KOBE on Hyperliquid

What's the HYPE with Hyperliquid? Key takeaways from my latest Messari report @HyperliquidX has a narrative problem (it's not a bad thing). We'll cover: - The Hyperliquid L1 - Hyperliquid as onchain Binance - How to find exposure - Points valuation Disclaimer: Tweet contains views that are solely my own. At this point we should all know that Hyperliquid is a leading CLOB perp DEX. However, it's important to understand the full potential of its L1. Even more critically, not enough people even know that it is an L1. I've seen Hyperliquid commonly referred to here as an L3 or an app on Arbitrum because deposits are routed through an Arbitrum bridge. Furthermore, some are still comping Hyperliquid to other perp DEXs and single use case DeFi protocols, and I think the team has demonstrated by now that they have bigger plans in mind: - Spot market has been added - EVM compatibility coming - Interest from 3P apps like @rage_trade and @hyperlendx I believe that Hyperliquid needs a new consensus narrative to reflect its unique characteristics, and so far, I'm seeing some similarities to a fully onchain version of Binance. The Hyperliquid L1 Hyperliquid has constructed a highly performant L1 optimized and configured end-to-end for their order book and perp DEX. Why do they need an L1? Put simply: - High Frequency Trading (HFT) profits are limited if there are other general purpose transactions occupying demand for block space and competing for gas (in contrast, Hyperliquid’s trading experience is gasless; gas is only induced for transactions that increase state bloat i.e. spot listings or transferring to new wallets). - The chain must allow for specific order prioritization such as for cancels and post-only limit orders which insure market makers aren’t subjected to as much toxic flow. In addition, a tailor-made solution helps optimize for specific functions, like atomic liquidations, funding distributions, and verifying solvency. @chameleon_jeff and the team builds from first principles, shipping their own custom consensus algo (HyperBFT) to maximize performance. Compare this to $DYDX which uses out-of-the-box Cosmos SDK and Tendermint (no hate on $DYDX - gud project). At a certain point, your outsourced tech's limitations become your own. Building all their tech in-house (including the bridge and oracle) is quite an accomplishment. Hyperliquid - Onchain Binance? Let's look at some narrative comps to Hyperliquid. dYdX: Key differentiation between Hyperliquid and dYdX is that Hyperliquid has built its order book fully onchain. It's fully transparent (no front-running or PFOF). Having an offchain order book / matching engine saves on additional validation, but doesn't provide a meaningful long-term alternative to CEXs. Hyperliquid is also further ahead on its ecosystem, showing signs it wants to be a full-fledged network that can offer more than just a perp DEX. Performant L1s and Parallelized EVMs You can also make the comp to performant L1s like Solana and to parallelized EVMs like Monad or Sei. I touch more on this in the report but against $SOL, the EVM is an interesting distinction and against parallelized EVMs like Sei and Monad, Hyperliquid already has a killer app (perp DEX) and stickier users. See below: The biggest moat Hyperliquid has however, against all other comps, is the network’s composability with a leading onchain order book. With EVM tooling soon to come, you might see a host of innovative native DeFi apps interested in integrating with this composability. Some examples: - Ethena-like protocols can utilize the native perp DEX to hedge exposure to volatile collateral instead of having to rely on offchain CEXs. - Options protocols built on Hyperliquid can utilize Hyperliquid’s native perp assets to create advanced trading strategies. - Lending protocols can use the native oracle to value collateral, then execute liquidations in Hyperliquid’s spot market. This could create the following flywheel for Hyperliquid's eco: Hyperliquid is not a blank slate general purpose L1. It's optimized for HFT on an onchain order book. The combination of its tech and composable order book means it could become a hub for similarly minded DeFi apps. The eco also has a unique trading-oriented community, which some teams might want to onboard. Perhaps Hyperliquid is much more akin to a fully onchain Binance. Remember, CZ also has a background in building for TradFi HFT, and Binance started off as an order book before adding the EVM compatible BSC Chain (now rolled into BNB). We think this narrative could catch on if Hyperliquid starts to get rolling. I've seen @kelxyz_ taking this stance as well. How can you get Exposure? You can check out some of Hyperliquid's impressive onchain metrics on Hyperliquid Stats. I chart some of the perp DEXs success in the report. It's still far and away behind Binance in volume, making up roughly 6% of the CEX's trading volumes in June. If being onchain, transparent, and permissionless matters, HL is poised for share capture as more users onboard into crypto. Can Hyperliquid retain these metrics post TGE? We think it can, for the following reasons: - Farming points is currently extremely difficult given the opaque distribution rubric. Reward weightings are constantly changing and look pretty complex. - Want a case study? Hyperliquid paused its points program in May and yet its volume share against Binance stayed relatively stable. This is a good sign. - Lastly, the HL team has not profited off of any of the trading activity on the platform. Their only form of compensation will probably come through vested tokens, which means their incentives are aligned with long-term holders and they're not concerned with short term vanity metrics. For exposure, we highlight the nascent spot market as a source of opportunity. Its TVL at ~$20M is dramatically under penetrated relative to Hyperliquid's perp TVL. There's also limited auctioned deployments which limits where capital can flow to (scarce token count), and HIP-2 guarantees your liquidity can't be pulled. Holding spot provides some points, which acts as additional yield for the duration of the points program. If you're betting on Hyperliquid's growth, stay tuned in to the spot market for investable opportunities. If the Binance vision starts playing out - auctioned deployment on Hyperliquid's spot market may be tremendously expensive. This helps filter for potentially high value teams. Follow the chad @0xPasteke for his comprehensive coverage on HL spot. What are HL points worth? Currently points are worth $5 on Whales Market. I think this is too conservative. This may be because: - The Hyperliquid token's FDV is still being indexed to more limited DeFi platforms such as other perp DEXs instead of to more comparable protocols like other L1s (blue-sky scenario, maybe even as a % of $BNB). - Airdrop expectations are too low. Hyperliquid hasn't taken funding from private investors, and the core team has less than 10 contributors (from last I heard). I think they've got more supply to distribute than in other TGEs this year. - The market may still be pricing in unplanned future dilution after the first season was extended unexpectedly. However, I think with more nodes being added recently, a staking asset is needed soon. We take a wide spread of assumptions to produce a valuation range. We go into what drove them in the report. Here are the results: Highlighted are the results for some probable scenarios IMO, which yields a value per point of between $10 and $30. NFA In conclusion: I think the market is viewing Hyperliquid with misguided frameworks. The performant L1 and incoming EVM compatibility will set it apart from other DeFi apps, and the composable order book may represent a new primitive in DeFi. We'll have to see what gets built on the network. Hyperliquid has the potential to become crypto's onchain and permissionless version of Binance + BNB. Points seem undervalued on OTC exchanges, with our valuation range showing positive asymmetry. If you want to participate in potential upside before the launch of the token, the spot market offers some enticing runway. We also discuss Hyperliquid's centralization concerns and more in the full report.