Hyperliquid: A New Chapter in Decentralization Trading Platform

Since the Mt. Gox incident in 2014, the issues of centralized trading platforms have plagued the cryptocurrency industry. Following the FTX collapse in 2022, decentralized order book platforms have gained more attention. Although platforms like dydx have achieved some success, they have not yet become mainstream due to policy and technical reasons.

By the end of 2024, Hyperliquid, launched by the quantitative trading expert Jeff Yan's team, quickly gained popularity. With billions of dollars in total locked value, Hyperliquid is expected to become a phenomenon in Decentralization trading platform.

Hyperliquid has designed an application chain specifically for high-performance order book systems and has built a bridging contract on Arbitrum. Currently, there are only 4 validating nodes, and the risk of the bridging contract is relatively high, but it provides a user experience close to that of centralized exchanges. This reflects the team's strategy: to prioritize user experience and rapid user acquisition, even if it may pose security risks; once the scale reaches a certain level, they will gradually address the issues of Decentralization and security. This approach is also common in high-performance infrastructure projects like Solana.

The main challenge faced by Hyperliquid is the cold start. Trading platforms have strong network effects, making it difficult for new platforms to break through. Hyperliquid has invested heavily in marketing, while also carefully designing its product to address the cold start.

HIP-1 and HIP-2

Hyperliquid introduces two core proposals, HIP-1 and HIP-2, to address token listing and circulation issues. HIP-1 defines the standards for token issuance and management, similar to Ethereum's ERC-20. HIP-2 proposes an automated market-making solution that operates within a preset price range for linear market-making.

Compared to traditional market makers, Hyperliquid's HIP-2 program significantly reduces market-making costs and accepts user deposits for market-making in a decentralized manner. This lowers the listing and circulation costs for projects and has earned Hyperliquid a good reputation.

Hyperliquid uses a Dutch auction mechanism for listing tokens, auctioning one slot every 31 hours, with an annual cap of 280. This transparent and open mechanism avoids centralized intervention and is entirely determined by the market. In December last year, its token listing auction price once approached $1 million, effectively preventing the proliferation of low-quality projects.

Vaults

Hyperliquid has designed a core primitive called Vaults, which is responsible for the platform's market making and liquidation operations. Users can provide funds to the Vaults and share in the profits or bear the losses according to their shares.

Vaults mainly participate in two types of liquidation: order book liquidation and backup liquidation. When the account's net value first falls below the liquidation line, the system will attempt to close positions through the order book. If the net value falls below two-thirds of the liquidation line, Vaults will intervene for backup liquidation.

Currently, Vaults support the deposit of three stablecoins: USDC, USDT, and USDC.e. The sources of income include market-making profits, order rewards, and liquidation profits. However, Vaults do not guarantee profit, and there are still market risks and risks of delayed liquidation.

In addition to the official Vault, users can also create a custom "User vault" or join a Vault created by others. This design shares market-making and liquidation profits with the community, helping to address the cold start problem.

Token Empowerment

Hyperliquid empowers its native token $HYPE in various ways. The platform uses most of the transaction fees and listing fees for repurchasing and burning $HYPE, reducing its circulation. $HYPE is also used as the gas fee for Hyperliquid L1. As the ecosystem develops, $HYPE may have more application scenarios in the future.

Controversies and Challenges

Hyperliquid faces two major controversies: the security of funds and the authenticity of trading volume. It operates on an independent blockchain that is not open source, and the multi-signature nodes may be controlled by the project party, posing security risks. Additionally, its trading data is abnormal, raising suspicions of wash trading.

However, order brushing is a common means of solving cold starts and is prevalent in both the Web2 and Web3 fields. Hyperliquid's strategy is to prioritize solving cold start and user experience issues, even if it may lead to controversy. From the results, this strategy has been successful and is worth studying and emulating.