Binance's strong competitor - Understanding how Hyperliquid successfully captures market share.

Author: Bloomberg; Translated by: LenaXin, ChainCatcher

The anonymous decentralized exchange Hyperliquid, developed by a small team of engineers, has attracted heavyweight investors and achieved a trading volume of hundreds of billions in just two years. The platform focuses on perpetual contract trading, which is a contract with no expiration date, dominating the cryptocurrency speculation market with a monthly trading volume exceeding $6 trillion.

Although Hyperliquid is vastly different in scale from the industry leader Binance, it has surpassed Coinbase in certain areas and established a competitive advantage in decentralized exchanges.

Its development has made it the focal point of the crypto wild west. Supporters praise its speed and transparency, but it also made it the center of last week's market crash, where traders on the platform incurred losses of $10 billion.

Hyperliquid is still dominated by a core group, raising questions among supporters about its level of decentralization. For supporting institutions like Paradigm and Pantera Capital, this is both a bet on the future of digital finance and a warning that much of the industry’s activities remain outside the formal regulatory framework.

Earlier this year, at an industry summit hosted by Coinbase, BlackRock and Coatue executives discussed development plans with cryptocurrency professionals, where Jump Trading President Dave Olsen specifically pointed out that Hyperliquid is Binance's “first heavyweight competitor.”

What are the characteristics of Hyperliquid? Why has it managed to attract former Boston Federal Reserve Chairman Eric Rosengren to join the board of its ecosystem-related Nasdaq-listed fund and successfully capture market share?

Essentially, this is a minimalist trading platform operated by a team of about 15 people from the Hyperliquid Labs in Singapore. The platform's front end blocks US users as per industry practice, but anyone can trade on its underlying blockchain. The no-identity verification mechanism is its core attraction, replicating the rapid growth of early exchanges that adopted similar models, which often quickly attracted regulatory attention.

Tarren Chitra, founder of the crypto risk modeling company Gauntlet, pointed out: “The highest growth rates are often found in the newest or least mature markets, as most existing market participants do not understand the logic of their existence.”

Hyperliquid was co-founded by Jeff Yan and a co-founder known by the pseudonym “iliensinc”. Jeff Yan, who previously worked at Hudson River Trading, operated the crypto trading platform Chameleon Trading before turning to build a trading system that pursues extreme speed, mostly operating outside traditional regulation.

But relying solely on speed cannot ensure survival; the real test lies in liquidity. Platforms like dYdX and GMX once relied on token incentives to attract market makers, but the model becomes fragile when the rewards are depleted. Hyperliquid's solution is to introduce the Hyperliquid market maker mechanism, where user deposits act as the platform's liquidity pool, and algorithms continuously provide buy and sell quotes to ensure that every transaction has a counterparty. Currently, the scale of funds in this system has exceeded 500 million dollars.

Market maker Wintermute algorithm trader Felix Buchter stated: “Without users, there are no market makers, and a lack of liquidity does not attract users. Hyperliquid has successfully solved this chicken-and-egg problem, as its launched HLP liquidity pool can provide quotes for any market.”

(Note: David Schamis, founding partner and Chief Investment Officer of Atlas Merchant Capital, discussed the new $888 million agreement for the issuance of HYPE tokens by the Hyperliquid exchange on the “Bloomberg Crypto” program with Tim Stenovec and Scarlet Fu.)

Some crypto experts point out potential conflicts of interest: the HLP mechanism of the protocol can act as a counterparty in certain transactions. Former Coinbase executive Vishal Gupta stated, “Operating exchanges should set rules and act as referees, rather than personally engaging in trading, as no one can ensure the fairness of rule enforcement.”

Supporters argue that, unlike past problematic exchanges, every transaction on HLP is recorded on-chain in real-time, forming an auditable trail, which constitutes its core difference from traditional platforms. As the platform matures and large external market makers settle in, the proportion of HLP transactions has shown a declining trend. However, it is worth noting that, unlike most competitors, HLP's code has not yet undergone a public third-party audit.

A spokesperson for Hyperliquid stated: “Unlike centralized exchanges, transparency is an inherent trait of Hyperliquid. Every transaction, settlement, and verification action can be validated in real time, and the platform never holds user funds.”

The HLP mechanism has drawn attention during the weekend market sell-off. Public data shows that when large traders on the platform incur losses, the fund pool instead gains about $40 million. This plunge also triggered the automatic position reduction mechanism standard in crypto exchanges, where the system will flatten profitable positions to absorb the failing flow when the buffer funds are depleted.

In other words, Hyperliquid reduces its losses and even profits $40 million by compensating losers with the money of the winners.

Analysts such as those from Gauntlet and Qitra point out that Hyperliquid's ADL rules have a textbook-like aggressive nature, which may be one of the factors driving HLP profitability.

After the sharp decline last week, Jeff Yan posted on platform X emphasizing that HLP is a “neutral clearing party that does not filter profitable liquidation opportunities,” and explained that the scale of Hyperliquid's liquidation seems large because the data is “fully on-chain,” while centralized exchanges often underreport liquidation volumes.

If we compare HLP to an engine, the validator nodes are the control center. Hyperliquid has only about 24 validator nodes, which stands in stark contrast to Ethereum's network of over a million nodes. Critics argue that its power is overly centralized, with the Hyper Foundation controlling nearly two-thirds of the staked HYPE native tokens, significantly influencing the decisions and governance of the validator nodes, although in some recent resolutions, its nodes chose to abstain to comply with community consensus.

Chorus One's research director, Cam Bembrick, pointed out: “Controlling more than two-thirds of the staked tokens means being able to do whatever you want on the chain.”

This power contradiction was highlighted in the so-called “JELLY incident”: at that time, the large bets on illiquid tokens threatened the HLP's solvency, and the verification node votes decided to liquidate the transaction, with the foundation using its own funds to compensate affected users.

At this moment, Hyperliquid acts like a market operator implementing intervention, akin to traditional exchanges rolling back trades. Jeff Yan referred to this as an “extreme situation,” requiring the immediate action of 16 validation nodes at that time to protect users.

Hyperliquid's financial structure uses most of the trading fees to repurchase HYPE tokens, creating a flywheel effect that drives up the token price through trading volume. The assistance fund for repurchasing HYPE tokens using platform fees has currently exceeded $1.4 billion. Supporters praise it as a growth engine, while critics warn that repurchases usually only lead to short-term price increases.

Seasoned crypto investor Santiago Roel Santos pointed out that token buybacks have a “high degree of reflexivity” and rely on continuously growing trading volumes to be maintained, and this model can only be sustainable when Hyperliquid consistently outperforms large competitors.

Hyperliquid prides itself on innovation, using token issuance closely tied to platform growth to incentivize user participation, but its liquidity model is somewhat traditional. Although Hyperliquid employs transparent on-chain operations, many previous platforms have proven that when technical requirements devolve into greed for fragile reward protocols, crises follow one after another.

Market enthusiasm remains high. Paradigm invested $888 million to support the Nasdaq-listed fund holding HYPE, allowing traditional investors to participate without trading directly.

(Note: The board members of this listed fund include Rosengren)

According to DefiLlama data, there are currently over 100 projects based on the Hyperliquid development ecosystem, which is now comparable in scale to BNB Chain or Solana.

David Shamis, co-founder of Atlas Merchant Capital, stated: “It is both a Coinbase-style exchange and an Ethereum-like Layer-1 blockchain, with both integrated into the same system.” He, who will serve as the CEO of the fund, also revealed that “the platform has achieved an annualized free cash flow of over $1 billion with fewer than 15 full-time employees.”

After the Hyperliquid upgrade this week, experienced users can create perpetual futures markets within minutes without the need for listing committee approval. Creators must stake millions of dollars worth of HYPE as collateral, and if validating nodes detect abuse, the staked amount may be forfeited.

This is a common risk control mechanism for proof-of-stake blockchains, which may give rise to trading markets for new tokens or volatility tracking products. Essentially, Hyperliquid not only opens the market to traders but also allows them to independently create markets.

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