Crypto
Dec 17, 2024
Hyperliquid is a “fully onchain open financial system with user-built applications interfacing with performant native components”. In English, it’s a L1 intended to operate financial composables and the flagship application, HyperLiquid DEX is an onchain order book perps exchange plus more (spot, vaults, more coming), and it’s one of our top performer pics* in terms of DeFi infra and token (HYPE) this cycle. Here’s why.
What is it exactly?
Hyperliquid is a performance layer 1 i.e. a purpose-built blockchain intended to handle high trading volume with low fees and low slippage, with a trading platform on top and the ability for users to build out their own applications using the Hyperliquid stack. HyperLiquid L1 launched in 2023, with spot trading on the DEX in April 2024. PURR was its first native token, followed by its governance token HYPE, launched last month (29 Nov 2024). The diagram below is helpful because it explains components of the Hyperliquid stack, which in turn, explains what’s possible in terms of what users can do.
Right at the bottom of the diagram, you can see HyperBFT, the custom consensus algo, i.e. a unique, tailored protocol designed to achieve consensus among distributed nodes in a network. All this is to say that HyperBFT has been built from the ground up to support an onchain financial ecosystem.
The components of that ecosystem that Hyperliquid have built out include Oracles, Spot, Perps, Vaults and Governance verticals, i.e. the native components. Spot and Perps are order books, and the Hyperliquid DEX makes use of these underlying order books. Oracles are price feeds for assets listed on the DEX. Vaults are pools of funds that users can trade on Hyperliquid DEX and a major use case is copy trading vault owners. In this way, they mimic a fund. Governance is the management layer. That’s the roundup of native components, now let's get to HyperEVM.
Think of HyperEVM as a faster, upgraded engine that runs the same apps (i.e. smart contracts) you’d build for Ethereum, but on the Hyperliquid network. Here you’ll find community-building apps and launching tokens. The diagram above shows borrowing and lending, auctions, native stablecoins, bridges “and more applications”. Right now there is a limited amount of projects (tokens and apps) running, which is reflective of the maturity of Hyperliquid. HYPE just launched last month, the DEX is over 6 months old, L1 not even a year old. Suffice to say Hyperliquid and in particular HYPE is doing well. Let’s look at why.
Why is HYPE performing so well?
HYPE is Hyperliquid’s native token and it launched Nov 29 2024. It has consistently increased in value since then. Why? We believe this is a combination of these 4 factors:
Community-First Ethos.
DEX TVL's consistent growth
Positive Market Sentiment
Other cool apps - Hypurr.fun, PVP. trade
Community First
Hyperliquid Foundation has put forth a pretty impressive launch plan that deliberately excludes VCs, paid Market Makers, and other third parties. Why did they do this? First, Fair Launches are the new meta. Retail are tired of being dumped on by VCs, private investors and other early-stage investors looking for exit liquidity. Hyperliquid are proudly bootstrapped by their founders @chameleonjeff and @iliensinc which means they don’t need to bake into their go-to-market strategy exit events for VCs which frequently prejudice users/retail. Hyperliquid got its start as one the largest Market Makers in many centralised trading platforms between 2020 to 2022. In the post-FTX/Alameda crypto world, its founders aimed to restore user trust by prioritizing transparency—putting the entire trading platform and order book on-chain (Hyperliquid DEX)—and democratizing market making and liquidations, ensuring users reap the rewards of early adoption, which is rare.
Why is this approach unique?
Market Makers play a critical role at the start of a new exchange by ensuring liquidity, price stability and a positive trading experience through continuous buy and sell activity. Market Makers are also powerful influencers over the success or failure of brand-new DeFi projects. Predatory market-making deals can trap DeFi projects into unsustainable financial commitments or exploit their need for liquidity during early stages. Market Makers usually take a ton of profit, particularly in the early stage of projects and benefit from rumplestiltskin-type commercial arrangements. Hyperliquid turns the market-making model on its head; “we believe that market making profits in early phases of the project should instead accrue to users”. Hyperliquid’s strategy has been to open up market-making to the community, when usually it is an exclusive activity reserved for independent market makers or market-making groups with a ton of float. This is done through the HLP Vault (which is just one of a collection of Vaults now available on the Hyperliquid stack). Anyone can deposit liquidity into the HLP Vault. The HLP Vault doesn’t receive DEX trading fees (which is common), instead, it receives “pnl” (i.e. the profit and loss of the market-making strategies of the HLP vault). Similarly, the Liquidation Vault shares PnL with Vault depositors. The HLP Vault ensures all depositors are treated equally, returning platform value directly to users—not the team. This reinforces Hyperliquid DEX's community-first promise, resonating deeply with its users and adding weight to its mission.
DEX TVL
Hyperliquid DEX total value locked (TVL) has consistently grown since go-live in June 2024 but saw exponential growth when the bull market picked up mid-November 2024. A simple measure of demand/interest in Hyperliquid is USDC bridging to Hyperliquid, which is essentially entry funds for users to enter the Hyperliquid ecosystem, including the DEX (to fund trading activity), the Vaults (to fund market-making participation, Liquidation participation and other Vault strategies) and new financial composables as they are built out by either Hyperliquid, or by Hyperliquid’s community.
HYPE, being Hyperliquid’s governance token, represents exposure to the Hyperliquid ecosystem, and includes the standard entitlements, i.e. governance rights (voting and proposal creation), staking rewards, denomination of transaction fees and other community rewards and incentives. While HYPE isn’t Hyperliquid’s first native token—PURR holds that title—its performance and launch timing position it as a top performer, embodying Hyperliquid’s stellar rise.
https://hypurrscan.io/stats (modified)
https://app.hyperliquid.xyz/trade
Positive Market Sentiment
To buy HYPE you have to bridge USDC onto the Hyperliquid DEX. That alone produces a powerful flywheel. Here’s how. First, users purchase HYPE tokens, which due to market interest, increases in value. Second, because there are no insiders/VCs, and because exposure is democratised and everyone must bridge across into the DEX to purchase HYPE, FOMO kicks in and more USDC gets bridged over to make the first purchases of HYPE. Users experience the DEX, see HYPE token price going up, feel like they don’t have enough exposure, and the cycle repeats itself, attracting other users to bridge over to see what all the fuss is about.
As a result, Hyperliquid’s perps portion of the DEX is punishing centralised competition less than 1 month after HYPE’s token launch and at the time of writing has more volume than Kukoin Futures, HDX Futures, Derbit, Kraken, dYdX, Bitfinex etc. By comparison, Hyperliquid had half the daily volume of Crypto.com futures as of today.
https://www.coingecko.com/en/exchanges/derivatives
Other cool apps - Hypurr.fun, PvP.trade
https://app.hypurr.fun/ is the pump.fun equivalent for the Hyperliquid ecosystem, i.e. it's a launchpad for projects to bootstrap liquidity before listing on the Hyperliquid DEX. Solana’s Pump.fun is one the darlings of the current bull market and has experienced significant growth, with 4.7M+ million tokens launched since inception in Jan 2024, and total fee revenue of 319M USD (as of today). If Hyperliquid continues to attract liquidity and attention at the rate it is presently going, it will be both a serious contender and threat to centralised exchanges, and to chains competitive for user interest, like Solana.
https://pvp.trade/ is a trading bot that infiltrates your telegram groups and gamifies trading, utilising the Hyperliquid DEX for its trades. This isn’t a new concept, trading bots on telegram has been around for a little while but the gamification of trading with and against your friends inside closed groups is a novel concept and one to watch.
Finally, The Legal Angle
Unsurprisingly, Hyperliquid's offerings, including its onchain order books and DEX, perpetuals trading, Vaults, native tokens, and the ability for consumers to ostensibly DIY their own (financial) products and services, raise obvious red flags for securities and virtual asset regulation and AML/KYC obligations across all jurisdictions where those offerings are available. The profit-sharing mechanics of Vaults and token features of HYPE may trigger classification as securities or collective investment schemes under laws like the US Howey Test or EU's MiCA, requiring proper registration and disclosures. The DEX itself, is a trading platform and in many jurisdictions, triggers registration and licensing obligations. Perps and market-making activities expose the platform to regulatory oversight for derivatives and financial services. Finally, the platform’s permissionless nature raises concerns over liability for user-built applications, consumer protection and risks of illicit financial activities. If Hyperliquid continues its stellar rise in the current bull market, then it shall surely draw the attention of securities and virtual asset Regulators. Here’s how Hyperliquid Foundation is looking to at least ringfence some of this legal and regulatory risk.
Ringfence liability for the DEX
Hyperliquid has strategically ringfenced legal risk by establishing separate legal entities for the Foundation and the DEX—standard practice—and uniquely implementing a domain-level distinction between the two. The Foundation, accessible via hyperfoundation.org, operates separately from the DEX, which is accessed through app.hyperliquid.xyz. When users move between the Foundation website and the DEX (the trading interface), a disclaimer appears, alerting users that they will leave the Hyper Foundation website and access a third-party site. It states:
This message emphasizes the separation between the two entities, ostensibly reducing liability for the Foundation, clarifying that once users access the DEX, they are interacting with a separate, independent platform. However, as we have notified Hyperliquid, we note that the “Start Trading” button on the Foundation website isn’t entirely without risk. It could be interpreted as offering financial advice unlicensed, specifically to invest or manage financial risk, in jurisdictions with stringent securities regulations. The exact legal interpretation will depend on the jurisdiction and how aggressively regulators with enforcement priorities against Web3 projects marketed to retail consumers are protecting their patch.
Further attempts at risk mitigation is evident in the trading interface’s disclaimer, which reads:
"This website-hosted user interface (this ‘Interface’) is a frontend software portal to the Hyperliquid protocol, a decentralized and community-driven blockchain and tools (‘Protocol’)... YOUR USE OF THE INTERFACE AND PROTOCOL ARE ENTIRELY AT YOUR OWN RISK."
This disclaimer reinforces that while the interface is provided by Hyperliquid Corp., all transactions are conducted on Hyperliquid’s permissionless blockchain and are ultimately the responsibility of the user. By clarifying that the Protocol is decentralized, the disclaimer shifts responsibility away from Hyperliquid Corp. and underscores that users interact with the protocol at their own risk.
Our assessment
Make no mistake, we are bullish on Hyperliquid and applaud its transparency and community-first ethos. We note with enthusiasm the use of onchain order books (although not novel, first place goes to https://raydium.io) and democratised approach to profit making activities usually reserved for the elite few. Notwithstanding, we see three main issues in the current assessment of legal and regulator risk:
Disclaimer Effectiveness: Hosting a DEX interface exposes the entity to risks of being deemed a facilitator of unregistered securities trading under the Howey Test in the US, and other jurisdictions’ securities laws. Disclaimers shifting risk to users are helpful but unlikely to provide full legal protection, particularly in jurisdictions with stringent securities or consumer protection laws.
Hosting Entity is the Prime Target, US Perspective: Recent US case law (CFCT vs Ooki DAO (2022) and SEC v. Ripple (2023)) suggests that the entity hosting the interface will be targeted as the regulatory focal point, regardless of disclaimers or claims of decentralization. This is particularly relevant if the DEX facilitates trading of assets classified as securities or derivatives.
EU Perspective: MiCA requires clear separation between the Foundation, Protocol, and Interface operators. While disclaimers help limit liability, hosting the DEX interface may still expose the operator to CASP classification and associated compliance obligations.
To mitigate these risks, Hyperliquid should:
Reinforce functional and operational separation between the Protocol, Foundation, and Interface operator;
Avoid activities or messaging (e.g., “Start Trading” buttons) that could be interpreted as inducement to trade;
Ensure comprehensive risk disclosures are aligned with MiCA, US and other jurisdictions’ regulatory expectations; and
Consider jurisdiction-specific compliance frameworks for interface operations.
In summary, while disclaimers and structural separation are prudent, regulators will likely focus on the interface operator as the primary point of liability, particularly under MiCA's CASP regime and US case law trends.
If you are interested in launching DeFi offerings and minimising risk, get in touch now.