Author: Saurabh Deshpande
Translation: Deep Tide TechFlow
Hello,
At the beginning of the year, I hinted that we would build liquidity positions from the balance sheet. Over the past few weeks, we have been steadily building Hyperliquid positions.
This aligns with our ongoing exploration of speed, profitability, revenue, and business models. Saurabh's article today elaborates on why we are investing in Hyperliquid.
For disclosure purposes, at the time of writing this article, we did not contact anyone at Hyperliquid. No marketing managers were harmed while writing this article. We will continue to invest, co-build, and research the future of on-chain market development. Our argument is that given Hyperliquid's ability to attract venture capital, it will become the primary avenue for building applications in the coming months.
Long before the term 'blockchain' emerged, merchants used a shared infrastructure known as the 'Silk Road.' Although this route has existed for centuries, it was considered dangerous and inefficient. Local warlords charged tolls, bandits attacked caravans, and merchants had to deal with dozens of different legal systems and currencies. Each trading post operated independently, hoarding information and charging fees based on market tolerances.
During the peaceful period of the Mongols, Genghis Khan improved the business environment by unifying the fragmented Silk Road. Eastern European merchants could now travel to China without worrying about their lives. Moreover, they could operate under a unified legal framework, using standardized measurements and protected by the same security forces. The Mongols established a system called 'Yam' (deep tide note: relay station providing food, shelter, and spare horses for Mongolian army messengers), a relay network composed of relay stations, horses, and sealed tablets (deep tide note: paiza, meaning 'imperial tablet', is a plaque carried by Mongolian officials and envoys to signify certain privileges and authority). This allowed merchants to cover greater distances and improved the transportation of goods.
Yams function like easily replicable nodes. They create network effects that strengthen the entire system with the addition of each new participant. The more merchants use the route, the higher the security, the more reliable the service, and the lower the costs for everyone. The Mongolian trade network lasted for centuries, achieving one of the greatest knowledge, technology, and cultural exchanges in the medieval world.
Humans have always solved scaling business issues this way: by building shared infrastructure that strengthens with each new participant. Later monumental inventions resemble derivatives of the Silk Road, helping us conduct business more efficiently. With the emergence of steamships, telegraphs, and container ships, we reduced the cost of transporting goods to several basis points, bringing it closer to zero. Today, even in the realm of digital finance, value transfer relies on networks with fundamentals that remain unchanged.
Financial markets have a simple truth: capital needs to flow, and it needs to flow efficiently. Joel has explored this in his book (Capital Flow). The blockchain world has been building a tech stack for years while largely overlooking this fundamental principle. Most DeFi protocols launch with great fanfare, attracting some initial liquidity during the incentive period, only to watch users and trading volume shift to the next hot project offering higher returns. This is a predictable pattern in DeFi.
Traditional finance is not inclusive. But those with access to channels can gain leverage to increase profits. Dollars are re-collateralized across different trades behind the glass doors of banks and prime brokers. The same collateral is used for different positions. As a result, the utilization of the entire engine approaches 100%. But only a few institutions have access to this control.
DeFi has opened these gates: anyone with a browser can borrow, swap, or hedge. But the cost of openness is that collateral is stranded. Isolated margin accounts, over-collateralized loans, and liquidity pools that cannot communicate with each other. In the chart below titled 'Permissionless Markets vs. Capital Efficiency Markets', traditional markets squat in the bottom right corner, DeFi lingers in the top left corner, while the top right corner remains empty. Hyperliquid's bet is to plant a flag in this blank space. This is important because if financial institutions are to use blockchain infrastructure, they will not do so just because it offers permissionless access. They want a system that is as efficient as their existing systems. Without institutional adoption, cryptocurrency will not unlock the next growth phase.
Our previous articles about Hyperliquid primarily focused on exchanges. This article will explore the Hyperliquid ecosystem and how it attempts to change the capital efficiency and liquidity of DeFi.
Hyperliquid's bet is that 'less is more', reducing interference and unnecessary actions allows for better accumulation and growth of wealth. And critically, it will bring its friends along. Hyperliquid does not attempt to be a universal computer or a metaverse theme park. It aims to become the financial district of Manhattan, squeezing into a single matching engine.
The question is, can Hyperliquid turn the exchange into a gravity well of such density that capital cannot escape? The answer lies in two interwoven ideas: how fast value circulates and how difficult it is to detach value.
Capital Transfer
First, blockchains are about money. This may sound obvious, but it is worth examining what 'transferring funds' actually means in practice. The Silk Road succeeded because it made trade easier, faster, and safer than other methods. But it was not unique. Throughout history, many have amassed wealth by controlling integrated infrastructure networks.
The Rothschild family is renowned in the financial services industry, but their fortune was built on a powerful information network in 19th century Europe. While other financiers had to wait days for news via horses and ships, the Rothschilds used carrier pigeons, private messengers, and strategically placed telegraphs to transmit market intelligence within hours. The family later invested in railroad construction across Europe, not for the transportation income, but because railroads were the arteries of 19th-century commerce. Controlling the railroads meant controlling the economy.
JPMorgan in the U.S. has also adopted a similar strategy. He funded railroad construction and organized industries around the railroads. He integrated competing rail lines into a comprehensive network, standardized the track gauge so that trains could truly connect, and eliminated redundant lines. When Andrew Carnegie needed to transport steel from Pittsburgh, he chose to use Morgan's railroads. When John D. Rockefeller needed to transport oil from Pennsylvania to the refinery, he chose to make a deal with Morgan's railroad empire.
Morgan's real innovation lay in the vertical integration of the infrastructure itself. He controlled the steel companies building the railroads, the banks providing funding for expansion, and the railroads transporting goods. This almost became the circulatory system of American capitalism. By the time he completed all this, you could not transfer funds, materials, or information within the U.S. without paying Morgan at some point in the chain.
Any chain that enables smooth capital flow between its various parts has an inherent advantage.
Stablecoins have become the killer application of cryptocurrency. As of June 22, Ethereum, Solana, and Tron have transferred a value of $12.2 trillion in stablecoins by 2025. Major blockchains have found their niche in the way stablecoins are transferred. Tron has become the dominant network for payments in emerging markets, while Ethereum handles larger institutional transfers, and Solana excels at high-frequency, low-value transactions.
Solana became the preferred platform for memecoin trading in 2024. This is reflected in the speed of stablecoin trading on Solana. With a stablecoin supply of only $1.8 billion, it settled $11.5 trillion worth of stablecoins. In other words, each stablecoin was traded over 6,300 times. With the rise of AI agents, trading activity on Base also surged. Due to the lower supply, the trading speed of stablecoins in 2024 was excessively high. However, Base was the only chain to settle more stablecoins in its selection. By 2025, the number of stablecoin trades on Base exceeded 1,700.
These numbers indicate that when fees approach zero, the behavior of money changes. On Ethereum, when the cost of a transaction is $10, small traders are less likely to regularly invest $50 or $100. But on Solana, we often see this, with fees below a cent. Exchanges, liquidity providers, and MEV extractors profit from fees and slippage. Validators profit from bribes by MEV extractors. You are not making high profits on small transactions, but rather small profits on massive trading volumes. When friction disappears, speed is everything.
On-chain activities can be divided into two parts - high-value activities (like Ethereum for its high liquidity) and low-value but high-frequency activities (like Base and Solana). Is it possible for both types of activities to exist simultaneously on one chain? Hyperliquid's approach is intriguing. Its ecosystem is not optimized for one type of capital flow but provides infrastructure for all types of capital flows.
The Hyperliquid ecosystem consists of two parts.
Hyperliquid DEX is powered by HyperCore, which is a native L1 order book system, and
HyperEVM is a high-performance blockchain based on EVM built by the Hyperliquid team.
While these two are building blocks, precompiles and builder code serve as distribution mechanisms.
Precompiles are specialized smart contracts used to connect HyperEVM and HyperCore, enabling seamless data access and execution across environments. These contracts allow developers to directly access trading data such as perpetual contract positions, spot balances, value equity, oracle prices, and staking delegations.
The builder code on Hyperliquid serves as a recommendation-like identifier that developers can use when building applications or tools on the platform. When users interact with Hyperliquid through a developer's application (such as a trading bot or interface), the developer's builder code receives rewards. This allows them to earn a share of the transaction fees generated by users. This creates a direct revenue stream for developers building valuable tools and applications within the Hyperliquid ecosystem.
Improving Capital Efficiency
Traditional DeFi lending protocols are extremely inefficient in managing collateral positions. On Ethereum-based platforms like Compound or Aave, liquidating a $100,000 USDC loan backed by $150,000 worth of ETH requires multiple costly operations:
Oracle price calls consume 80,000 gas ($10-30),
External DEX swap costs 150,000 gas ($15-50), and
Slippage loss due to AMM mechanisms ranges from 0.5-2% ($500-2000)
Front-running liquidators extracting MEV adds about 1% more value loss, usually resulting in total inefficiency of $500-3,000 per liquidation.
Hyperliquid's precompile functionality eliminates these inefficiencies by directly integrating the order book. Lending smart contracts can use the reading precompile feature to directly read price data from the HyperCore order book and send liquidation orders directly by writing to the system contract HyperEVM. The same $100,000 liquidation scenario only requires 2,100 Gas for price data retrieval and 47,000 Gas for execution. This significantly reduces costs compared to traditional Ethereum-based protocols while eliminating slippage by accessing over $2 billion in order book liquidity.
The result is that liquidating $100,000 through lending applications on Ethereum costs about $27, plus around $15,000 in value leakage through MEV, while it costs less than $5 on Hyperliquid.
Protocolized Liquidation
Precompiles support protocolized liquidation, where lending protocols implement an automatic liquidation mechanism similar to the perpetual contract system on HyperCore.
In traditional finance, when you cannot meet the margin call, your broker will immediately sell your stocks at market price. This is convenient and does not cause any loss of value because they can directly access the deep market.
In most DeFi protocols, the situation is more complex. When your loan encounters issues, the protocol has to find someone willing to liquidate you, then hope they can sell your collateral across multiple exchanges without suffering too much from slippage. It's like having to sell your house through a series of intermediaries rather than directly on the market.
Hyperliquid operates more like traditional finance. When your collateral falls too low, the smart contract sells it directly into the deep order book that handles billions in daily transactions. Your position is closed at a fair market price without having to find someone to take over your loan and leak value.
This architecture improves capital efficiency at the protocol level. Traditional DeFi protocols maintain separate liquidity reserves, often offering a loan-to-value (LTV) ratio of 75% due to execution risk. Liquidity-based lending protocols can eliminate buffers and offer LTV ratios of over 90% because liquidations are executed with the assurance of deep liquidity. This enables users to deploy capital more efficiently while maintaining the same risk profile.
Liquidity as a Moat
Liquidity is the soul of financial applications. If your product is great but lacks liquidity, it does not count as a product. In traditional DeFi applications, liquidity is mostly a zero-sum game. DeFi is somewhat composable, but we have not truly unified liquidity. When one platform has liquidity, others lack it.
Chains like Ethereum face a problem: when Aave needs to liquidate large positions, it must break them into separate blocks (which reduces Gas efficiency) to obtain liquidity from different platforms, or risk slippage losses. As mentioned earlier, for a $100,000 liquidation, Ethereum typically ends up paying about $1,000 to different intermediaries. This is why projects are forced to integrate with multiple external DEXs, increasing complexity, gas costs, and execution risks while still failing to guarantee optimal pricing.
On the surface, this is merely a liquidity issue. However, it spills over and occupies the team’s scarce resources. Ultimately, poor execution is detrimental to the protocol. Thus, founders end up spending their precious time on activities that are not core to the business. If you are a lending protocol, one of your core goals is to increase loan volumes. Of course, figuring out how to liquidate bad debts is also important. But if there's a better way to access large liquidity pools, it means you don't have to worry about finding the optimal way to liquidate risk positions; you can spend your time on development rather than maintenance.
New protocols often launch with minimal liquidity, leading to the 'chicken or egg' problem, where traders avoid the platform due to poor execution, which in turn prevents liquidity providers from earning their deserved fees.
Reflecting on how our traditional financial system has solved these issues often makes sense. Exchanges like London, New York, and Mumbai ultimately win because everyone trades there. There were no L2s to segment users, nor liquidity brought by L2s. The network effects in finance are particularly strong because they have a compounding effect: more participants mean better prices, which in turn attract more participants, ultimately creating even better prices.
Hyperliquid is addressing this issue by strengthening liquidity collaboration. Do you think your application can bring liquidity and benefit from it?
Hyperliquid's builder code is a permissionless fee-sharing mechanism that allows DeFi developers to earn from the trades executed by their applications. They attempt to solve the issue of fragmentation by allowing all applications to access the same unified liquidity pool of over $2 billion, making Hyperliquid one of the most liquid exchanges in the cryptocurrency space. All projects built on HyperEVM can easily leverage this liquidity.
Applications built with builder code do not compete for liquidity but contribute to and benefit from the shared liquidity layer. When users trade through any builder code application, they access the same deep order book as the core Hyperliquid exchange. This applies to mobile wallets, trading bots, and complex DeFi protocols.
This architecture means that newly launched lending protocols do not need to build liquidity themselves or integrate with multiple external decentralized exchanges (DEX). Lending smart contracts can use the precompile mechanism to read prices directly from the HyperCore order book and send liquidation orders directly by writing to the system contract, achieving instant access to institutional-level liquidity depth. The protocol benefits from the same liquidity that serves billions of transactions daily, ensuring efficient liquidation regardless of the protocol's establishment time or scale.
Builder Code Network Effects
In most DeFi ecosystems, new applications are like new restaurants opening on the same street. They compete for the same customer base, dividing the existing pie. On Ethereum or Solana, when a new DEX launches, it must convince users and liquidity providers to leave Uniswap or Raydium. It's a zero-sum game: the gains of one application are the losses of another.
Builder code completely overturns this. Every new application on Hyperliquid actually enhances the entire ecosystem, just like adding a new store to a shopping mall. When a new trading bot goes live and brings in 1,000 active users, these users increase trading volume for HyperCore's liquidity pool (which all other applications use). The higher the trading volume, the better prices everyone can get. The stronger the execution of lending protocols, the smaller the spreads on derivatives platforms, and even competing trading bots can benefit from deeper liquidity.
This is a positive-sum game, as when the shared infrastructure becomes stronger, everyone wins. Rather than fighting over a fixed share, let each new participant contribute to a larger pie for others.
With liquidity now achievable in just a few lines of code, the quality of applications becomes even more critical.
This dynamic turns the traditional fragmentation of DeFi liquidity on its head. These protocols no longer launch with empty order books or extremely low AMM liquidity; instead, they immediately inherit the execution quality of the entire Hyperliquid ecosystem. Derivative trading applications launched today can offer the same tight spreads and deep liquidity as established protocols, eliminating the typical barriers to entry faced by existing platforms.
The unified liquidity model also enables complex cross-protocol interactions that were previously unachievable. Decentralized hedge funds can execute complex multi-asset strategies across different builder code applications while maintaining consistent execution quality, as all trades are ultimately settled based on the same order book.
This reminds me that every factory used to be half a power plant. Due to transportation limitations, electricity could only be produced within the factory. Factories had to install steam engines, constantly feeding coal to the boilers, while intricate belts ran to massive overhead drive shafts. A large part of the workforce spent the whole day feeding coal, tightening pulleys, and lubricating bearings. These jobs could only maintain the factory's lighting without improving the quality of the products on the production line.
Subsequently, public AC power grids and small electric motors emerged. Factories could now purchase kilowatt-hours just like buying water. Maintenance personnel decreased; workshop layouts became flexible; management's focus shifted from 'keeping the boiler pressure' to 'how to double the output?'.
The role of builder code is similar. It frees developers from merely acquiring and managing liquidity. They can prioritize user experience and focus on building applications with outstanding experiences.
HyperEVM Ecosystem
The HyperEVM ecosystem has rapidly grown into a comprehensive DeFi infrastructure with a total value exceeding $1.5 billion, covering over 100 projects. HyperEVM uses the same HyperBFT consensus mechanism as HyperCore, allowing direct interaction with spot and perpetual contracts through precompiles and system contracts. HyperEVM | Hyperliquid Documentation. This unique architecture enables protocols to build complex financial applications leveraging the liquidity of the native order book while maintaining full compatibility with the EVM.
Chart: Note - This market map is not exhaustive.
The scope of the project is extensive, ranging from lending markets to liquid staking, and then to synthetic assets. But they all benefit from the same unified liquidity layer. Applications from different industries are being built on Hyperliquid.
Loans and Money Markets:
HyperLend ($470 million TVL) - A primary lending protocol that directly accesses order book liquidity for instant, efficient liquidations.
HypurrFi ($319 million TVL) - The home of leveraged lending markets and the USDXL stablecoin, backed by U.S. Treasury bonds.
Unit Protocol - Introduces BTC, ETH, and SOL as uBTC, uETH, etc., into Hyperliquid's bridging layer.
Felix Protocol - A multi-collateral stablecoin (feUSD) that reduces reliance on external stablecoins.
Exchanges:
HyperSwap and KittenSwap - AMM-based DEXs handling $75 million in daily trading volume, unlike major exchanges, they still need to guide their own liquidity.
Liquid Staking:
StakedHYPE - Simple liquid staking, stHYPE automatically compounds rewards
Kinetiq - Smart validator selection system that automatically delegates to the highest-performing validators
LoopedHYPE - Automatic leverage loop staking rewards, with potential annual returns exceeding 10% through 3x to 15x leverage.
The rapid growth of the ecosystem suggests that eliminating liquidity routing friction will yield significant benefits. With the launch of protocols and the convenience of instant access to deep liquidity, the total locked value (TVL) of HyperEVM has steadily climbed to $1.5 billion.
What does all this mean?
I believe Hyperliquid has four obvious advantages.
First, of course, instant access to deep liquidity while reducing execution risk. Launching on Hyperliquid means immediate access to a powerful liquidity pool that serves billions in daily transactions. This eliminates the typical cold-start liquidity challenges that plague new protocols. Moreover, direct access to unified liquidity can significantly reduce execution risks like slippage and MEV extraction, ensuring that trades are smoother and safer from the start.
The second is permanent fee sharing. Builder code provides a sustainable economic model by embedding a permanent fee-sharing mechanism in each transaction. This ensures that protocols can continuously gain revenue proportional to the actual value they create, rather than relying on temporary incentives or unsustainable liquidity mining schemes.
The third is a focus on development. Developers can freely allocate their energy and resources to building better products and optimizing user experiences. They no longer need to spend significant time, capital, or effort maintaining liquidity incentives, managing funds, or negotiating with partners to sustain liquidity.
BasedApp exemplifies this. They did not spend months building trading infrastructure from scratch; instead, they focused on what users truly want: 'holding, trading, and using cryptocurrency in the real world.' After launching their mobile app, they can fully access Hyperliquid's liquidity for perpetual contract trading and combine it with their established Visa card infrastructure for real-world spending. As founder Edison Lim said, they can focus on creating 'the operating system for on-chain finance' rather than solving liquidity routing issues.
Finally, the cross-protocol synergies. Each new protocol enhances the shared liquidity ecosystem, creating a virtuous cycle where increased activity attracts more participants and further deepens the liquidity pool. This interconnected manner creates lasting network effects, benefiting all participants and ensuring the ongoing growth of the ecosystem.
Most ecosystem building follows a similar strategy: providing funding to developers and organizing hackathons. These approaches have their value but overlook the fundamental issue. The real resistance lies in the ongoing competition for liquidity, rather than a lack of capital or ideas. Each emerging protocol must fight for its own liquidity through connections and then contend with profit-driven capital when incentive mechanisms fail. Builder code completely disrupts this burden. After access, inherit a $2 billion order book and earn a share of the fees based on the traffic you generate. Teams like Lootbase can focus their efforts on the product without worrying about fragmented liquidity provider (LP) incentive mechanisms.
For developers, this creates a fundamentally different value proposition. On other chains, you might get $50,000 in funding to build a DEX, but then spend six months convincing market makers to provide liquidity and spending a lot of time on incentives. On Hyperliquid, you can access over $2 billion in order book liquidity from day one. Your success depends on building a great product, not on your ability to persuade venture capitalists to fund liquidity mining.
Hyperliquid will not offer funding sponsorships and accelerator projects in the traditional sense. You won’t receive full guidance during development, nor guaranteed market support. Instead, you gain the infrastructure needed to build applications that can operate correctly from day one. If you can create real value for users, builder code will ensure you receive fair economic returns.
Hyperliquid will face competition from new chains like MegaETH and Monad, which are about to launch and have impressive technical specs. Whether these new chains can rival Hyperliquid's shared liquidity and capital efficiency approach remains to be seen. Technical performance is a key point right now, while economic design is the fundamental factor in creating lasting value.
