Hyperliquid: The Rise of a New Arena for Decentralized Finance

Hyperliquid is a high-speed on-chain perpetual contract exchange, running on its self-developed Layer 1, providing centralized exchange-level performance while maintaining on-chain transparency. Its native token $HYPE is responsible for network governance, can reduce trading fees after staking, and captures value through buybacks via listing auctions.

The core liquidity of the protocol is the HLP Vault, a hybrid vault that combines market makers and liquidators, accounting for over 90% of the TVL. In March 2025, Hyperliquid experienced a severe black swan event: the $JELLYJELLY manipulation incident, which nearly triggered a cascade of liquidations across the entire vault. The incident exposed the centralization issue of validator governance: the intervention of the Hyper Foundation prevented a collapse, although this action ensured survival, it sparked controversies regarding decentralization.

However, after the crisis, Hyperliquid quickly rebounded thanks to whale stickiness and ecological expansion, setting new highs in trading volume, open interest, and $HYPE price. Today, the platform (including HyperEVM) has launched over 21 new dApps, covering NFT, Decentralized Finance tools, and vault infrastructure, with capabilities far exceeding perpetual exchanges.

Where are "Degen" whales trading?

James Wynn is a well-known degen in the crypto space. He is an anonymous whale who turned $210 into $80 million in three years. His most famous achievement is turning $7,000 of $PEPE into $25 million, and he consistently uses 40x leverage to create nine-figure positions.

Wynn often publicly displays his entry points, responding in real-time to market fluctuations, even treating an eight-digit liquidation with indifference. But the real key is not who Wynn is, but where he trades.

For Wynn and all high-leverage, high-position degens, Hyperliquid is the new arena. Anonymous whales (such as "Insider Brother") are making large position trades on Hyperliquid, and their positions are now seen by Chinese crypto media as a barometer of real-time market sentiment and the platform's dominance.

So how did Hyperliquid get to this point? Why do high-risk traders choose it?

We will break it down one by one.

What is Hyperliquid?

Hyperliquid is a decentralized exchange, but it does not adopt the AMM model like Uniswap.

It adopts a completely on-chain order book mechanism, pricing not through liquidity pools but through on-chain matching, providing a real-time trading experience similar to CEX. Limit orders, trades, cancellations, and settlements all occur transparently on-chain and can be settled within a single block.

Hyperliquid has built a dedicated Layer 1 blockchain, also named "Hyperliquid", specifically designed for high performance. This allows it to execute trades at the speed and stability required by high-frequency traders.

This performance is not just talk. By June 2025, Hyperliquid's market share in the on-chain derivatives market will reach 78%, with a daily trading volume exceeding $5.5 billion.

$HYPE

Hyperliquid is not just a trading platform, but a complete on-chain financial system, and its core token is $HYPE.

Tokenomics and Philosophy

The total supply of $HYPE is 1 billion tokens, which will be distributed to approximately 94,000 users through a large-scale airdrop (310M, 31%) in November 2024, making it one of the projects with the most genuine user distribution in recent years.

A total of 70% is allocated to community airdrops, incentives, and contributors: no VC. This is based on the clear vision of founder Jeffrey Yan. He is a Harvard math graduate and a former high-frequency trading engineer at Hudson River Trading.

Yan has publicly stated: "Letting VCs control the network will be a scar." He hopes to build a financial system "constructed by users and belonging to users."

The concept of "community first + protocol performance" is also reflected in the mechanism design of $HYPE: it is not only a governance tool but also a practically usable token.

Utility

$HYPE not only has governance functions but also directly reduces transaction fees. Users can stake $HYPE to receive fee discounts.

In addition, $HYPE is also at the core of network security. Hyperliquid operates on a Proof-of-stake consensus mechanism, and staking $HYPE is not just for fee reduction or earning rewards; it is the foundation of the entire block generation mechanism.

To become a validator, the following conditions must be met:

• At least stake 10,000 $HYPE
• Through KYC/KYB identity verification
• Build a highly available infrastructure (including multiple non-validator nodes)
• Node performance will be continuously monitored, and the rights allocation will be managed through the delegation program of Hyper Foundation.

The current annual staking yield for validators is approximately 2.5%, with the yield curve designed based on the Ethereum model.

Other features of Hyperliquid

a.HIP-1 Auction Mechanism: Decentralized Token Listing Process

One of Hyperliquid's most unique and often underestimated mechanisms is its auction-based token listing system: HIP-1.

The mechanism determines the listing qualification of new tokens through an on-chain Dutch auction:

• The starting price is double the last transaction price;
• Linear decline lasted for 31 hours, dropping to a low of 10,000 USDC;
• The first wallet address to accept the current price will gain the right to create and launch the Token.

Unlike some exchanges that operate in a black box and charge high listing fees, the HIP-1 listing is completely transparent, requires no negotiation, and has no insider allocation.

For example, at the end of 2024, the CEO of Moonrock Capital accused a certain exchange of demanding 15% of tokens from a Tier 1 project as listing fees (approximately $50 million to $100 million). Another exchange was rumored to require listing fees as high as $300 million.

Even if an exchange introduces a "Batch Vote to List" mechanism, there still exists the issue of opacity where 2 projects are voted to be listed, but in reality, 4 projects go live.

And on Hyperliquid:

• The entire auction process is on-chain and executed entirely by smart contracts;
• 100% of the listing fee goes into the Assistance Fund and is used to buy back and burn $HYPE;
• No team deductions, and no reserved quotas.

Compared to other protocols where teams and VCs typically acquire listing fees, Hyperliquid's fee distribution logic is:

• All fees are obtained by the community: HLP, aid fund, and spot publishers share.

However, despite the transparency of the mechanism, there are still significant issues in Hyperliquid's spot market:

• Most auction成交价 are close to the底价 (e.g., 500 $HYPE), reflecting limited market interest in spot listing.
• The trading volume of the token after launch is extremely low;
• The official page does not clearly indicate information about new listings, resulting in low attention;
• The current spot market accounts for only 2% of the total spot trading volume on DEX, of which 84% is the $HYPE/USDC pair.

If Hyperliquid wants to truly challenge the listing status of centralized exchanges, it must enhance UI visibility, activity, and linkage with the secondary market.

b.Vault Mechanism

Hyperliquid not only serves active traders but also provides users with a way to earn passive income through the vault system, allowing funds to participate in algorithmic trading strategies.

Currently, there are two types of vaults:

• User-created Vaults: Anyone can initiate a vault and use the liquidity pool for trading. Investors share profits and losses proportionally, while the vault manager can collect 10% of the profits as a management fee. To ensure alignment of interests, the manager must stake at least 5% of the vault's TVL (Total Value Locked). This model is similar to the "Copy Trading" of centralized exchanges.
• HLP (Hyperliquidity Provider): The HLP treasury operates market-making strategies on Hyperliquid. Although strategy execution is still currently offchain, data such as positions, orders, trading history, deposits, and withdrawals are all recorded on-chain in real-time and are publicly available for anyone to audit. Anyone can provide liquidity to HLP and share profits and losses proportionally. HLP does not charge any management fees, and all profits and losses will be completely distributed proportionally based on each provider's share in the treasury.

Currently, HLP accounts for 91% of Hyperliquid's total TVL. Its strategies are divided into two categories:

Market Making:

• Continuously post buy/sell dual quotes;
• Earn the spread.

Liquidator:

• When the user's margin falls below the maintenance margin, the platform attempts to place a limit order to close the position;
• If the margin falls below 66% of the maintenance margin, the system will call the liquidation treasury to take over the position;
• HLP attempts to limit price liquidation to reduce slippage and risk;
• If the risk is too high and cannot be controlled, the Auto-Deleveraging (ADL) mechanism will be triggered to force a reduction in position.

In summary, HLP = market maker + clearing agent.

• As a market maker, HLP continuously provides liquidity (two-way quotes);
• As a liquidator, HLP takes over the positions of users who are liquidated and handles the reduction of positions.

Summary

The revenue structure of the Hyperliquid platform is as follows:

• Trading Fee (Taker/Maker): Allocated to HLP depositors;
• Auction and spot trading fees: 100% goes into the assistance fund for the repurchase and destruction of $HYPE;
• No team commissions/financial fees, unlike most DEXs.

Performance of HLP

We measure the actual protocol revenue of HLP through "Hedged PnL". This data does not include the unrealized gains or losses from market fluctuations, and only includes:

• taker/maker trading fees;
• Funding rate income;
• Settlement fees, etc.

Therefore, it reflects the true "Alpha" capability of the protocol.

Data shows that during the bullish market in 2025, HLP's daily net position is usually negative, indicating that it is mostly shorting the market. This is because the platform has placed a large number of limit buy orders, which causes HLP to passively take on sell orders, resulting in an overall bearish exposure.

In March, we can clearly see a huge spike, with a net nominal exposure close to -$50 million. This was exactly the moment when the $JELLYJELLY event erupted, and Hyperliquid was almost breached.

Hyperliquid's risk exposure

The risk concentration issue of HLP

As mentioned earlier, HLP accounts for over 90% of the TVL on Hyperliquid and simultaneously undertakes the main liquidity source and liquidation responsibilities of the platform. Such a high concentration poses systemic risk: if HLP fails, the entire platform could collapse.

We can see that HLP TVL accounts for about 75% of the total TVL of the entire hypeliquid chain.

This was starkly revealed in the $JELLYJELLY incident in March 2025. The incident was a meticulously orchestrated attack that nearly caused a systemic chain liquidation of the entire HLP treasury.

The event process is summarized as follows:

• $JELLYJELLY is a meme + ICM project on Solana, with a market cap that once reached $250 million, but has since dropped to $10 million, with extremely low liquidity;
• The attacker deposited 3.5 million USDC as margin on Hyperliquid;
• Short $JELLYJELLY at a price of $0.0095, with a short amount of approximately $4.08 million;
• At the same time, a large amount of spot buying caused the spot price to soar;
• Withdraw margin again, causing the position to be forcibly liquidated, HLP takes over the short position;
• In the market