What is Hyperliquid (HLP), and how does it work?

What is Hyperliquid?

Hyperliquid is a decentralized perpetual exchange operating on its own high-performance layer-1 blockchain, HyperEVM. It specializes in perpetual futures trading, allowing users to speculate on crypto prices without holding the underlying assets. 

The HyperEVM mainnet has been launched with smart contract capabilities while preserving its fast, low-latency trading.

A key feature of Hyperliquid is its onchain order book, which enables real-time, transparent trading with minimal latency. It supports a range of cryptocurrencies, including:

It bridges the gap between centralized finance (CeFi) and DeFi and offers a seamless, high-speed trading experience tailored for modern decentralized finance (DeFi) users by addressing challenges like inefficient order matching and high latency.

Hyperliquid has adopted a community-driven approach, rejecting venture capital funding, allocating 70% of its tokens to users, and redistributing all revenue back to the community. As of Feb. 5, Hyperliquid has a market capitalization of approximately $8.92 billion.

How does Hyperliquid function?

Hyperliquid operates on a layer-1 blockchain explicitly designed for derivatives trading. For rapid transaction processing, Hyperliquid uses HyperBFT, a proprietary consensus algorithm. This system ensures that trades, orders and liquidations occur in real-time, with all transactions transparently recorded onchain.

Perpetual order book DEX

A fully onchain perpetual order book exchange is a core feature of the platform. Unlike decentralized exchanges (DEXs) that rely on automated market makers (AMMs), Hyperliquid adopts a traditional order book system. This approach allows traders to place bids and asks for various assets, resembling the experience of centralized exchanges (CEXs). 

As of Feb. 5, Hyperliquid supports up to 100,000 orders per second. Orders are matched using a price-time priority mechanism, ensuring fair execution for all market participants.

Margining system

Hyperliquid has a decentralized clearinghouse that manages users’ margin balances and positions. The exchange supports both cross-margin and isolated-margin trading. Cross-margin allows traders to distribute collateral across multiple positions, while isolated-margin dedicates specific collateral to each trade, reducing liquidation risks for other holdings. This system enhances traders’ flexibility and risk management.

Pricing mechanism

To maintain accurate pricing, Hyperliquid uses a decentralized oracle system, with validators updating spot prices from major exchanges every three seconds, ensuring price integrity and reducing manipulation risks.

The system determines funding rates, margin calculations and liquidation processes using these price updates, ensuring price integrity and reducing manipulation risks. 

Order types and options available on Hyperliquid

Hyperliquid L1 maintains an order book for each asset. The order book integrates with the clearinghouse, which handles all positions and margin checks. 

These checks occur when a new order is placed and again for the resting side upon order matching. This process ensures a consistent margin system, even amid oracle price fluctuations.

Order types and options available on Hyperliquid include:

Order types

• Market: Executes immediately at the current market price.
• Limit: Executes at the specified limit price or better.
• Stop market: Converts to a market order when the stop price is reached, often used to minimize losses or secure profits.
• Stop limit: Converts to a limit order once the stop price is reached.
• Scale: Places multiple limit orders within a defined price range.
• TWAP: A large order divided into smaller suborders executed every 30 seconds, with a 3% maximum slippage per suborder.

Order options

• Reduce Only: Closes part of an existing position rather than opening a new one.
• Good Till Cancel (GTC): Remains on the order book until executed or canceled.
• Post Only (ALO): Ensures the order is added to the book without immediate execution.
• Immediate or Cancel (IOC): Cancels any portion of the order that isn’t immediately filled.
• Take Profit (TP): Triggers a market order when the TP price is reached.
• Stop Loss (SL): Triggers a market order when the SL price is reached.

What are vaults in Hyperliquid?

Hyperliquid vaults provide a flexible way for users to participate in trading strategies while benefiting from the platform’s advanced features, such as liquidation management and high-speed market making. 

Unlike traditional vaults that only rebalance between two assets, Hyperliquid vaults allow users — including decentralized autonomous organizations (DAOs), institutions and individuals — to deposit funds and share the profits. Vault owners receive 10% of total profits, except for protocol vaults, which operate without fees or profit sharing.

Hyperliquidity Provider (HLP)

HLP is a protocol vault that engages in market-making and liquidation processes, earning a portion of trading fees. It democratizes strategies usually reserved for institutional traders, allowing the community to contribute liquidity and share profit and loss (PNL). 

HLP does not have additional profit-sharing for vault owners, as it is fully community-owned. The deposit lock-up period for HLP is four days.

Creating and managing vaults

Anyone can create a vault by choosing a name, writing a description, and depositing at least 100 USD Coin (USDC). Vault leaders must always maintain at least 5% ownership of their vault. 

Depositors earn a share of vault profits, with proportional withdrawals ensuring liquidation prices remain stable. Users can browse and assess vaults via Hyperliquid’s platform to make informed investment decisions.

Deposits and withdrawals

Depositing into a vault is straightforward, with tracking on the “Portfolio” page. Withdrawals can be requested after the lock-up period, which is one day for user vaults and four days for HLP. If there are specific traders you admire or support, you can make deposits into their vault to get exposure to their trading strategies.

Here’s how deposits work in Hyperliquid: Suppose you deposit 100 USDC into a vault with existing deposits of 900 USDC. The total vault balance now becomes 1,000 USDC, and you own 10% of the vault.

Over time, the vault grows to 2,000 USDC through the leader’s trading activities without any additional deposits or withdrawals from you. When you decide to withdraw, you are entitled to 10% of the vault — 200 USDC. However, after deducting a 10% profit share (10 USDC) for the leader, you receive 190 USDC. Note that some slippage may occur as positions are closed during the withdrawal process.

This structure allows you to benefit from the vault’s performance without needing to make further deposits or withdrawals.

What is the HYPE token?

The HYPE token is the native cryptocurrency of the Hyperliquid blockchain, serving as the backbone of its ecosystem. It plays a key role in governance, staking and enabling advanced transactions within the HyperEVM. HYPE integrates utility, decentralization and community-driven incentives.

HYPE holders actively shape the network by voting on meaningful upgrades and changes, ensuring a decentralized decision-making process. The token also supports staking, allowing users to secure the network while earning rewards. 

Although most Hyperliquid transactions are gas-free, HYPE is essential for advanced operations, including smart contract interactions and powering decentralized applications (DApps).

The total supply of HYPE tokens is 1 billion. The following table illustrates the distribution of HYPE tokens:

How to trade on Hyperliquid

Trading on Hyperliquid is accessible via a standard DeFi wallet or by logging in with an email address. Onboarding is the first step before you begin trading.

Onboarding a DeFi wallet on Hyperliquid

For onboarding to Hyperliquid, you have two options: log in with your email or connect Hyperliquid to your DeFi wallet.

Here are the steps for onboarding Hyperliquid with your email:

1. Click the “Connect” button and enter your email address.
2. A six-digit verification code will be sent to your email. Enter the code to log in.
3. A blockchain address will be created for your email once logged in.
4. Deposit native USDC via the Arbitrum network from a centralized exchange or a DeFi wallet.

The following are the steps for connecting Hyperliquid to your DeFi wallet:

You must have an Ethereum Virtual Machine (EVM)-compatible wallet along with USDC and ETH on Arbitrum.

1. Visit Hyperliquid and switch to the Arbitrum network.
2. Click “Connect” and choose your wallet type. Approve the connection in your wallet extension.
3. Click “Enable Trading.”
4. Deposit USDC onto Hyperliquid, which requires ETH for gas fees. 

Did you know? As of Feb. 3, 2025, the total value locked (TVL) on Arbitrum was $13.62 billion, and its L2 market share was 32.2%.

Trading on Hyperliquid using a DeFi wallet

To trade with a DeFi wallet, you need an EVM-compatible wallet. Supported wallets include MetaMask, WalletConnect, Coinbase Wallet and Rabby. If you don’t already have one, download a browser extension and create a new wallet.

You will require USDC on Arbitrum as collateral for trading, while ETH is needed to cover gas fees for USDC deposits.

Native Arbitrum USDC differs from bridged USDC, so use the correct token while making transactions. Native Arbitrum USDC, issued directly on the Arbitrum blockchain by Circle, is fully redeemable through Circle. 

In contrast, bridged USDC originates from Ethereum or other blockchains and relies on third-party bridge mechanisms, which can introduce risks like depegging and smart contract vulnerabilities. On Hyperliquid, using native Arbitrum USDC provides better liquidity, lower slippage and reduced withdrawal risks compared to bridged USDC.

What are the trading fees on Hyperliquid?

Trading fees are calculated based on your rolling 14-day trading volume, starting with volume tracked from Feb. 26, 2015. All sub-account volume contributes to the master account’s total, and all accounts share the same fee tier. Vault volume is calculated separately. Referral discounts and rewards apply only to your first $25 million in trading volume.

Maker rebates are automatically paid per trade and sent directly to your trading wallet. Users can claim referral rewards on the Referrals page.

Unlike many other protocols where fees primarily benefit the team or insiders, Hyperliquid directs all fees to the community, specifically to the HLP and the assistance fund. For security, the assistance fund primarily holds HYPE, the most liquid native asset on the Hyperliquid layer 1 (L1). The fund’s system address (0xfefefefefefefefefefefefefefefefefefefefe) operates entirely onchain as part of the L1 execution and requires validator quorum for use in specific situations.

Risks associated with trading on DEXs like Hyperliquid

Investing and trading on DEXs like Hyperliquid carries inherent risks. Understanding these risks is crucial for making informed decisions. You need to be aware of the risks associated with using the Hyperliquid platform, ranging from smart contract vulnerabilities to market manipulation.

• Smart contract risk: Hyperliquid relies on the functioning of the underlying Arbitrum bridge smart contracts for security and functioning. You may suffer a loss in case of a vulnerability in these contracts.
• Network risk: Hyperliquid operates on its L1 blockchain, which has not undergone scrutiny as much as more established L1s like Ethereum. Due to consensus issues or other problems, the network may experience downtime.
• Market liquidity risk: New protocols tend to have low liquidity. On Hyperliquid, this may lead to significant price slippage for traders, affecting their trading experience and triggering losses.
• Oracle manipulation risk: Any technical issue or compromise on the oracle’s end may result in an inaccurate supply of data. If this continues for an extended period of time, liquidation may occur.

Hyperliquid has taken measures to mitigate the risks. One such measure is open interest caps, which combine liquidity, basis and leverage to prevent oracle manipulation attacks. It prevents orders from being placed further than 1% of the oracle price. Moreover, no new positions can be opened when an asset hits the open interest cap.

However, it’s essential to exercise caution when engaging with DeFi platforms, as they are not without risks. While the above safeguards enhance security, users should remain vigilant and understand the inherent risks of decentralized finance.