Introduction
The cryptocurrency market is witnessing a significant shift in how liquidity is provided and managed. At the forefront of this change is HyperLiquid’s HLP (HyperLiquid Liquidity Provider), a innovative solution that’s democratizing market making strategies. This analysis delves into the current state of crypto market making, the challenges faced by token projects, and how HLP is reshaping the landscape.
Table of Contents
Market Making Overview
The crypto industry has seen a rise in custom agreements between token projects and market makers aimed at bootstrapping liquidity. Market makers play a crucial role by providing continuous buy and sell orders, ensuring tokens remain actively tradable.
Why Token Projects Seek Market Making Partnerships
- Price Stability: Tightening bid-ask spreads to enhance stability and reduce manipulation risks.
- Liquidity: Providing balanced liquidity on both sides of the order book for easier trade execution.
- Cross-Exchange Arbitrage: Aligning token prices across centralized exchanges (CEXs) for consistency.
Common Market Making Deal Structures
Two prevalent models have emerged, often disadvantaging inexperienced project teams:
- Retainer Model: Projects provide cash and tokens, with costs ranging from $2,000 to $20,000 monthly. Projects retain all PnL from market-making activities.
- Loan & Call Option Model: Market makers take a token loan (0.5% to 1.5% of total supply) for 12-18 months, pairing it with their stablecoins. Call options are introduced to limit risk but can be structured unfavorably for projects.
Many teams, lacking expertise in derivatives, options, and financial instruments, are frequently outmaneuvered by more experienced market makers, leading to unfavorable terms.
This situation often results in poor outcomes for project teams, who either face high monthly fees or disadvantageous deal structures, particularly in setting call option strike prices.
HLP Overview
HyperLiquid’s Liquidity Provider (HLP) aims to democratize market-making strategies by allowing everyday users to participate in providing liquidity to token projects. This creates a win-win situation:
- Users gain access to returns typically reserved for highly technical teams or privileged players on centralized exchanges.
- Emerging projects secure liquidity without falling victim to predatory market-making agreements.
HLP operates as a protocol vault engaging in market making and liquidations, earning a share of trading fees. Key features include:
- Open participation with USDC contributions
- No fees charged by the vault
- PnL distributed proportionally to depositors
- 4-day deposit lock-up period
HLP Mechanics
HLP’s operations revolve around calculating a fair price using tick data from both Hyperliquid and major CEXs. It then executes market making and taking strategies around this fair price, aiming to provide profitable, 24/7 liquidity.
Sources of Alpha
HLP’s primary sources of alpha include:
- Market making
- Funding
- Fee accrual
Trading fees, introduced on June 13, 2023, initially accrued fully to HLP. Since August 12th, these fees have been split between HLP, the insurance fund, and the open interest incentive program.
Liquidations
On August 9th, HLP began executing backstop liquidations when an account’s equity falls to ⅔ of its maintenance margin. Both market making and liquidation strategies now operate under the same protocol vault.
Vaults on HyperLiquid
Hyperliquid has expanded its vault system, allowing anyone to manage a vault with advanced features similar to the DEX. This development has led to the creation of user-owned vaults, offering new opportunities for liquidity provision and trading strategies.
Key Features of User-Owned Vaults
- Open deposits for profit sharing
- 10% performance fee for vault owners
- Vault leaders must maintain ≥5% of the vault TVL
While over 89 user-owned vaults have been deployed, they account for just 5.5% of the total vault TVL. The majority of deposits remain concentrated in HLP and its component strategy vaults.
Our hyperliquid vault screener tracks 22 different metrics and allows users to find the best vault to deposit into. You can screen for top vaults here.
Key Takeaways
- HyperLiquid’s HLP is democratizing market making in crypto, offering opportunities for both everyday users and emerging projects.
- Traditional market making agreements often disadvantage inexperienced token projects, leading to unfavorable terms and high costs.
- HLP provides a transparent, fee-less structure for liquidity provision, with profits distributed proportionally to depositors.
- The expansion of user-owned vaults on HyperLiquid presents new opportunities for diversified liquidity provision and trading strategies.
- Despite the proliferation of user-owned vaults, deposits remain heavily concentrated in HLP and its component strategies, indicating strong user trust in the protocol-managed approach.
Conclusion
HyperLiquid’s HLP represents a significant evolution in crypto market making, addressing longstanding issues of accessibility and fairness. As the DeFi landscape continues to mature, solutions like HLP may play a crucial role in fostering a more equitable and efficient market structure. For investors and projects alike, staying informed about these developments could prove pivotal in navigating the ever-changing cryptocurrency ecosystem.
How do you see innovations like HLP impacting the future of liquidity provision in crypto markets? Share your thoughts and experiences in the comments below.
