Hey Edge readers,
This week, we’re zooming in on the competitive world of perpetual exchanges. As the crypto market perks up, we break down how platforms like Hyperliquid are innovating derivatives trading and providing opportunities for users to earn substantial yields.
Here's what we're covering this week:
- What are perpetual exchanges?
We explore the state of perp exchanges with a spotlight on Hyperliquid.
- Lido enters restaking 🗞️
New stablecoins, BTC staking, and more.
Stay sharp. 🫡
– The Exponential team
What are perpetual exchanges?
Perpetual decentralized exchanges (Perp DEXs) have seen a notable resurgence over the past year, benefiting from a positive shift in crypto sentiment. Perp DEXs allow traders to engage in perpetual contracts—a type of derivative similar to futures but without an expiry date, allowing for price speculation of assets. Since September 2023, trading volumes on perp DEXs have consistently risen, hitting a peak of $230B in March 2024—an eightfold increase.
Much of this growth can be attributed to newer platforms like Hyperliquid and RabbitX which have both seen impressive growth. Their shares of monthly volume jumped from around 16% and 9% in January to 25% and 13% in April, respectively. Hyperliquid, in particular, now competes closely with market leader dYdX (total market share of 26% from v3 + v4), while older protocols such as GMX, Vertex, gTrade (Gains), and Synthetix have seen declines in perp volume as traders gravitate towards these emerging platforms.
Spotlight on Hyperliquid
Hyperliquid is a fully on-chain order book perpetuals exchange operating on its own optimized Layer 1 blockchain, utilizing Tendermint for consensus. Secured by a Proof-of-Stake mechanism, it incorporates standard staking and slashing processes. The Hyperliquid L1 is tailored specifically for derivatives trading, with the ability to handle up to 20,000 orders per second.
Funds are transferable via a dedicated EVM-compatible bridge on Arbitrum, secured by the same validator set that secures the Hyperliquid L1 blockchain. Deposits and withdrawals on the bridge are confirmed once more than two-thirds of the staking power has verified the transactions.
Hyperliquid enables trading over 100+ assets, including blue chips (BTC, ETH) and a wide variety of altcoins (full list here), with just USDC as collateral, and up to 50x leverage. The protocol plans to move to a fully decentralized and permissionless listing process in the future.
In the first quarter of 2024, Hyperliquid’s total trading volume exceeded $100B, marking a 6.5-fold increase from the previous quarter. The platform has also seen a surge in cumulative new users, now totaling over 130K, with approximately 7K daily unique traders
Earning yield on Hyperliquid
Investors can earn yield on Hyperliquid by providing liquidity to its Hyperliquidity Provider (HLP) vault. This vault engages in market making and liquidations, earning a portion of the trading fees. Here’s how it works:
- HLP example: Suppose you deposit 100 USDC into the HLP vault with existing deposits totaling 900 USDC. The vault’s total then becomes 1,000 USDC, and your share is 10%. If the vault grows to 2,000 USDC, and you decide to withdraw, you would receive 200 USDC, representing your 10% share.
The primary risk associated with HLP is potential losses from unsuccessful trading strategies. Similar to mechanisms like GMX’s GLP and GM pools, there is no guarantee that vault counterparties will lose money overall. Also note that deposited funds are locked and can be withdrawn after 4 days.
Over the past month, HLP vault’s PnL was over $5.8M, translating to an annualized return rate of about 25% on USDC.
Alternatively, users can also create their own vaults and get a 10% profit share from it. These vaults feature personalized trading strategies that can be shared with others. In practice, this is the same as copy trading.
Traders on Hyperliquid pay fees whenever a leveraged position action occurs (open, close, liquidation). Currently, 100% of trading fees are distributed to Hyperliquid liquidity providers and the insurance fund (used to backstop in case of bad debt).
Overall, Hyperliquid’s innovative approach and robust growth signify its potential as a leading player in the perp DEX landscape. For those interested in learning more about Hyperliquid vaults, remember to due your own research (DYOR) before investing.
In the news
- Lido proposes alliance to promote stETH-based restaking ecosystem - Read
- Liquity unveils new stablecoin with user-set borrowing rates - Read
- MarginFi to launch Solana LST-backed stablecoin later this month - Read
- pSTAKE among recent protocols to launch Bitcoin liquid staking solution - Read
- Jito DAO considers spending $29M on liquidity mining incentives - Read