The price of the Chinese currency is quite strong after the plunge. Talk about Hyperliquid from the perspective of HIP, Vaults and Token models.

The author of this article will provide an overview of Hyperliquid from the perspective of HIP, Vaults and Token models to help you deeply understand the design ideas behind this hot project.

Authors: Bai Ding Shew, Xian Rang GodRealm X

Since the Mentougou incident in 2014, corruption and market manipulation issues on centralized trading platforms have plagued all participants in Crypto. After the FTX bankruptcy incident in 2022 completely sounded the alarm for people, people have significantly deepened their attention to decentralized order book platforms. Well-known on-chain order book platforms such as dydx and Degate are representatives of this kind. While they have achieved remarkable results, they have not yet become a phenomenal platform due to policy and technical reasons.

At the end of 2024, Hyperliquid was launched by Jeff Yan’s team, who specializes in quantitative trading.With its efforts in product and marketing, it quickly became popular throughout Web 3 and attracted widespread attention. With a TVL worth of billions of dollars, Hyperliquid is expected to completely launch a new chapter in a decentralized trading platform and become a phenomenal application.

In the previous article “Hyperliquid Technical Interpretation: Bridge Contracts, HyperEVM and Their Potential Problems”, we mentioned thatHyperliquid designedAn application chain dedicated to high-performance order book systems,It built a bridge for this application chain on Arbitrum, so it was identified as a “pseudo-Layer 3” by L2BEAT. Currently, Hyperliquid has only 4 verifier nodes. The risk of bridge contracts is extremely high, which greatly sacrifices decentralization and security, but it also improves transaction matching efficiency and achieves a CEX-level user experience. Although controversial, this reflects the Hyperliquid team’s style of doing things:

The core goals were UX and rapid user acquisition at the beginning, even if doing so would pose security risks.As the size of the product reaches a certain level, demining will be gradually started to solve decentralization and safety issues. This kind of project operation idea is common in high-performance infrastructure such as Solana and Optimism, and can often achieve good results in commercialization.

Similarly, Hyperliquid faces the same difficulty as other trading platforms: cold start issues. The trading platform itself has a strong network effect,”the more people use it, the easier it is to use”, which makes the track easy to be controlled by oligarchs. Nowadays, the cold start of new trading platforms is extremely difficult. Observing Hyperliquid’s previous large-scale airdrops and KOL matrices, it is not difficult to see that they have put great efforts into market operations.

However, marketing momentum alone will not allow new trading platforms to rise rapidly. There will undoubtedly be strong product support behind this. Judging from Hyperliquid’s design ideas at the product level, it is also focusing on the core purpose of “cold start”.hereinThe author will analyze the results from the perspective of HIP, Vaults and Token modelsHyperliquidExpand Overview，Help everyone deeply understand the design ideas behind this hot project.

HIP-1 and HIP-2

Analogy to Ethereum’s EIP proposal, Hyperliquid named its proposal HIP and took the lead in introducing the two most important core HIPs for it: HIP-1 and HIP-2 to solve the issue of listing and circulation of Tokens. Among them, HIP-1 mainly solves the Token issuance and management solution on the Hyperliquid chain, similar to Ethereum’s ERC-20.

Here we can compare Ethereum DEX’s depositing method for comparison. Most DEXs adopt AMM’s product model. There are two steps to list new tokens:

1. First, the Token developer needs to call the Mint function in the token contract that complies with the ERC-20 standard to define basic data such as the token name, symbol, and total supply.

2. After that, the newly minted Token is paired with another asset (such as ETH or USDT) and added to the liquidity pool of DEX to provide initial liquidity. After that, people in the market will naturally use arbitrage, SWAP and other behaviors to price the Token.

In Hyperliquid’s system, the process of List tokens is much simpler. First of all, the Hyperliquid application chain is dedicated to the order book system. If you issue new tokens on Hyperliquid through the HIP-1 standard, the system will directly help you create a trading pair between the new Token and USDC. When you deploy a Token contract, you can set a hyperliquidityInit parameter to determine how much Token will be automatically injected into the orderbook market as initial liquidity. This eliminates the need to manually inject initial liquidity as in Ethereum AMM.

In this regard, the main function of HIP-2 is to use the above initial liquidity to automatically make market and solve the initial circulation problem of Tokens.

So what are the details of the HIP-2 automatic market-making plan? Simply put,HIP-2the proposed scheme isConduct “linear market-making” within a predetermined price range.Token deploymentfirstTo preseta price range, and thenHyperliquid systemAutomatically issue pending orders based on this range to ensure the marketonThere is always liquidity.

The details of this part mainly include three parts:

1. Set the price range and frequency of pending orders:Token issuers must specify the upper and lower limits of market-making prices, as well as the dividing points of purchase and sale orders. Each price point increases by 0.3% relative to the previous price point. This process will be updated every 3 seconds or so (or longer) to ensure that the system’s pending orders always keep up with market fluctuations and avoid lag.

2. Order generation:When the price range is updated, HIP-2 calculates how many orders should be placed at different price points based on the spot quantity provided by the Token issuer.

3. Automatic reverse market making:Whenever a “full sell order” is closed, the system will automatically use the funds traded (such as USDC) to place a reverse limit purchase order. In this way, new pending orders will always appear in the market to ensure that liquidity is always active.

Currently, there are two main charging methods for general market makers on the market:The first type is to charge a fixed monthly fee. The second type does not directly charge a monthly fee. Instead, it borrows a certain proportion of Token from the project party to make the market, usually 0.5%-1.5%. Of course, in order to prevent the price of Token from soaring and causing the reimbursement cost to increase sharply, the market maker can change the charging method at any time, or repay the Token at a pre-agreed price. This involves a game between the project party and the market maker, and the description is limited in space.

Hyperliquid officially reduces market-making costs with the HIP-2 solution and receives user deposits for market-making in a decentralized form. This involves its module called Vaults.We will introduce it later.

HIP-1 and HIP-2 aim to significantly reduce project funding and circulation costs. HIP-1 ensures the decentralization and transparency of coin placement, while HIP-2 specifically provides “automatic market-making” service for the order book system, allowing projects lacking market maker resources to make markets with confidence on the spot order book platform. This has brought a good reputation to Hyperliquid, but because Hyperliquid’s current coin placement fee is too expensive, ordinary project parties will still be blocked from the threshold.

talked aboutOn the topic of coin fees, we must explain the methods used by Hyperliquid.Dutch shooting mechanism.In the past six months, CEX has charged sky-high coin listing fees, put controversial Tokens on the shelves, and plunged immediately. All kinds of targets have been directed at the centralization of its coin listing process. Against this background, the HIP-1 proposal stipulates thatThe Hyperliquid platform uses an open and transparent Dutch auction mechanism, rather than aplatformMake your own decision,As a result, he gained widespread goodwill.

In Hyperliquid’s plan, every 31 hours is used as an “auction cycle”, and one coin placement quota is publicly auctioned during each cycle. The number of coin placement quotas per year is limited to 280. At the beginning of each auction cycle, a new round of auctions starts at twice the transaction price in the previous cycle. If the auction failed in the previous cycle, the auction will start again at US$10,000 for this cycle. Due to the Dutch auction, the auction price will gradually decrease from the initial price until a bidder who accepts the selling price appears, and will gain the right to bid.

Compared with traditional CEX, Hyperliquid’s coin listing mechanism is quite innovative. First of all, it ensures the openness and transparency of the coin listing process and avoids human intervention and price manipulation. Secondly, this approach completely hands the decision to the market and avoids asking CEX insiders to charge insider fees.In December last year, Hyperliquid’s auction price was close to US$1 million.It also prevents lower-quality project parties from having the financial resources to purchase coins, directly avoiding the proliferation of memecoin.

Source: ASXN Data

To sum up, we can see that the significance of HIP-2 is more to help weak project parties quickly cold start and provide them with initial liquidity support, which also helps Hyperliquid’s cold start as a trading platform. The Dutch auction method leaves the rights to market for pricing. The entire process is open and transparent, and it is a fair and just method. It can be said that Hyperliquid has indeed opened up a new model of order book trading platform. After it solves the security risks at the bottom of the application chain in the future, it is expected to become a phenomenal platform that can compete with Binance for the right to speak.

Vaults

Similar to traditional CEX platforms, Hyperliquid also has basic scenarios such as leverage and contract trading. When contracts and leverage are involved, corresponding clearing components must be provided. In this regard, Hyperliquid provides a more decentralized and open form for everyone to participate in.

The core primitive of the Hyperliquid platform is called Vaults, which is written at the bottom of the L1 chain. Market-making and clearing activities that occur on the Hyperliquid platform are operated by Vaults, and users can provide funds to Vaults and share the gains/losses of market-making or clearing based on the proportion of shares.

To briefly explain here, the maximum leverage multiple that can be supported by each asset in Hyperliquid is different, ranging from 3 to 50 times. The specific calculation formula is as follows:

For example, the maximum leverage multiple backed by an asset is 50 times, then according to the formula, the clearing line is 1% of the initial margin, and if the maximum leverage is 3 times, the clearing line is 16.7%. Clearing is triggered when the net value of the account is below the clearing line. The clearing methods can be divided into two types: order book clearing and backup clearing.

Order book clearing means that if the net value of a trader’s account falls below the clearing line for the first time, the trader’s position will automatically attempt to issue a market order to the order book platform to liquidate all or part of the position, and the remaining collateral can still belong to the trader. The backup clearing is that if the net value of the account falls below 2/3 of the clearing line and the position is not processed in a timely manner through the order book clearing method, Vaults will intervene to carry out backup clearing. At this time, the trader’s position and margin will be transferred to the liquidator and will not be refunded to the user. It can be said that Vaults Treasury is mainly responsible for backup clearing in such scenarios, providing a foundation for the Hyperliquid platform and preventing the generation of bad debts.

Currently, Vaults only supports depositing three stablecoin assets: USDC, USDT and USDC.e(cross-chain USDC).

Source: Hyperliquid.xyz/vaults

In terms of income sources, there are three potential income sources for Vaults participants. The first is market-making income, including short-term price fluctuations and the capital rates earned by holding unilateral positions. The second is the income from pending orders. Those who take orders in Hyperliquid will pay a transaction fee of 0.025, while those who hold orders will receive a reward of 0.002%. The third is the liquidation income. When the position is lower than 2/3 of the liquidation line, the HLP clearing treasury can take over the position and make profits from it.

Depositing assets with Vaults is not guaranteed. On the one hand, fluctuations in market prices may lead to losses in market-making strategies. On the other hand, after Vaults takes over the positions to be cleared, if liquidation is not timely due to various reasons, or the assets to be cleared fall sharply, losses will be caused.

Currently, there are two original vaults created by the official Hyperliquid team, namely the HLP vault responsible for market making and the Liquidator vault responsible for clearing. In addition, anyone can create their own customized “User vault” on the Hyperliquid chain and formulate their own quantitative strategies., become the “creator” to be responsible for profits and losses.

Of course, users can also join a Vault created by the official or others to become a “follower”, which is a bit like a single copy model. Since the Vault creator is responsible for managing funds, he will receive a 10% profit share from his followers. However, the proportion of assets the creator injects into his vault must always be greater than or equal to 5%, otherwise he will be restricted from withdrawing funds.

Vaults with varying yields

It should still be emphasized that as an emerging exchange, Hyperliquid has a series of designs designed to solve the cold start problem. The existence of Vaults means that the potential benefits of market-making and liquidation are distributed to the community. According to Hyperliquid’s official documents, the purpose of this is to “de-platform” and open up the power of CEX’s monopoly and achieve democratization. However, this is essentially a means to solve the cold start problem of trading platforms, just like using a bad check. Attract users and liquidity, which not only solves the cold start problem, but also receives praise, killing two birds with one stone.

Nowadays, the market popularity has dropped, but Hyperliquid Vaults ‘TVL is still maintained at hundreds of millions of dollars, and a cold start has been completed. The APR of some vaults even reaches nearly 9000%, which is quite a wealth-creating effect. However, there is one issue that needs to be noted. Regarding how to ensure the safety of funds deposited in the treasury, the official does not seem to have disclosed relevant information at present, which poses certain hidden dangers.

Token empowerment

Previously, Hyperliquid airdropped 70% of $HYPE to the community, but $Hype did not experience significant selling pressure. Instead, it rose from US$2 at the time of TGE to about US$30, which was inseparable from $HYPE’s strong Token empowerment. Currently, there are two main ideas for Token empowerment. One is to give money holders income incentives, and the other is to create deflation and reduce circulation.

Hyperliquid shares a large amount of business revenue with $HYPE holders to form incentives. The platform’s revenue is mainly divided into two parts: transaction fees and currency listing fees. Part of the transaction fee is used to repurchase $HYPE. According to statistics, about 50% of the daily transaction fee income of the Hyperliquid platform is currently used to repurchase $HYPE. These $HYPE are usually destroyed to reduce circulation; and part of the coin deposit fee (about 50%, the official did not disclose specific documents) will also be used to repurchase and destroy $HYPE.

As of early February, Hyperliqud’s market share among all on-chain derivatives trading platforms was close to 75%, and it had become a monopoly. Therefore, the effect of its business revenue empowering the official Token platform was quite significant. Currently, Hyperliquid still maintains a strong growth trend.

As of February 8, 2025, the destruction volume of $HYPE has reached 152,000 pieces, with a value of approximately US$3.426 million.

In addition to business revenue, Hyperliquid’s infrastructure also empowers $HYPE. First of all, Hyperliquid L1 uses $HYPE as the Gas fee. Although it claims to provide gas-free transactions, this means that users do not need to perceive the existence of Gas when trading. The system has included the Gas fee in the transaction fee, but this does not mean that the Gas design was cancelled at the bottom of the chain. In addition, with the completion of DeFi infrastructure in the ecosystem after the implementation of HyperEVM,$HYPE may have specific scenarios such as loans and pledges.

Hyperliquid controversy

The controversy over Hyperliquid mainly focuses on two aspects. The first is the issue of financial security. Hyperliquid runs on an independent public chain that is not open source. Trading on Hyperliquid is equivalent to making a deposit to the Hyperliquid L1 Bridge. Although Hyperliquid’s bridge contract was audited by a well-known company Zellic, the node code supporting the bridge contract is not open source. There may be problems with this part of the code. In addition, Hyperliquid uses multi-signature bridges, and the high probability of multi-signature nodes is controlled by the project party itself.

Selected projects for which Zellic has provided audit services

In addition, Hyperliquid has been criticized mainly for its swipe transaction volume. Its open interest data is also very exaggerated for a DEX.

Hyperliquid's Funding Rates Panel

This figure is the capital rate panel provided by Hyperliquid. Its original intention is to provide users with an intuitive comparison of capital rates to facilitate users to carry out cross-market arbitrage, but it exposes some intriguing problems of Hyperliquid. We can see that the capital rates for most Tokens are the same, maintaining at the default 0.01%. Many people suspect that there is not so much actual transaction volume on Hyperliquid.

Because in a truly active market, supply and demand cannot be completely balanced, fluctuations in capital rates will occur. When there are more purchases than sales orders, the borrower’s funding rate will be lower, while when there are many sales orders, the funding rate will increase. The appearance of so many similar 0.01% means that Hyperliquid may be swiping orders, that is, increasing trading volume through frequent clearing transactions and repeated pending orders to create the illusion of market activity.

Some traders in the market also reported that they tried to do quantitative trading on Hyperliquid but failed because the actual trading depth was not enough. However, apart from user experience and inference, the swipe problem cannot be confirmed. Because Hyperliquid is not open source, we cannot obtain complete raw transaction data by building nodes. In fact, there is no need to confirm this question. We might as well think about another question: If swiping orders are real, why would Hyperliquid do this? In fact, it is still a cold start problem.

Swipe is an effective means to solve the cold start of trading platforms. Referring to various Web2 products with significant network effects, various forms of swipe are far more common than Web3. Today, about 30-40% of the transaction volume on e-commerce platforms such as Taobao and Tmall is completed through swiping orders every year;Youtube’s video sites often have automatic likes, comments, and attention that simulate user behavior. Wait; in popular games such as Peace Elite, among the 50 people in a game, it is very likely that you are the only real person, and the rest are all AI.

As for the major order books CEX in Web3, no one dares to say that they have never swiped an order, so swiping the order problem is common and not as bad as everyone thinks. As we said earlier, Hyperliquid’s style is that the purpose of all actions is firmly to solve the core problem, even if there is some negative impact on the reputation, so swiping the bill is in line with its consistent style. There are actually only two core issues: cold start and user experience. In order to solve these two problems, it can even create a centralized public chain that is not open source, let alone swiping bills?

Overall, Hyperliquid’s product design basically revolves around one program: all product links and operational actions should cooperate fully to survive the cold start period and give users the CEX experience, even if they are controversial or give up something. Judging from the results, its strategy is very successful and worthy of review and research.