Hyperliquid: The Rise of Decentralization Platform from Product Design Perspective

Since 2014, the issues of centralized trading platforms have plagued the cryptocurrency industry. After the FTX incident in 2022, decentralized order book platforms have received more attention. By the end of 2024, Hyperliquid has rapidly risen to prominence with its products and marketing, attracting widespread attention. With billions of dollars in total locked value, Hyperliquid is expected to become a phenomenal decentralized trading platform.

Hyperliquid has designed an application chain specifically for high-performance order book systems and has established a bridge on Arbitrum. Currently, there are only 4 validation nodes, sacrificing decentralization and security, but improving trading efficiency and achieving a user experience at the level of centralized exchanges. This reflects the style of the Hyperliquid team: first aiming for user experience and rapid user acquisition, and then addressing decentralization and security issues. This approach is also quite common in some high-performance infrastructure projects.

The main challenge faced by Hyperliquid is the cold start problem. Trading platforms have strong network effects, making it difficult for new platforms to rise quickly. Hyperliquid has put a lot of effort into market operations, while also designing solutions to the cold start problem at the product level.

HIP-1 and HIP-2: Reducing Listing and Circulation Costs

Hyperliquid introduces two core proposals, HIP-1 and HIP-2, to address the listing and circulation of Tokens. HIP-1 is similar to Ethereum's ERC-20 standard, which stipulates the Token issuance and management scheme. HIP-2 provides an automated market-making solution, performing linear market-making within a preset price range.

Compared to traditional market makers, Hyperliquid reduces market-making costs through HIP-2 and accepts user deposits for market-making in a decentralized manner. This significantly lowers the listing and circulation costs for project teams, especially benefiting small projects that lack market-making resources.

Hyperliquid adopts a public and transparent Dutch auction mechanism for listing new tokens, avoiding insider manipulation by centralized exchanges. Each auction cycle lasts for 31 hours, with a limit of 280 token listing slots per year. Although the listing fees are relatively high, this also prevents the proliferation of low-quality projects.

Vaults: Decentralization of Market Making and Clearing Mechanism

Hyperliquid's Vaults are a core primitive responsible for market making and liquidation operations on the platform. Users can provide funds to the Vaults and share in the profits/losses from market making or liquidation.

Vaults are mainly responsible for backup liquidation to prevent bad debts. Users can deposit three stablecoins: USDC, USDT, and USDC.e. The sources of income include market-making earnings, order rewards, and liquidation gains.

In addition to the official Vault, anyone can create a custom "User vault" and formulate quantitative strategies. This design shares market-making and liquidation profits with the community, helping to solve the cold start problem while receiving positive feedback.

Token Empowerment

Hyperliquid shares a large portion of its business revenue with $HYPE holders, creating incentives. A part of the transaction fees and listing fees is used to buy back and burn $HYPE, reducing circulation.

$HYPE is also used as the gas fee for Hyperliquid L1. With the development of the ecosystem, $HYPE may have more application scenarios in the future.

Controversies and Reflections

Hyperliquid is facing controversies regarding fund security and wash trading. It operates on an independent blockchain that is not open source, and the multi-signature nodes may be controlled by the project team. In addition, its trading data has also raised suspicions of wash trading.

But from the perspective of product design, Hyperliquid's strategy is very successful. It has made a series of designs around solving the cold start and improving user experience as two core issues. Even if it may provoke controversy, it insists on prioritizing the achievement of goals. This approach is worth studying and learning from.