‍

Exploring Hyperliquid's Platform and Trading Features

Introduction

Hyperliquid is a decentralized perpetual trading protocol that aims to deliver a user experience on par with centralized exchanges while maintaining the decentralization, security, and transparency inherent in blockchain technology. Built on its custom Layer 1 blockchain, Hyperliquid combines the best elements of both centralized and decentralized finance. As of today, the platform boasts more than 200,000 active users and has processed over $300 billion in cumulative transaction volume. Daily trading volumes consistently exceed $1 billion, with over 8,000 unique traders interacting with the platform regularly.

‍

The essence of Hyperliquid lies in its ability to offer high-speed, high-throughput trading with minimal latency. It provides users access to perpetual futures contracts, leveraging up to 50x, all while operating on a fully transparent, decentralized system. This report explores the structure of Hyperliquid, its key technological innovations, the mechanisms underpinning its success, and its vision for reshaping decentralized trading.

‍

‍

Industry Context and Evolution of Decentralized Exchanges

The decentralized finance space has evolved rapidly since the launch of Uniswap in 2018, which introduced the concept of decentralized exchanges powered by automated market makers. Prior to this, centralized exchanges dominated cryptocurrency trading due to their ability to offer deep liquidity, fast execution, and ease of use. However, they come with inherent risks, including lack of transparency, centralized control, and the potential for hacking or mismanagement of user funds. These limitations created a demand for decentralized trading venues where users could retain control of their assets without relying on centralized entities.

The Emergence of Automated Market Makers (AMMs)

Automated market makers such as Uniswap revolutionized decentralized trading by removing the need for traditional order books and market makers. Instead, AMMs use liquidity pools; smart contracts that hold reserves of tokens. Liquidity providers deposit assets into these pools, and trades are executed based on predefined algorithms like the constant product formula (xy=k). This allows for permissionless, decentralized trading without needing counterparties.

Advantages of AMMs:

• Permissionless trading: Anyone can provide liquidity or trade on an AMM, democratizing access.
• No reliance on counterparties: Traders interact with the liquidity pool rather than waiting for a buyer or seller.
• Simple liquidity provision: Liquidity providers don’t need to actively manage their positions; they simply deposit assets into the pool.

Drawbacks of AMMs:

• Impermanent loss: Liquidity providers are exposed to price movements that can reduce the value of their positions compared to simply holding the assets outside the pool.
• Capital inefficiency: AMMs often require large amounts of liquidity to facilitate trades, leading to capital being locked in unproductive ways.
• Slippage and pricing inaccuracies: AMMs can suffer from slippage and price discrepancies, especially during periods of high volatility or low liquidity.

Despite their success, AMMs are not a perfect solution for all types of trading, particularly high-frequency trading or complex derivatives like perpetual futures.

The Rise of Virtual AMMs (vAMMs)

To address some of the inefficiencies of traditional AMMs, vAMMs were introduced. vAMMs replicate the liquidity curves of AMMs but do not require actual asset pools. Instead, virtual assets are created to simulate trading environments. These virtual pools allow users to trade derivatives like perpetual futures without needing deep liquidity for every asset pair.

While vAMMs solve some of the capital inefficiency issues of AMMs, they still face challenges:

• Inaccurate market reflection: vAMMs struggle to track real-time market prices, often relying on external data sources or oracles to maintain accuracy.
• Liquidity constraints: Without actual liquidity pools, vAMMs sometimes fail to offer sufficient depth, especially during periods of volatility.
• Arbitrage challenges: Since vAMMs are virtual, they often depend on internal arbitrage bots or external arbitrageurs to keep prices aligned with the broader market.

Hybrid Models

As the DeFi space continued to evolve, hybrid models emerged to address the shortcomings of both AMMs and vAMMs. Hybrid systems, such as those implemented by Hyperliquid, combine the efficiency and precision of traditional order books with the transparency and decentralized nature of AMMs. In hybrid systems, decentralized order books are paired with automated market-making functions to ensure constant liquidity and efficient price discovery.

These models strike a balance between capital efficiency, price accuracy, and user control, allowing for:

• Faster price discovery: By leveraging order books, prices reflect real-time market conditions more accurately than AMMs or vAMMs.
• Deeper liquidity: Hybrid models often use off-chain components or external liquidity sources to ensure deeper liquidity, especially for large trades.

• Transparency: Every order, trade, and liquidity movement is visible on-chain, preserving the transparency of DeFi while offering the efficiency of centralized systems.

The Need for Perpetual Futures in DeFi

Perpetual futures, which allow traders to speculate on asset prices without an expiry date, have become immensely popular in centralized exchanges due to their flexibility and leverage opportunities. These contracts enable traders to profit from both rising and falling markets by going long or short, respectively. However, in decentralized finance, perpetual futures were slower to gain traction due to technical challenges related to liquidity, price feeds, and latency.

Traditional centralized exchanges like Binance, Bybit, and FTX (before its collapse) dominate perpetual futures trading. These platforms offer deep liquidity, high-speed execution, and robust infrastructure, but they also have significant drawbacks:

• Lack of transparency: CEXs are opaque, and users must trust the platform to accurately report prices, manage funds, and execute trades fairly.
• Custodial risks: Users must deposit their assets on centralized platforms, exposing them to the risk of hacks, mismanagement, or even collapse, as seen with FTX.
• High fees: Centralized exchanges often charge significant fees for trading, withdrawals, and other activities.

By bringing perpetual futures into the decentralized space, Hyperliquid addresses these key issues. Traders can enjoy the benefits of perpetual futures; leverage, flexibility, and liquidity, while maintaining control of their assets and enjoying the transparency and security of decentralized systems. This is where Hyperliquid fills a critical gap in DeFi.

‍

Hyperliquid’s Technology Stack

To compete with centralized exchanges in terms of speed, scalability, and user experience, Hyperliquid has developed a highly specialized technology stack built on a custom Layer 1 blockchain. This infrastructure is designed to handle the demands of high-frequency trading (HFT) while maintaining decentralization and transparency.

Layer 1 Blockchain

Hyperliquid’s Layer 1 blockchain is purpose-built for trading and financial transactions. Unlike general-purpose blockchains like Ethereum or Solana, which are designed to handle a wide range of applications, Hyperliquid’s L1 is optimized for trading, offering fast and efficient transaction processing.

Consensus Mechanism: HyperBFT

At the core of Hyperliquid’s L1 is its proprietary HyperBFT consensus mechanism. HyperBFT is based on cutting-edge consensus algorithms such as HotStuff and LibraBFT. These algorithms are designed for high-performance environments where low-latency consensus and fault tolerance are critical.

Key Features of HyperBFT:

• Low Latency: With a median latency of 0.2 seconds, Hyperliquid rivals centralized exchanges like Binance in terms of trade execution speed. This is essential for high-frequency traders who require near-instant confirmation of trades.
• High Throughput: HyperBFT can theoretically process over 2 million transactions per second, ensuring that the network can handle large trading volumes without congestion.
• Scalability: Unlike older blockchain consensus mechanisms that struggle to scale beyond a few thousand transactions per second, HyperBFT is designed to scale as the platform grows, ensuring it can support institutional-level trading activity.

Hyperliquid’s focus on high-performance consensus ensures that it can support the kinds of trading strategies and volumes seen on centralized platforms, but with the added benefit of decentralization.

Oracle Pricing and Data Integrity

Accurate pricing is critical for a trading platform, especially when dealing with leveraged products like perpetual futures. Hyperliquid’s custom-built oracle system ensures that prices are always in sync with the broader market, even during periods of volatility.

Oracle Price Calculation

Hyperliquid’s oracles aggregate price data from multiple top-tier centralized exchanges, including Binance, OKX, Kraken, Bybit, and KuCoin. These prices are then used to calculate a weighted median price, ensuring that no single exchange can manipulate the price feed.

• Price Update Frequency: The oracles update every three seconds, ensuring that price feeds are as close to real-time as possible.
• Weighted Median: By using a weighted median calculation, Hyperliquid avoids outlier prices that could distort the market, ensuring that trades are executed at fair market rates.

Price Stability Measures

In times of extreme volatility or disruptions in the price feed from centralized exchanges, Hyperliquid activates a price protection mechanism. This mechanism relies on the median of the best bid, best ask, and last trade prices to maintain stability until normal conditions return.

• Protection Against Manipulation: By relying on multiple data sources and price protection mechanisms, Hyperliquid minimizes the risk of price manipulation and ensures that trades reflect the true state of the market.
• Transparency: All oracle data is visible on-chain, allowing users to verify that prices are accurate and have not been tampered with.

Hyperliquid’s oracle system is critical for maintaining the integrity of the platform, especially during times of high volatility when price discrepancies can lead to significant losses for traders.

‍

Hyperliquid’s Core Trading Mechanics

At the heart of Hyperliquid’s trading platform is its on-chain orderbook, which offers a more efficient and precise trading mechanism compared to traditional AMM-based DEXs. The platform also provides advanced trading features such as leverage, cross-margining, and an automated liquidation process to ensure smooth trading even under adverse market conditions.

On-Chain Orderbook

Hyperliquid operates a fully on-chain orderbook, a feature that sets it apart from most decentralized exchanges, which rely on AMMs or liquidity pools. The orderbook mimics the structure of traditional financial markets, providing a price-time priority system for matching trades.

Order Matching

Hyperliquid’s orderbook operates on a price-time priority basis, meaning that trades are matched based on the price offered and the time the order was placed. This system ensures that trades are executed fairly and efficiently, with the best available prices being matched first.

• Price-Time Priority: Trades are matched in the order they were placed, ensuring that traders are rewarded for placing their orders earlier, especially during times of high volatility.
• Transparency: All trades are visible on-chain, allowing users to verify that the matching engine is functioning as intended.

Clearing House Integration

The orderbook is integrated with Hyperliquid’s clearing house, which manages all positions, margin requirements, and liquidations. The clearing house ensures that margin checks are performed when new orders are placed and that all positions remain solvent, even during times of high volatility.

• Margin Checks: The clearing house performs real-time margin checks to ensure that traders have sufficient collateral to support their positions.
• Liquidations: If a trader’s margin falls below the required level, the clearing house initiates a liquidation process to close the position and prevent the platform from accruing bad debt.

Margin and Leverage Trading

Hyperliquid allows traders to access leverage of up to 50x on perpetual futures contracts. This leverage enables traders to amplify their gains, but it also increases the risk of liquidation if the market moves against them.

Cross-Margin vs. Isolated Margin

Traders can choose between cross-margin and isolated margin for their positions.

• Cross-Margin: In cross-margin mode, margin is shared across all open positions. This allows traders to use unrealized profits from one position to support another, reducing the risk of liquidation. Cross-margin is particularly useful for traders who manage multiple positions simultaneously.
• Isolated Margin: Isolated margin allows traders to allocate specific amounts of margin to individual positions. This limits the risk to each position and prevents a bad trade from liquidating the entire account.

Leverage Management

Leverage allows traders to increase their exposure to the market without needing to commit large amounts of capital. However, it also increases the risk of liquidation. Hyperliquid’s clearing house ensures that margin requirements are strictly enforced, and traders can adjust their leverage based on their risk tolerance.

• Flexible Leverage: Traders can adjust their leverage between 1x and 50x, depending on the asset and their trading strategy.
• Real-Time Margin Checks: The platform performs real-time margin checks to ensure that traders have enough collateral to support their leveraged positions.

Liquidation Process

Liquidations are a critical component of any leveraged trading platform. Hyperliquid employs a sophisticated liquidation process to ensure that positions are automatically liquidated if the trader’s margin falls below the maintenance level. This process helps protect the platform from bad debt while ensuring that traders do not lose more than their initial margin.

Market Orders

When a trader’s position is liquidated, the platform places market orders to close the position. These orders are matched against the best available prices in the orderbook, ensuring that the liquidation is executed efficiently.

• Partial Liquidations: If the full position cannot be liquidated in one trade, the system will partially liquidate the position, reducing the trader’s risk while maintaining market stability.
• Fair Pricing: Market orders are executed at the best available price, ensuring that liquidations do not negatively impact the market.

Backstop Liquidations

If the market orders do not fully liquidate the position, Hyperliquid’s backstop liquidation mechanism steps in. This mechanism is managed by the Hyperliquid Liquidity Provider, which absorbs the remaining risk and ensures that the platform does not accrue bad debt.

• Backstop Mechanism: The HLP vault takes over the remaining positions and liquidates them gradually to minimize slippage and maintain market stability.
• Protection Against Bad Debt: By relying on the HLP to manage backstop liquidations, Hyperliquid ensures that the platform remains solvent and that users are protected from cascading liquidations during times of high volatility.

‍

The Hyperliquid Liquidity Provider (HLP)

A key innovation of Hyperliquid is the HLP vault, which democratizes access to market-making and liquidity provision. Unlike traditional centralized exchanges where liquidity provision is typically reserved for professional market makers, Hyperliquid allows any user to participate in liquidity provision by depositing USDC into the HLP vault.

 Market-Making for All

The HLP vault enables everyday users to participate in market-making activities, earning a share of the trading fees generated by the platform. 

This decentralized approach to liquidity provision democratizes access to market-making, which is traditionally restricted to a few highly technical teams or institutional players.

• Fee Distribution: The HLP vault distributes 20% of the trading fees to liquidity providers. These fees are paid out proportionally based on the amount of liquidity each user has contributed to the vault.
• No Impermanent Loss: Unlike AMM systems where liquidity providers are exposed to impermanent loss (the risk of losing value due to price fluctuations in the assets they are providing), Hyperliquid’s HLP eliminates this risk by relying on orderbook-based liquidity provision. Liquidity providers are not exposed to fluctuating asset prices, as the HLP only deals in USDC.

Backstop Liquidations and Market Stability

In addition to providing liquidity, the HLP also plays a crucial role in managing backstop liquidations, ensuring that the platform remains solvent during times of high volatility. When a trader’s position cannot be fully liquidated through the orderbook, the HLP steps in to absorb the remaining risk.

• Risk Management: The HLP absorbs the positions that cannot be liquidated through the orderbook and gradually liquidates them to prevent excessive slippage. This ensures that the platform remains solvent and that users are protected from bad debt.
• Profit Sharing: Liquidity providers in the HLP earn a share of the profits generated from backstop liquidations, providing them with an additional revenue stream beyond trading fees.

‍

User Experience and Ecosystem Growth

Hyperliquid has placed a strong emphasis on creating a user-friendly trading experience, making decentralized perpetual trading accessible to both novice and experienced traders alike. The platform offers a range of features that simplify onboarding, trading, and liquidity provision, while expanding its product offerings to include spot markets and index perpetuals.

User Onboarding

Hyperliquid makes it easy for users to get started by simplifying the process of depositing collateral and trading on the platform.

Bridging USDC

Hyperliquid supports the seamless bridging of USDC from other blockchains, allowing users to deposit collateral into their trading accounts without friction. The platform uses an EVM-compatible bridge, secured by the same validators that support the Layer 1 blockchain.

• EVM-Compatible: The bridge is compatible with Ethereum and other EVM-based chains, making it easy for users to transfer USDC between different ecosystems.
• Security: The bridging process is secured by Hyperliquid’s validators, ensuring that deposits and withdrawals are processed safely and transparently.

Gas-Free Trading

One of the major pain points for DeFi users is the high cost of gas fees, especially on blockchains like Ethereum. Hyperliquid addresses this issue by offering gas-free trading, allowing users to trade without worrying about transaction fees.

• No Gas Fees: Users can trade perpetual futures and other assets on Hyperliquid without paying for gas, reducing the overall cost of trading.
• Low Barriers to Entry: By eliminating gas fees, Hyperliquid makes trading more accessible to smaller traders who may be deterred by the high cost of transactions on other platforms.

Spot Market and Exotic Products

In addition to perpetual futures, Hyperliquid has expanded its product offerings to include spot markets and exotic derivatives, allowing traders to diversify their strategies and gain exposure to a wider range of assets.

Spot Markets

Hyperliquid’s spot markets allow traders to buy and sell assets directly, without using leverage or derivative contracts. These markets operate with the same efficiency and transparency as the perpetual futures markets, providing users with a reliable way to trade assets on-chain.

• Real-Time Trading: Spot markets operate in real-time, allowing users to execute trades based on the current market price.
• On-Chain Transparency: Like all of Hyperliquid’s markets, spot trades are recorded on-chain, ensuring transparency and accountability.

Index Perpetuals

Hyperliquid has introduced several index-based perpetual contracts that allow traders to speculate on the performance of multiple assets, rather than individual tokens. These index perpetuals are designed to track the value of specific baskets of assets, providing traders with exposure to broader market trends.

• NFTI-USD: This index tracks the floor prices of prominent NFT collections, such as Bored Ape Yacht Club, Mutant Ape Yacht Club, and Azuki. It provides traders with a way to speculate on the overall performance of blue-chip NFTs without needing to own individual NFTs.
• FRIEND-USD: This index tracks the trading behavior of a curated group of prominent NFT traders and collectors, offering exposure to the performance of this influential group.

Index perpetuals allow traders to diversify their portfolios and gain exposure to broader market trends without needing to manage multiple individual positions.

‍

Future Growth and Expansion

As Hyperliquid continues to grow, the platform is set to expand its ecosystem by integrating support for Ethereum Virtual Machine (EVM), enabling the development of decentralized applications (dApps) and smart contracts on its high-performance infrastructure. This integration will transform Hyperliquid from a specialized trading platform into a broader financial ecosystem capable of supporting a wide range of DeFi products.

Ethereum Virtual Machine Integration

The upcoming integration with EVM will allow developers to build dApps on top of Hyperliquid’s infrastructure, leveraging its high-performance blockchain for a wide range of use cases. This integration is expected to drive significant innovation within the ecosystem, as developers will be able to create new financial products that take advantage of Hyperliquid’s scalability, low latency, and security.

Composability and Liquidity

The EVM integration will enable greater composability within the ecosystem, allowing dApps to interact seamlessly with each other and with Hyperliquid’s core trading infrastructure. This will create new opportunities for liquidity aggregation, cross-platform trading, and complex financial products.

• Cross-Platform Integration: dApps built on Hyperliquid’s EVM will be able to interact with other DeFi platforms, creating a more interconnected ecosystem.
• Liquidity Aggregation: By integrating with other DeFi protocols, Hyperliquid will enable a wider range of liquidity sources to be tapped into, ensuring deeper markets and reducing slippage for large trades.

Innovation Within the Ecosystem

With the EVM integration, developers will have the flexibility to create new decentralized applications and smart contracts that leverage Hyperliquid’s Layer 1 infrastructure. This could include decentralized lending protocols, insurance products, synthetic assets, and other financial derivatives, further expanding the platform’s use cases.

• New Financial Products: Developers will be able to create novel financial products that interact directly with Hyperliquid’s order books, oracle systems, and liquidity providers, opening the door for a wide range of decentralized financial applications.
• Composable DeFi Ecosystem: By incorporating smart contract functionality, Hyperliquid will allow different protocols to build on top of each other, creating a more robust and interconnected DeFi ecosystem.

Hyperliquid's Vision for Long-Term Growth

Hyperliquid’s long-term vision is to establish itself as a fully-fledged decentralized financial ecosystem that supports not only perpetual trading but also a diverse range of DeFi products. This expansion will position Hyperliquid as a major player in the DeFi space, offering solutions for both retail and institutional investors.

• Institutional Adoption: With its high-performance blockchain, robust risk management systems, and scalable infrastructure, Hyperliquid aims to attract institutional investors who are looking for a decentralized alternative to traditional financial markets.
• Global Financial Access: Hyperliquid’s mission extends beyond the crypto-native user base, as the platform seeks to provide financial access to underserved markets around the world. By offering decentralized trading, liquidity provision, and financial products that are accessible to anyone with an internet connection, Hyperliquid is positioned to play a crucial role in democratizing access to global financial markets.

Conclusion

Hyperliquid represents a big step forward in decentralized perpetual trading by combining the speed, efficiency, and liquidity of centralized exchanges with the transparency, security, and decentralization of blockchain technology. Built on a custom Layer 1 blockchain optimized for high-performance trading, Hyperliquid addresses many of the shortcomings of traditional decentralized exchanges such as AMMs, while providing a more robust solution for high-frequency and perpetual futures trading.

The platform’s on-chain orderbook, HyperBFT consensus mechanism, and custom-built oracle system provide the infrastructure needed for real-time trading with deep liquidity and transparent pricing. With the added flexibility of cross-margining and leverage up to 50x, Hyperliquid is well-suited for professional traders seeking a decentralized alternative to centralized platforms.

The HLP vault democratizes liquidity provision, allowing everyday users to participate in market-making and earn a share of trading fees without the risks associated with impermanent loss. This decentralized approach to liquidity management helps ensure market stability while providing consistent liquidity across all assets.

Looking ahead, EVM integration will position Hyperliquid as a key player in the broader DeFi ecosystem, enabling the development of decentralized applications and smart contracts that leverage its high-performance infrastructure. This expansion will create new opportunities for liquidity aggregation, composability, and innovation, further solidifying Hyperliquid’s position as a leader in decentralized finance.

In conclusion, Hyperliquid offers a complete ecosystem for decentralized perpetual and spot trading, liquidity provision, and smart contract functionality. As the platform continues to grow and expand its offerings, it is poised to become a major player in the decentralized finance space, providing a scalable, secure, and transparent alternative to traditional centralized exchanges.

‍

Sources:

‍
Hyperliquid website: https://hyperliquid.xyz/

‍

Hyperliquid docs: https://hyperliquid.gitbook.io/hyperliquid-docs

‍

Hyperliquid dashboard: https://hyperliquid.asxn.xyz/

‍

Hyperliquid ASXN report: https://newsletter.asxn.xyz/p/hyperliquid-the-hyperoptimized-order

‍

Kouei USDC deposits: https://dune.com/kouei/hyperliquid-usdc-deposit

‍

Hypurrscan: https://hypurrscan.io/

‍

DefiLlama: https://defillama.com/

‍

‍

Disclaimer: This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.