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 investments, allocating 70% of tokens to the community, and returning all revenue to platform users has attracted market attention. The practice of directly repurchasing HYPE with revenue has caused the circulating market value of HYPE to quickly surpass UNI, entering the top 25 cryptocurrencies, while also driving a surge in the platform's business data across the board.

This article aims to describe the current state of Hyperliquid's development, analyze its economic model, and evaluate the current valuation of HYPE, attempting to answer the question "Is HYPE really expensive?"

The content only represents the author's provisional thoughts at the time of publication and may change in the future. The viewpoints are subjective and may contain errors in facts, data, or logical reasoning. Colleagues and readers are welcome to criticize and correct, but this article does not constitute any investment advice.

Some content references the Hyperliquid research report released by ASXN in September, which is the most comprehensive and in-depth Hyperliquid report I have ever read. Readers who wish to learn more about the mechanism details of Hyperliquid can refer to that report.

2. Overview of Hyperliquid's Business

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

2.1 Derivatives Exchange

The derivatives exchange is Hyperliquid's first launched product and its flagship product, playing a central role in the entire product ecosystem.

At the core product mechanism level, Hyperliquid has not adopted other innovative product logics like GMX, SNX, etc. due to on-chain performance bottlenecks (, but instead chose the Central Limit Order Book (CLOB) ), which is the most widely used mechanism by various exchanges globally 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 the LibraBFT developed by the Meta pre-blockchain team, capable of supporting up to 2 million TPS. With strong underlying performance support, 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 terms of trading fees and discount rules. The only difference is that Hyperliquid does not require KYC.

In addition to trading products, Hyperliquid has offered Vault functionality from the initial establishment of the product, similar to the "copy trading" in centralized exchanges. Anyone can invest funds into any Vault, which is managed by the Vault manager who conducts the investments. 10% of the profits are allocated to the Vault manager, while to maintain consistency of interests, the manager must ensure to hold at least 5% of the Vault's shares.

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

Unlike a regular Vault, HLP serves as the official Vault and effectively acts as a counterparty for many transactions on the platform. Therefore, HLP can receive a portion of various fees on the platform, such as ( transaction fees, funding fees, and liquidation fees ). From this perspective, HLP is somewhat similar to the liquidity pools of certain DEXs, with the difference being that the liquidity pools of certain DEXs act as counterparties for all transactions on the platform, and their strategy is passive and public; while HLP's strategy is non-public, meaning that 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 maintaining profitability with a net short position during the long-term 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 is 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 platform metrics reached a peak 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 last two months, the gap between other decentralized derivatives exchanges and Hyperliquid has further widened, with a significant difference now.

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

Hyperliquid's recent data shows a significant decline. The highest daily 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 certain centralized exchange, and the trading volume is 6% of that exchange; the open interest and trading volume are roughly equivalent to about 15% of some exchanges. At its peak popularity from December 17-20, Hyperliquid's open interest could reach 12% of a certain centralized exchange, with trading volume hitting 9% of that exchange; both open interest and trading volume data were close to 20% of some exchanges.

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

( 2.2 Spot Exchange

Hyperliquid's spot exchange also follows an order book model, and in terms of product architecture and fee standards, it is consistent with the derivatives exchange.

Currently, Hyperliquid's spot exchange only lists Hyperliquid native assets 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 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 being conducted in a Dutch auction format, specifically:

Anyone can participate in the auction, with the initial auction price set at twice the last auction closing price, and it will linearly decrease to 10000U) over 31 hours. This value is adjustable; it was previously lower and has recently been adjusted to 10000U(. The first developer to successfully bid will qualify to create a TICKER, which can be listed on Hyperliquid's spot exchange. The auction amount is paid in USDC.

HIP-2) Hyperliquid's AMM ###

Since Hyperliquid's spot trading operates in an order book format, 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 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, using every 0.3% price change as a grid.

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

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, and it is comparable to the trading volumes of certain DEXs.

( 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, HyperEVM is not an independent chain, but rather, like other parts of L1, it is secured by the same HyperBFT consensus mechanism. This allows the EVM to interact directly with L1's native components, such as the spot and perpetual order books.

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

• Unlike Hyperliquid's current spot and exchange located on RustVM, HyperEVM is permissionless, meaning any developer can build applications, issue assets )FT or NFT ( on it.
• HyperEVM and Hyperliquid's L1 have interoperability, such as how L1's oracles can be used by HyperEVM, and transfers of certain tokens can also be conducted between the two VMs. ) cannot be fully interoperable because the assets on L1 are "permissioned," only including USDC and assets generated through HIP-1, while 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 author has not seen a similar product architecture in the crypto world before, and we are still unclear how typical cases of composability like "depositing ETH into Lido to obtain stETH, then lending stETH on a platform for USDC, and using USDC to buy the Meme token PEPE" can be implemented under the current architecture on HyperEVM and Hyperliquid L1. This may define whether it is one chain or two chains, but in my current understanding, the relationship between HyperEVM and Hyperliquid L1 may be more akin to the relationship of "an L2 with certain interoperability and an L1," or the relationship between a centralized exchange and its exchange EVM chain, like the relationship between certain exchanges and their public chains.

The HyperEVM testnet is currently running smoothly, and several validators have started participating in the validation of the HyperEVM testnet, including some well-known validator nodes.

Due to the fact that RustVM is not open to all developers, there are currently few applications developed based on Hyperliquid's RustVM, mostly 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 numerous projects planned to be launched on HyperEVM. In addition to the projects that successfully obtained HIP-1 tokens mentioned above, the Hypurr.co website also lists a considerable number of them.

The specific mechanism of HyperEVM and its relationship with Hyperliquid L1 will remain to be seen until its official launch. Currently, the official has not provided a timeline for the launch of HyperEVM.

Summary: Hyperliquid's overall business positioning is similar to that of leading trading groups, with its core business being trading + L1 operation, which has made it a direct competitor to major trading groups. Although the business model is consistent, Hyperliquid differs from existing leading trading groups in that it chooses to build its trading business on-chain. Compared to CEX, which requires permission and has opaque data, Hyperliquid's trading platform has advantages such as permissionless access ( without KYC ), transparent and verifiable business data, better composability, and lower overall operational costs, which also enables it to allocate more revenue and profits to its token HYPE.

3. Hyperliquid Team, Token Economic Model and Valuation

( 3.1 Team