Written by: Little Cake

Hyperliquid launched its native lending feature on September 18, allowing users to use HYPE or BTC as collateral to borrow USDC and USDT.

The borrowing volume on the first day was $269 million, which co-founder Jeff Yan confirmed on X.

On the same day, HYPE hit a historical high of $92.56, an increase of about 8% from the previous day. The probability of the contract on Polymarket stating "HYPE will reach $100 before the end of the year" rose to 64.5%.

A DeFi product generating $269 million in borrowing on its launch day is one of the top cold-start performances in the history of on-chain lending. Aave v3, deployed on Arbitrum, had a borrowing volume of only several tens of millions in its first day.

However, behind the numbers lies a structure that needs to be unpacked.

HYPE as Collateral

The core parameters of the lending feature are as follows:

The loan-to-value (LTV) ratio for HYPE is 65%, meaning that $1000 of HYPE can be used to borrow $650 worth of stablecoins. The liquidation threshold is 82.5%, which means that when the value of the collateral falls, causing the borrowing ratio to exceed 82.5%, forced liquidation is triggered.

The LTV for BTC is 50%, which is more conservative; $1000 of BTC can only be used to borrow $500.

This parameter setting itself is a signal. Hyperliquid has set a higher LTV for its native token compared to BTC, indicating that the protocol's confidence in HYPE's liquidity and price stability, at least on a parameter level, exceeds its confidence in BTC.

The global supply cap for USDC is $1 billion, with a borrowing cap of $500 million. For USDT, the supply cap is $50 million and the borrowing cap is $10 million. The interest rate is dynamically adjusted based on the utilization rate, starting at about 5%, and rising quickly after the utilization rate exceeds 80%.

The protocol retains 10% of the borrowing interest as a liquidation buffer fund. This money is not distributed to HYPE holders nor burned, but serves as a safety cushion to cover losses from inadequate liquidations in extreme market conditions.

What is $269 Million Doing?

Where did the $269 million in borrowing go on the first day?

There's no officially disclosed breakdown, but we can infer several main uses from Hyperliquid's product structure:

Circular Leverage. Deposit HYPE → Borrow USDC → Buy more HYPE → Deposit again. This is the most classic use case of DeFi lending and also the most dangerous. A 65% LTV theoretically means that $1 of HYPE can be leveraged to an exposure of about 2.86 times through multiple cycles.

Contract Margin Supplement. Hyperliquid is the largest perpetual contract DEX in the world, with an average daily trading volume of about $5.5 billion. Traders can use HYPE as collateral to borrow USDC, which goes directly into their contract margin accounts without needing to sell HYPE. This is a crucial efficiency boost for large holders, allowing them to trade with borrowed money while holding HYPE.

Arbitrage and Market Making. Market makers can use their held HYPE and BTC positions to borrow stablecoins for deploying liquidity on other platforms or trading pairs.

Among these three uses, the first two will increase the total leverage within the Hyperliquid ecosystem, while the third will guide funds outside the ecosystem. From the perspective of protocol health, the first is the riskiest, as it creates a self-reinforcing reflexive cycle.

Reflexive Risk: HYPE’s “Upward Trap”

When HYPE is used as collateral, its price changes are no longer just a market variable; they become a function of the leverage level throughout the entire lending system.

Upward Spiral: HYPE price rises → Collateral value increases → Users can borrow more USDC → Use borrowed USDC to buy more HYPE → HYPE price rises further. This positive feedback loop can push the price far beyond fundamental levels in a short time.

Downward Spiral: HYPE price drops → Collateral value shrinks → Certain positions trigger liquidation threshold (82.5%) → Liquidation bots sell HYPE for USDC to repay debts → HYPE price drops further → More positions get liquidated.

This pattern has recurred throughout DeFi history.

In 2022, the collapse of LUNA/UST was an extreme version of a collateral reflexivity crisis. A more recent case is the cascading liquidations of ETH across multiple lending protocols in 2024.

Hyperliquid has set several safeguards: the liquidation threshold of 82.5% is triggered earlier than many protocols (providing more buffer space), the 10% interest reserve can cover part of the liquidation losses, and the borrowing cap of $500 million for USDC also limits the overall size of the system's leverage.

However, the effectiveness of these safeguards depends on the liquidity depth of HYPE. If in a sharp downturn, a large amount of HYPE needs to be liquidated simultaneously, but the buy orders are insufficient to absorb the selling pressure, the price may breach the liquidation threshold, leading to bad debts. Hyperliquid itself experienced a similar situation during the JELLY incident in March 2025, where a manipulator created a large amount of JELLY short positions, causing Hyperliquid's treasury (HLP) to incur about $4 million in losses due to insufficient liquidity.

The Transformation of HYPE’s Identity: From Exchange Token to “On-Chain Currency”

Viewing this lending feature in the context of HYPE's overall narrative, it represents a key upgrade in HYPE’s identity.

Before the launch of the lending feature, HYPE's value support came from three aspects:

Buyback and burn from trading fees (Hyperliquid's Assistance Fund buys back HYPE monthly with protocol income), expectations for market share growth of perpetual contract DEXs, and the development of the HyperEVM ecosystem.

The lending feature adds a fourth leg: Use as Collateral.

When HYPE can be used to borrow dollars, it transforms from “a token representing the value of the Hyperliquid platform” to “an on-chain asset that can generate USD liquidity.” This is similar to the role of ETH in DeFi lending protocols, where holding ETH not only represents a "stake" in the Ethereum network but also acts as an "on-chain collateral" that can be exchanged for USD liquidity at any time.

This transformation directly impacts HYPE's valuation framework.

Traditional “exchange tokens” are priced based on a price-to-earnings ratio of fee revenue. However, an L1 native token that also functions as collateral can be priced at a higher multiple because its holders do not need to sell it to gain liquidity, thereby reducing the opportunity cost of holding.

Metrics Worth Tracking

Borrowing Utilization Rate. Of the $500 million borrowing cap for USDC, $269 million (about 54%) was consumed on the first day. If the utilization rate continues to rise above 80%, interest rates will rise quickly, which may suppress borrowing demand. If the utilization rate stabilizes between 50%-70%, it indicates a healthy balance of demand and supply.

Proportion of HYPE as Collateral. Of the $269 million borrowed, how much was collateralized with HYPE and how much with BTC? The higher the proportion of HYPE collateral, the greater the system's sensitivity to HYPE price fluctuations.

Liquidation Events. The manner and outcome of the first large-scale liquidation event will be a key test of the system's health. If the liquidation goes smoothly (no bad debt, no price breaches), market confidence will strengthen; if accidents similar to JELLY occur, HYPE may quickly retrace recent gains.