The Rise of the Decentralization Trading Platform Hyperliquid

Since 2014, the issues of centralized trading platforms have plagued the cryptocurrency industry. After the FTX incident in 2022, decentralized order book platforms have gained more attention. By the end of 2024, Hyperliquid, developed by a quantitative trading team, has quickly gained popularity, sparking widespread discussion. With billions of dollars in total locked value, Hyperliquid is expected to become a phenomenal decentralized trading platform.

Hyperliquid has designed a high-performance order book system application chain and built a bridge on Arbitrum. Currently, there are only 4 validator nodes, sacrificing Decentralization and security but significantly improving trading efficiency, achieving a user experience on par with centralized exchanges. This reflects the team's strategy: to first pursue a good experience and rapid customer acquisition, and then gradually address security issues. This approach is also common in projects like Solana.

Hyperliquid also faces the challenge of cold starts. To address this, they have invested heavily in marketing while also designing around cold starts at the product level. This article will analyze Hyperliquid's design approach from three perspectives: HIP, Vaults, and token model.

HIP-1 and HIP-2

Hyperliquid proposed two core proposals, HIP-1 and HIP-2, to address the issues of token listing and circulation. HIP-1 primarily addresses on-chain token issuance and management, similar to the ERC-20 standard. Compared to Ethereum DEX, the process for listing new tokens on Hyperliquid is simpler.

HIP-2 provides an automated market-making solution, performing "linear market-making" within a preset price range. The system automatically publishes buy and sell orders to ensure market liquidity. This reduces the market-making costs for project teams, allowing projects with limited resources to also participate in market-making on the order book platform.

Hyperliquid adopts a Dutch auction method for listing tokens, auctioning one slot every 31 hours, with a yearly limit of 280. This ensures the listing process is open and transparent, avoiding human intervention. Last December, the listing fee approached $1 million, which also prevented the proliferation of low-quality projects.

Vaults

Hyperliquid's Vaults are a core component responsible for market-making and liquidation. Users can provide funds to the Vaults, share profits, or take on risks. Currently, it supports three stablecoins: USDC, USDT, and USDC.e.

The sources of income for Vault participants include market making profits, order placement rewards, and liquidation profits. However, there are also risks such as market making strategy losses and untimely liquidations.

In addition to the official market making and clearing vaults created by the platform, anyone can create a custom Vault and formulate quantitative strategies. Users can also join Vaults created by others, similar to a copy trading model. Creators need to maintain at least 5% of the share to earn a 10% commission.

The design of Vaults shares the market-making and liquidation profits with the community, helping to address the cold start problem. Currently, the total locked value of Vaults remains at several hundred million dollars, with some Vaults achieving an annual yield of up to 9000%.

Token Empowerment

The $HYPE token of Hyperliquid has implemented various empowerment measures:

1. Use a large portion of business revenue to buy back and destroy $HYPE, including about 50% of transaction fees and part of the listing fees.

2. Use $HYPE as Gas fee on the underlying chain.

3. It may be used in future DeFi scenarios such as lending and staking.

Currently, Hyperliquid accounts for nearly 75% of the on-chain derivatives trading market, providing strong support for token empowerment. As of early February, $HYPE has burned 152,000 tokens, worth approximately $3.426 million.

Controversies and Thoughts

Hyperliquid faces two major controversies: first, the issue of fund security, as its underlying chain is not open source and nodes may be controlled by the project party; second, there are suspicions of wash trading, with abnormal transaction data.

Regarding the issue of order brushing, we need to consider the motivations behind it. Order brushing is a common means to address cold starts and is prevalent in both Web2 and Web3 projects. Hyperliquid's strategy is to resolve the cold start and user experience issues at any cost, even if it is controversial, which is consistent with its usual approach.

Overall, Hyperliquid's product design closely revolves around two main goals: cold start and user experience, and it adheres to this strategy even in the face of controversy. From the results, their approach has been very successful and is worth in-depth study within the industry.