Liquid HLP

Real yield, completely liquid.
Published

August 21, 2024

Modified

August 24, 2024

Series of posts: protocol overview, technical overview, and some scrap notes / material

Protocol Overview

Introduction

Hyperliquid was conceived with the goal of creating a performant decentralized perpetuals order book exchange. The mission was inspired by the experiences of the core contributors, notably the evident tradeoff between performance and decentralization among incumbent exchanges. On one hand, the performant functionality, more familiar to quantitative traders, offered by CEX platforms came with the costs inherent to centralization: opaque system design, priviledged parties, and custody risk, among others. On the other hand, existing decentralized alternatives were burdened by the limitations imposed by the turing-complete blockchains on which they operate, necessarily resulting in design comprimises which sacrifice the desired behavior of an exchange venue. These comprimises often end up harming both parties of a transaction: takers are preyed on through the imprecision of their intents and latency of execution, while makers leak value to the toxic flow of parties more informed from external venues.

Unlike the incumbent general purpose L1s, the Hyperliquid native blockchain was designed to precisely serve the requirements of a performant orderbook. With an extensive background in high frequency trading, the core contributors took an opinionated approach to the development of the protocol. Nearly all of the components of the platform were designed from first principles, from the rust-implemented HyperBFT consensus algorithm to the unique nonce structure utilized for order authentication. As a result, Hyperliquid been aggressively capturing market share and continuously solidifying product-market fit differentiation across the crypto ecosystem at large.

Hyperliquidity Provider (HLP)

The core contributors to Hyperliquid have been providing liquidity to the exchange since inception, bootstrapping the most fundamental component of an orderbook. The purpose of this bootstrapping effort was to service informed and liquid fills to early users, the core contributors have expressed their disinterest in short term gains from market making on the platform. But as always: don’t trust, verify. Aware of this cypherpunk expectation, the team verified their intention with permissionless deposits.

Hyperliquidity Provider (HLP) is a protocol vault which runs an ensemble of market making strategies, performs the liquidations of unhealthy positions on the platform, and receives a portion of trading fees. Unlike standard vaults on Hyperliquid, HLP does not have a fee structure for the vault leaders. The HLP vault is fully owned by the community, open for anyone to share in the pnl of the strategy.

The vault’s historical performance is an attestation to the competence and sophistication rarely seen in the crypto industry. The vault has delivered high-sharpe returns for many months, showing impressive resilience through market turmoil, all while vault deposits increased from $1mm to $250mm. At the time of writing, HLP stands as a strong candidate for the single best source, risk-adjusted, of real, dollar-denominated yield within the entire crypto ecosystem.

In more ways than one, the HLP vault is the embodiment of the things which make Hyperliquid unique.

Liquid HLP

Nexus is developing a protocol to enable liquidity on Hyperliquid vault deposits. Its core product is Liquid Hyperliquidity (LHLP), a liquid derivative token (LDT) which represents ownership of equity in the Hyperliquidity Provider vault. LHLP shares many similarities with the existing family of products known as liquid staking tokens (LSTs). Just as LSTs can be traded or used in DeFi applications while the original assets remain staked, LHLP can be utilized across the DeFi landscape while the underyling assets contribute to the HLP vault. By offering liquidity to HLP depositors and increasing capital efficiency, this mechanism plays a premier role in the unification of liquidity between the two Hyperliquid L1s.

Minting LHLP

  1. The user requests to mint LHLP via our dApp interface by entering the amount of USDC they wish to spend, and viewing the amount of LHLP they would receive.
  2. If the user agrees with the amount of LHLP, the user is able to click the “Mint” button which pops up on their selected wallet to sign an EIP712 style signature specifying the USDC amount and the LHLP amount they will receive.
  3. After the user signs the transaction with their wallet, Nexus validates the request & submits the transaction to the blockchain.
  4. Upon successful confirmation of the transaction, the mint is completed and the LHLP is transferred to the user’s wallet.

Redeeming LHLP

  1. The user requests to redeem LHLP via our dApp interface by entering the amount of LHLP they wish to redeem, and viewing the amount of USDC to receive.
  2. If the user agrees with the amount of USDC, the user is able to click the “Redeem” button which pops up their selected wallet to sign an EIP712 style signature specifying the LHLP amount and the USDC amount they will receive.
  3. After the user signs the transaction with their wallet, Nexus validates the request & submits the transaction to the blockchain.
  4. Upon successful confirmation of the transaction, the redemption is completed and the USDC is transferred to the user’s wallet.