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 crypto market, aside from AI and Meme. 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 strategy of directly repurchasing HYPE with revenue has allowed HYPE's circulating market value to quickly surpass UNI, placing it in 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 to answer the question "Is HYPE really expensive?"

This article reflects the author's stage of thinking as of the time of publication, which may change in the future, and the views are subjective and may contain errors in facts, data, or reasoning logic. Criticism and discussion from peers and readers are welcome, but it does not constitute any investment advice.

2. Overview of Hyperliquid's Business

Hyperliquid's current business mainly includes derivatives exchanges and spot exchanges. In the future, it plans to launch a universal EVM - HyperEVM.

2.1 Derivatives Exchange

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

At the core product mechanism level, Hyperliquid adopts the central limit order book (CLOB), which is widely used by global exchanges and is the most familiar mechanism for trading users and market makers, 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 Hyperliquid team based on LibraBFT, 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, forming a decentralized derivative exchange architecture.

For end users, the experience on 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.

In addition to trading products, Hyperliquid has provided the Vault function since the establishment of the product. The Vault is similar to the "copy trading" feature of centralized exchanges, where anyone can invest funds into any Vault, managed by the Vault manager. 10% of the earnings are distributed to the Vault manager, and to maintain alignment of interests, the manager must 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 general Vault, HLP, as the official Vault, actually acts as a significant number of counterparty roles on the platform, thus being able to earn a portion of various platform fees such as ( trading fees, funding fees, and liquidation fees ). From this perspective, HLP is relatively similar to the liquidity tokens of certain DEXs, with the distinction that: the latter 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 can be either 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 while remaining profitable with a net short position 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 transaction 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 past two months. With the $HYPE airdrop and continuous price increase, various platform metrics also peaked between December 17-20.

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

From the perspective of valuation and trading volume, Hyperliquid is currently more suitable for comparison with certain centralized exchanges.

Hyperliquid's recent data has shown a significant decline. The highest single-day trading volume reached 10.4 billion USD, but in recent days it has been below 5 billion USD. However, its open interest still accounts for 10% of a leading trading platform, and the trading volume is 6%. The open interest and trading volume are roughly equivalent to about 15% of certain second-tier trading platforms. At its peak, from December 17-20, Hyperliquid's open interest could reach 12% of a leading trading platform, with a trading volume of 9%. Both the open interest and trading volume data are close to 20% of some second-tier trading platforms.

Overall, the Hyperliquid derivatives exchange is developing rapidly and has established a solid leading advantage in the field of decentralized derivatives exchanges, with the gap compared to leading centralized exchanges reduced to within 10 times.

( 2.2 Spot Exchange

Hyperliquid is also an order book-based exchange, and its product architecture and fee standards are consistent with those of derivative exchanges.

Currently, the Hyperliquid 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 for the Hyperliquid network. However, the cost of creating a HIP-1 token is relatively high, as successful creation also means eligibility for listing on the Hyperliquid spot exchange.

Hyperliquid's HIP-1 will be publicly auctioned in a Dutch auction format. Everyone can participate in the bidding, starting at a price that is double the last transaction price, linearly decreasing to 10,000U) adjustable### within 31 hours. The first successful bidder will qualify to create a TICKER, which can be listed on the Hyperliquid spot exchange, with the bidding amount paid in USDC.

Among the created Tickers worth noting are ( sorted by auction amount in descending order: ): GOD, CREAM, ANIME, MON, SWELL, RIFT, GAME, ANZ, SOVRN, FARM, ETHC, SOLV, etc.

SOLV can be seen as the dividing line for the HIP-1 auction, previously characterized by meme and domain name logic, where tickers often held symbolic significance, and the focus of speculation is on the uniqueness within the ecosystem.

After SOLV, the project parties mainly compete for ecological niches and listing qualifications, with prices gradually rising, the highest GOD auctioned for nearly 1 million dollars. The project parties focus mainly on pan-entertainment, with games and NFTs making up the majority, but there are also DeFi projects such as Solv, Swell, and Cream.

As an exchange, Hyperliquid's spot "listing fee" has stabilized at over $100,000 in the past month, which is already close to some second-tier centralized exchanges' listing fees.

Through HIP1, Hyperliquid has a public "decentralized listing" mechanism, where listing fees are determined by market participants, avoiding the issues of centralized exchanges. On the other hand, the fees collected for listings are used for HYPE repurchase and burning, which is beneficial for the price performance and valuation metrics of HYPE.

HIP-2( Hyperliquid's AMM )

Since Hyperliquid spot trading operates in the form of an order book, the liquidity of new tokens is difficult to guarantee. Hyperliquid proposes HIP-2 to solve the initial liquidity problem of token creation in HIP1.

HIP2 provides an automated market-making system that allows developers to automatically market-make the HIP-1 generated tokens. The market-making logic is linear within a specified range, where developers set the upper and lower limits of the market-making price as well as the buy-sell boundary point. The system automatically market-makes based on a price change of 0.3% per grid within the range.

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

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

( 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. HyperEVM is not an independent chain:

Hyperliquid L1 features a general-purpose EVM as part of the blockchain state. Importantly, 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 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 functions for contracts and spot trading are supported by RustVM, which will also focus on these two core dAPPs, while other dAPPs will be built on top of HyperEVM.

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

• Unlike Hyperliquid's current spot and exchange on RustVM, HyperEVM is permissionless, allowing any developer to create applications and issue assets (FT or NFT).
• HyperEVM is interoperable with Hyperliquid L1, such as L1 oracles available for HyperEVM usage, and some token transfers can also be interchanged between the two VMs. ( cannot be fully interchanged, as L1 assets are "permissioned", only including USDC and assets generated through HIP-1, while there are many more HyperEVM assets ).
• HyperEVM will use $HYPE as Gas, while Hyperliquid currently does not require users to pay Gas on L1.

The HyperEVM testnet is currently operating normally, with many validators participating in the testnet validation, including some well-known validator nodes.

Due to the fact that RustVM is not open to all developers, currently there are few applications developed based on Hyperliquid RustVM, mostly transaction auxiliary tools.

Such as the Telegram trading bot Hyperfun( token HFUN), the Telegram social trading bot pvp.trade, the trading terminal tealstreet and Insilico, as well as 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 mentioned above that have successfully obtained HIP-1 tokens, there are many more projects.

The specific mechanism of HyperEVM and its relationship with Hyperliquid L1 will only be revealed once it officially launches. Currently, the official has not provided a launch date for the HyperEVM.

Summary: Hyperliquid's overall business positioning is currently similar to that of leading trading groups, with its core business being trading + L1 operations, making it a direct competitor to major trading groups. Although the business model is similar, Hyperliquid differs from existing leading trading groups by choosing to build its trading business on-chain. Compared to CEX, which requires licensing and has opaque data, Hyperliquid's trading platform advantages include permissionless access ( with no KYC ), transparent and verifiable business data, better composability, and lower overall operational costs, which also enables it to allocate more revenue and profits to H.