This article is from: Bloomberg
Translation｜Odaily Planet Daily (@OdailyChina); Translator｜Moni
In just two years, a decentralized exchange built by a team of a dozen engineers has gone from obscurity to attracting the attention of top investment institutions, facilitating billions of dollars in trading volume, and becoming a new focal point in the crypto derivatives market. This exchange is Hyperliquid.
Today, perpetual futures—a derivative trading model without an expiration date—are dominating crypto speculative trading, with monthly trading volumes exceeding $6 trillion. Hyperliquid is thriving in this field, although its scale is still far smaller than that of the leading exchange Binance, it has surpassed Coinbase in some metrics.
While it is well-received by the crypto community for its trading speed and transparency, Hyperliquid's explosive growth has also sparked some controversy—just last week, during a crash in the cryptocurrency market, traders on the platform suffered $10 billion in liquidation losses in a very short time.
Despite being nominally a decentralized exchange, Hyperliquid is still controlled by a core "small team," raising questions about its true level of "decentralization." For its investors, such as Paradigm and Pantera Capital, this represents both an opportunity to bet on the future of digital finance and a reminder that many core aspects of the crypto industry remain outside the regulatory framework.
Earlier this year, at the Coinbase Summit in Manhattan, New York, representatives from BlackRock, Coatue, and other traditional financial institutions gathered to discuss the next phase of the crypto industry. During this time, Jump Trading President Dave Olsen publicly referred to Hyperliquid as the first truly competitive rival to Binance. This raises an obvious question—
How did Hyperliquid stand out in such a short time?
Essentially, Hyperliquid cannot be considered a "powerful" trading platform. It is currently operated by a team of about 15 people under the Singapore entity Hyperliquid Labs. The two co-founders are Jeff Yan and the anonymous "iliensinc." Jeff Yan previously worked at Hudson River Trading as a quantitative trader and later operated a crypto trading platform called Chameleon Trading. His years of industry experience have taught him one thing: a cryptocurrency trading platform cannot survive solely on speed; the real test is liquidity.
Cryptocurrency trading platforms that rely on token incentive models often struggle to maintain long-term growth, such as dYdX and GMX, because once the rewards dry up, market makers will leave. To address the liquidity issue, Hyperliquid found its answer: Hyperliquidity Provider (HLP), which is an active market-making pool that allows user-deposited funds to act as the platform's "market maker capital," continuously posting buy and sell quotes using algorithms to ensure there are always orders available in the market. Currently, the system has over $500 million in funds.
Market maker Wintermute's algorithmic trader Felix Buchert stated, "Without users, market makers won't come; without liquidity, users won't come either. This raises the chicken-and-egg question, and Hyperliquid's success lies in introducing this HLP, ensuring that quotes can be made for almost any type of token trading."
In fact, HLP plays three roles—
Liquidity provider: HLP takes on the primary market-making function of the platform, ensuring stable depth for buyers and sellers.
Risk buffer: In the event of user losses or severe market fluctuations, HLP acts as a systemic risk hedging pool, absorbing liquidation losses and avoiding the common ADL (automatic liquidation) seen in traditional exchanges. This way, profitable users are not forced to liquidate due to systemic risk.
Revenue-sharing mechanism: All users who deposit funds into HLP can share in the platform's fee income and funding rate profits.
It can be said that the HLP treasury strategy has shaped Hyperliquid's unique competitive advantage, allowing it to quickly stand out in a highly competitive field.
As crises emerge, will Hyperliquid be the next target of U.S. regulators?
Crisis One: HLP code has not undergone public third-party audits
HLP is a booster for Hyperliquid's rapid development, but it also sows the seeds of crisis.
Some industry insiders have identified potential conflicts of interest with HLP. Former Coinbase executive Vishal Gupta pointed out: "HLP can act as a counterparty in certain trades. When you operate an exchange, you should set the rules and be the referee, but you shouldn't participate in the game; otherwise, no one can ensure you enforce your rules fairly."
Although every HLP transaction on Hyperliquid is recorded on-chain in real-time for public auditing, and as more external market makers join, HLP's share of total trading volume gradually decreases, it is important to note that the HLP code has not yet undergone public third-party audits.
A spokesperson for Hyperliquid Labs explained: "Unlike centralized exchanges, Hyperliquid's transparency is an inherent part of its design. Every transaction, liquidation, and validator action can be verified in real-time, and the platform never holds user funds."
During last weekend's market crash, HLP once again became the focus of attention. Public data shows that when large users on the Hyperliquid platform suffered losses, the HLP treasury recorded approximately $40 million in profits. This crash also triggered Hyperliquid's automatic liquidation mechanism (ADL), which is a standard defense line for crypto exchanges: when the risk buffer is exhausted, the system deducts positions from profitable accounts to absorb the loss.
Some analysts believe that Hyperliquid's ADL rules are exceptionally aggressive, almost textbook-level. In response, Jeff Yan stated on X that HLP is a non-predatory liquidator and does not actively choose profitable liquidations. He also explained that all orders, trades, and liquidations on Hyperliquid are executed on-chain, and anyone can verify the liquidation process and system solvency without permission. This transparency and neutrality make fully on-chain DeFi an ideal form of global financial infrastructure. Some centralized exchanges (CEX) have serious underreporting issues regarding liquidation data. For example, if Binance has thousands of liquidations in the same second, it may only publicly display one, which could lead to the actual liquidation scale being underestimated by a hundred times. The hope is that the industry will regard transparency and neutrality as core features of the new financial system.
Crisis Two: Centralized "decentralization," governance structure under dispute
If HLP is the engine, then the validators are the cockpit.
Hyperliquid currently has about 24 validator nodes, far fewer than Ethereum's over a million nodes. Critics argue that this design is highly centralized. For instance, Kam Benbrik, research director at blockchain validation company Chorus One, pointed out: "When you control more than two-thirds of the staking rights, you can almost do whatever you want on-chain."
While the lack of identity verification is central to Hyperliquid's appeal to crypto users, this model also follows the development path of some previously high-growth cryptocurrency exchanges. However, the problem is that such exchanges often face regulatory scrutiny afterward. Tarun Chitra, founder of cryptocurrency risk modeling company Gauntlet, explained: "The fastest-growing markets are often emerging or the least mature markets because most existing market participants do not understand the significance of their existence."
Currently, the Hyper Foundation still controls nearly two-thirds of the staked HYPE tokens, giving it significant influence over governance and validation decisions. Although the Hyper Foundation has chosen to abstain from some decisions to respect community consensus, its concentrated power remains a concern. This centralization issue was notably exposed during the previous "JELLY incident": at that time, an "attacker" exploited the platform's publicly available calculation logic, algorithm processes, and risk control mechanisms to execute a highly damaging "no-code attack" on the illiquid JELLY token, leading Hyperliquid validators to ultimately vote for the liquidation of that trade, with the foundation using its own funds to compensate affected users—at that moment, Hyperliquid was almost indistinguishable from traditional exchanges that roll back trades.
Jeff Yan explained at the time that the JELLY incident was a "special case" that required the urgent intervention of the 16 validators to protect user interests.
Crisis Three: Financial structure risks, self-balancing in a regulatory gray area
In terms of financial structure, Hyperliquid's mechanism also seems to contain high risks. The platform uses most of its trading fees to repurchase HYPE tokens, creating a "flywheel effect": the more trading occurs, the higher the token price. To date, the platform fee-driven HyperLiquid Assistance Fund has accumulated over $1.4 billion, with supporters viewing this as a growth driver, while critics warn that such repurchases often only boost prices in the short term.
Long-term investor Santiago Roel Santos pointed out that this token repurchase model is "highly self-referential" and relies on continuous growth in trading volume to sustain itself.
In fact, for a platform that prides itself on innovation, this model is quite traditional: exchanges encourage user participation and enhance liquidity through tokens closely tied to platform growth.
Although Hyperliquid's processes are fully on-chain and transparent, many similar platforms in history have collapsed rapidly due to "token incentive bubbles," where many seemingly driven by technology ultimately proved to be mere greed for an unstable reward protocol.
Nevertheless, market interest continues to soar.
According to DefiLlama data, there are currently over 100 projects building on Hyperliquid, with its ecosystem scale comparable to BNB Chain or Solana. David Schamis, co-founder of Atlas Merchant Capital, stated: "In a sense, Hyperliquid is both like Coinbase (exchange) and Ethereum (public chain)—the two have merged into one. The platform has achieved over $1 billion in annualized free cash flow, with fewer than 15 full-time employees."
Hyperliquid Labs submitted two comment letters to the U.S. Commodity Futures Trading Commission (CFTC) in May, stating that it would support a clear regulatory framework for the development of decentralized finance (DeFi) in the U.S. and also committed to constructive cooperation with regulators to promote the development of a more open, transparent, and efficient financial system. However, Hyperliquid's success seems to have exposed some loopholes in the current regulatory framework, especially as the relatively lenient attitude in the U.S. has provided space for Hyperliquid's development. But the question remains: how long can Hyperliquid continue to operate outside the regulatory spotlight?
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