Hyperliquid: decentralised exchange or blockchain?

Hyperliquid (HYPE) is an advanced decentralised exchange and Layer 1 blockchain. Discover more about this cutting-edge protocol.

Hyperliquid began as a decentralised exchange focused on derivatives trading. However, it stands out from most competitors by operating on its own Layer 1 blockchain. The platform enables perpetual futures trading on numerous cryptocurrencies and offers a user experience that resembles popular centralised exchanges (CEX).

One of Hyperliquid’s key strengths is its high speed, which ensures a smooth user experience through low latency and reliable performance. In an industry where performance is crucial, Hyperliquid successfully combines elements of centralised finance (CeFi) and decentralised finance (DeFi), positioning itself as an innovative solution.

One of the platform’s key strengths is the quick execution provided by the listing team, which consistently stays attuned to the community to identify emerging trends. If you follow the official X page, you might be familiar with their classic posts, such as “In response to the community’s requests, you can now open long or short positions on [token name].”

Now, let’s get to the point! If you’re here at the Young Platform Academy, the introductory information wasn’t sufficient for you, and you want to learn everything about Hyperliquid and how it works. Keep reading to satisfy your curiosity.

How does Hyperliquid work?

To fully understand Hyperliquid, it is essential to recognise that it is more than just a decentralised exchange or a Layer 1 blockchain. Key components include:

One of the features that sets Hyperliquid apart from its competitors is its unique approach to IT development. Instead of starting by building a blockchain and then attempting to attract users and applications, the team took the opposite approach: they first launched a successful decentralised application (dapp) that garnered a growing number of users. They then developed a high-performance Layer 1 blockchain to support the dapp. This strategy ensured a robust infrastructure tailored to the demands of high-frequency trading.

To ensure the security and efficiency of its network, Hyperliquid employs HyperBFT, a Byzantine Fault-Tolerant​​ (BFT) consensus mechanism. BFT systems, initially proposed by Satoshi Nakamoto, are designed to enable a decentralised network to function correctly even if some nodes behave incorrectly or maliciously. This capability is essential for blockchain security, as it allows the system to reach a consensus despite the presence of untrustworthy actors.

HyperBFT is an enhanced version of the HotStuff protocol, which VMware Research developed for managing distributed networks. HotStuff is an evolution of the Tendermint protocol, which popularised the concept of consensus based on a leader’s decisions that can change over time. Compared to Tendermint, HotStuff provides greater efficiency in communication between nodes and reduces transaction latency. 

The process involves the following phases:

1. Proposal Phase: A designated leader node proposes adding a new block to the blockchain.   

2. Voting Phase: Other validating nodes verify the validity of the proposed block and provide their consent.

3. Finalization Phase: If at least two-thirds of the nodes validate the block, it is permanently added to the blockchain.

4. Change of Leader: If the current leader becomes unreliable, the protocol automatically replaces them with a new leader to ensure the process continues smoothly.

To understand how HyperBFT works, imagine a group of friends trying to organise a surprise party. They must agree on a date and time, but some members might create confusion by changing their minds or sharing incorrect information. To prevent chaos, selecting a leader who collects votes and sets the final date could be effective.

In the blockchain context, a similar principle applies to the network nodes. The leader proposes the addition of a new block while the other nodes validate it. If the leader misbehaves, they can be replaced. This system enhances both security and the speed of transactions.

Hyperliquid’s founder, Jeffrey Yan, and his team designed HyperBFT to create an optimal infrastructure for algorithmic high-frequency trading (HFT). Their background in quantitative trading influenced their choice to implement a highly efficient consensus mechanism that ensures fast trade finalisations, reduces latency, and improves network responsiveness. As a result, Hyperliquid is particularly competitive with other decentralised exchanges, offering users conditions comparable to those of centralised exchanges for derivatives trading and automated strategies.

To understand Hyperliquid and its functionality, it’s essential to define HyperEVM, one of its ecosystem’s most innovative components. The HyperEVM is an Ethereum-compatible virtual machine designed to facilitate the development of advanced decentralised finance (DeFi) applications. Possible integrations include borrowing and lending platforms, cross-chain bridge systems, and native stablecoins.

One of the most interesting features is its interaction with Hyperliquid’s Layer 1, where the native components reside. With HyperBFT, users can pay gas fees on HyperEVM directly using the native HYPE token. This simplifies the user experience by reducing the need to hold multiple assets to operate on the platform, allowing for seamless integration between Layer 1 and applications developed on HyperEVM.

The main functionalities of Hyperliquid’s decentralised exchange

Let us now turn to the central focus of the Hyperliquid ecosystems derivatives trading platform. Its structure is reminiscent of other DEXs with perpetual, e.g. GMX, another decentralised exchange developed on Arbitrum (ARB). However, as you learned in the introduction to this article, in this case, the Layer 1 blockchain was born ‘from a rib’ of the trading platform, not vice versa.

But back to Hyperliquid and how it allows its users to trade with a fluidity and speed comparable to that of a CEX but in a completely decentralised manner, for example, a distinctive aspect of the platform is that, despite being a DEX, it does not force traders to pay gas fees on individual trades. Users pay gas fees only for deposits and withdrawals. In contrast, they pay commissions depending on the monetary volume traded (we will address this issue in a dedicated section) and in line with centralised competitors based on the trades made.Another significant advantage is the low latency. Orders are confirmed in less than a second, and although transactions are recorded on-chain, they do not need to be manually signed. Moreover, tokens listed on Hyperliquid are often chosen in response to communityrequests, a custom that strengthens the bond between the protocol and its users.

In summary, understanding Hyperliquid and its functionality means recognising that its trading platform enables users to open both long and short positions with leverage of up to 50x on Bitcoin and other cryptocurrencies. It offers extremely fast order execution and low latency, allowing traders to take advantage of market movements without the delays often experienced on other decentralised platforms, which require lengthy confirmation times.

Hyperliquid’s commission system is based on the trading volume conducted by users over the previous fourteen days, particularly when large amounts of money are involved. For instance, if a trader’s total trading exceeds $5 million in counter value, they will incur a taker fee of 0.030% and a maker fee of 0.005%.

A unique aspect of Hyperliquid’s model is the redistribution of commissions. Rather than being retained by the team or investors, these commissions are reinvested in the community through the HLP token and the assistance fund.

At Hyperliquid, users can set up different order types to adapt their trading strategy to market conditions.

There are also advanced options to manage orders more precisely:

Hyperliquid, like most perpetual futures trading platforms, utilises a funding rate to maintain an equilibrium between the market price of an asset and the price of the derivative contracts based on that asset. This funding rate is updated hourly to prevent significant price discrepancies between the futures market and the spot market.

The mechanism works as follows: if the contract price exceeds the spot price of the same cryptocurrency, traders who hold ‘long’ positions (betting on price increases) will pay those with ‘short’ positions (betting on price decreases). Conversely, if the contract price is lower than the spot price, those with ‘short’ positions will pay those with ‘long’ positions.

To align with centralised exchange (CEX) models, the fixed component of the interest rate is set at 0.01% every 8 hours, which translates to an annual percentage rate (APR) of 11.6%.

The method HyperLiquid uses to derive asset prices is unique. Like all decentralised exchanges, it employs an oracle that calculates a weighted average of the prices from major centralised exchanges based on their significance or market share.

Hyperliquid facilitates trading and allows users to invest their funds in Vaults. These Vaults are self-managed by users, enabling anyone to deposit cryptocurrency and earn a share of the profits generated. This innovative liquidityminingmechanism offers potential rewards, although it is important to note that depositors are not guaranteed to make a profit.

These virtual vaults contain one or more open positions and are managed by the following rules:

Of course, investing in Vaults involves risks. Before depositing, it is essential to analyse the Vault’s strategy and performance history.

To understand Hyperliquid and its operations, it’s important to highlight its primary vault: the Hyperliquidity Provider (HLP). This vault supplies liquidity for market-making on the decentralised exchange. As of now, the total value locked (TVL) in the HLP is considerable. 

The system was designed to address a prevalent issue in the crypto landscape, particularly concerning derivative trading platforms: the reliance on institutional market makers. Often, projects lacking sufficient capital for effective order management depend on these entities, which impose their conditions for providing significant liquidity.

Recognising this challenge, the Hyperliquid team aimed to eliminate this dependency by redistributing profits to the community that would typically go to institutional market makers.

In the long term, Hyperliquid aims to attract external market makers by making its API and SDK available to facilitate their entry into the market. This move is expected to increase the depth of Hyperliquid’s markets, enhance the system’s overall stability, and reduce risks for the HLP Vault.

Hyperliquid’s native token (HYPE)

To summarise this overview and clearly understand Hyperliquid and its functionality, it is essential to highlight HYPE, the platform’s native token, and its airdrop, which many consider a key factor in the ecosystem’s success.

In November 2024, Hyperliquid launched the Genesis Distribution, distributing 310 million HYPE tokens—31% of the total supply—among approximately 94,000 users. The token’s initial price was around $1, but within a few weeks, it surged to $28, even reaching a peak of $35. Some users received allocations exceeding 1 million HYPE tokens, which were valued at more than $30 million at the token’s highest point.

One significant reason for this success was Hyperliquid’s decision to avoid venture capital involvement. Unlike many other projects, the platform refrained from allocating substantial portions of the supply to private investors, who often sell off large amounts in the initial months, hindering the token’s growth. In this instance, 76.2% of the supply is allocated to the community, which enhances user trust and reinforces the decentralised model.

HYPE is not just a speculative asset; it plays a vital role within Hyperliquid. It is used to pay transaction fees on Layer 1, offers discounts on trading commissions, and allows users to participate in the platform’s governance by voting on updates and changes. Additionally, it can be staked for rewards while contributing to the network’s security and development.

The allocation of HYPE’s supply reflects its importance. Of the total supply, 38.88% is reserved for future releases and community rewards (including the potential for at least one more airdrop). 31% was distributed during the genesis phase, and another 23.8% was set aside for the network’s developers. The remaining portion is divided between the Hyperliquid Foundation and community grants aimed at stimulating the growth of the ecosystem.

One of the key features of HYPE is its Buyback & Burn mechanism, which is managed by the Assistance Fund. This emergency fund is designed to protect the platform in the event of hacker attacks or other issues. To date, network validators have decided to use these funds to repurchase HYPE tokens. As a result, a portion of the commissions generated from perpetual futures trading is utilised to buy back the token, while the commissions from spot trading are directly burned. This process reduces the circulating supply of HYPE tokens and has the potential to increase their value over time.

Hyperliquid’s performance: an unprecedented success

Hyperliquid has quickly risen to prominence in the decentralised trading space, achieving liquidity and trading volumes comparable to the most popular centralised exchanges. Recently, the platform recorded an impressive $15 billion in trading volumeover a 24-hourperiod, which represents 20% of Bybit’s futures volume and 8% of Binance’stotal volume. Additionally, the Total Value Locked(TVL) has grown significantly, indicating that an increasing number of traders are adopting this protocol.

Hyperliquid has redefined the concept of asset listing in the crypto space. Traditionally, centralised tier 1 platforms require crypto projects to pay high fees to have their tokens traded. In contrast, Hyperliquid offers a permissionless and transparent listing process. Anyone can propose a new asset for trading through an on-chain auction system, making the process fairer and more decentralised.

The Future of Hyperliquid

Now that you understand what Hyperliquid is and how it operates, it’s time to draw some conclusions. While 2024 could mark the establishment of this protocol, 2025 might be the year it solidifies its position as the leader in the decentralised finance industry.

The platform is attracting an increasing number of projects eager to benefit from its high liquidity, speed, and the growing cohesion of its community. However, many remain sceptical, primarily due to the high level of centralisation stemming from the limited number of validators responsible for securing the network.