the top 25 cryptocurrencies, while also causing a surge in the platform's 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 "Is HYPE really expensive?"

This article represents a stage of thinking as of the time of publication, which may change in the future. The views expressed are highly subjective and may contain errors in facts, data, or reasoning, but do not constitute any investment advice.

2. Overview of Hyperliquid's Business

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 it is its flagship product, occupying a core position in the entire product ecosystem.

At the core product mechanism level, Hyperliquid adopts the widely used mechanism of Central Limit Order Book (CLOB) and has focused on performance. The decentralized derivatives exchange they built runs 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 team based on LibraBFT, capable of supporting up to 2 million TPS. With strong performance support at the underlying level, Hyperliquid has brought core components such as order books and clearinghouses on-chain, ultimately forming a decentralized derivatives 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 is that Hyperliquid does not require KYC.

Hyperliquid has provided the Vault feature since the initial establishment of the product, similar to the "copy trading" in centralized exchanges. Everyone can invest funds into any Vault, and the manager will make investments, with 10% of the profits distributed to the manager. Meanwhile, the manager needs to ensure that they hold at least 5% of the Vault.

However, based on the current TVL, 95% of the TVL is in the official Vault HLP. HLP acts as a counterparty for a significant number of transactions on the platform, allowing it to earn a portion of various platform fees such as transaction fees, funding fees, and liquidation fees. From this perspective, HLP is relatively similar to the LP of a certain DEX, with the distinction being that the latter serves as the counterparty for all transactions on the platform, with a passive and public strategy; while HLP's strategy is non-public, the counterparty for user transactions could be HLP or other users, and HLP's strategy can also be adjusted at any time.

Since its launch in July 2023, HLP has almost always maintained a net short position, providing liquidity for retail traders, and has remained profitable with net short positions during the long bull market. Currently, the 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 has been using fees to maintain its relatively positive APR for HLP.

From the perspective of trading volume and open interest, Hyperliquid is developing 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 occupied a leading position in terms of trading volume since June of this year. In the past two months, the gap between other decentralized derivatives exchanges and Hyperliquid has further widened, with a significant difference now.

In terms of valuation and trading volume, Hyperliquid is currently more comparable to centralized exchanges.

Hyperliquid's recent data shows a significant decline. The highest single-day trading volume was 10.4 billion USD, but in recent days, the trading volume has been less than 5 billion USD. However, its open interest still accounts for 10% of a major trading platform, while the trading volume is at 6%. The open interest and trading volume are approximately equivalent to 15% of some second-tier trading platforms. At its peak popularity from December 17-20, Hyperliquid's open interest could reach 12% of a major trading platform, and the trading volume reached 9%; both open interest and trading volume data were close to 20% of some second-tier trading platforms.

Overall, Hyperliquid's derivatives exchange has developed rapidly, establishing a solid leading advantage in the decentralized derivatives exchange sector, and its gap compared to leading centralized exchanges has narrowed to within 10 times.

( 2.2 spot exchange

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

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

HIP-1) Decentralized Coin Listing (

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

Hyperliquid's HIP-1 will be conducted publicly 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成交价格, which linearly decreases over 31 hours to 10000U). This value is adjustable; it was previously lower and has recently been adjusted to 10000U(. The first developer to place a successful bid will receive a qualification to create a TICKER, which can be listed on the Hyperliquid spot exchange. The auction amount is paid in USDC.

Among the created Tickers worth noting, ) is sorted in descending order by auction amount ###:

• GOD: A game invested in by a certain investment institution
• CREAM: The well-established lending project Cream troubled by hackers, associated with a certain well-known individual.
• ANIME: is the token ticker of a well-known NFT project, rumored to be acquired by its team, but has not yet received official confirmation.
• MON: The publisher of the game Pixelmoon
• SWELL: Ethereum ecosystem staking & re-staking protocol
• RIFT: A game protocol based on Virtual
• GAME: Rumored to be based on Virtual's GAME, but not yet officially confirmed.
• ANZ: Stablecoin protocol of the base chain
• SOVRN: The previous gaming asset platform is about to launch a game on Hyperliquid.
• FARM: Hyperliquid's native AI pet game, launched through the Hyperfun platform.
• ETHC: A mining project associated with a well-known individual
• SOLV: A Bitcoin ecosystem staking protocol, with certain investment institutions involved, has not yet issued tokens.

SOLV can be roughly seen as a dividing point for the HIP-1 auction, which was previously largely based on meme and domain logic, with tickers often having symbolic meaning. The focus of speculation is on the uniqueness within the ecosystem.

After SOLV, most of the projects are vying for ecological positions & listing qualifications, and the prices gradually rise, with the highest GOD being auctioned for nearly 1 million USD. The projects mainly focus 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 stabilized above $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 faced by centralized exchanges regarding listings. On the other hand, the collected listing fees will be used for HYPE buybacks and burns, which is also beneficial for the price performance and valuation metrics of HYPE.

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 issues of tokens created through HIP1.

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

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

Hyperliquid's average daily spot trading volume over the last 30 days is around 400 million USD, ranking it among the top ten in DEX, comparable to the trading volumes of some well-known DEXs.

( 2.3 HyperEVM

HyperEVM is not yet online. In the official documentation of Hyperliquid, the current derivatives and spot exchange running on RustVM are 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 its 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 allows 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 based on RustVM, which will focus on these two core dAPPs, while the other 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 NFTs ### on it.
• HyperEVM and Hyperliquid's L1 have interoperability, such as the L1 oracle being available for HyperEVM, and some token transfers can also be interchanged between the two VMs. ( cannot be fully interoperable, because the assets on L1 are "permissioned", only including USDC and assets generated through HIP-1, whereas HyperEVM has many more assets ).
• HyperEVM will use Hyperliquid's native token $HYPE as Gas, while Hyperliquid's current L1 does not require users to pay Gas.

The HyperEVM testnet is currently running normally, and many validators have begun participating in the HyperEVM testnet verification, including some well-known validator nodes and data analysis organizations.

Due to RustVM not being open to all developers, currently there are few applications developed based on Hyperliquid's RustVM, mostly being trading auxiliary tools:

Such as the Telegram trading bot Hyperfun( token HFUN), the Telegram social trading bot pvp.trade, the trading terminal tealstreet, Insilico, and the derivatives trading aggregator Ragetrade, etc.

HyperEVM is open to all developers, and there are many projects planned to be launched on HyperEVM. In addition to the projects we mentioned earlier that have successfully obtained HIP-1 tokens, there are many more projects.

The specific mechanism of HyperEVM and its relationship with Hyperliquid L1, we still need to wait for its official release.