Original Article Title: Taking a Step Back: Hyperliquid Fundamentals
Original Author: vikramcantsingh, Director at the University of Pennsylvania Blockchain Association
Original Translation: DeepSeek

Editor's Note: The article analyzes how Hyperliquid is breaking traditional market inequality through its on-chain order book, providing a fair trading environment. It also explores its technical innovation, potential use cases (such as non-custodial BTC transactions), and challenges (such as regulatory pressure). The article also values Hyperliquid's native token HYPE, predicts its future revenue growth, and believes that Hyperliquid has the potential to become a disruptive on-chain liquidity hub.

The following is the original content (slightly reorganized for better readability):

Amidst the turmoil in the stock market and cryptocurrency market within a precarious macro environment, I believe taking a step back to examine the fundamentals is crucial. Price declines weed out traders and present entry opportunities for new first principle investors. This is especially felt in assets like HYPE, where the majority of holders are perpetual futures traders (due to the airdrop distribution nature). Therefore, a downward market trend leads to these perpetual traders being liquidated, forcing them to sell HYPE to replenish collateral, resulting in a widespread HYPE sell-off. Conversely, volatile market conditions typically lead to higher volumes and subsequently higher fees, making HYPE more attractive to fundamental investors.

We will discuss:

· Why I am excited about Hyperliquid today?

· Long-term outlook on Hyperliquid

· Potential hurdles

· Comparative valuation model for HYPE

Why I Am Excited About Hyperliquid Today?

I believe a high-performance on-chain order book will bring a transformative improvement to the existing paradigm. The market should be a place where investors meet on equal footing, but today's market is inherently skewed towards institutions and high-frequency trading firms at a foundational design level. The on-chain order book changes this, and Hyperliquid provides the means to achieve this goal.

In traditional finance, high-frequency trading firms spend millions of dollars to colocate servers near stock market servers, while retail users need to spend thousands of dollars on setting up and maintaining personal custodial servers. Similarly, centralized cryptocurrency exchanges create an unequal market through in-house market-making agreements and prioritized server hosting. Through the on-chain order book, Hyperliquid enables anyone to establish their Citadel and Jane Street at almost zero cost. Furthermore, Hyperliquid's robust and user-friendly SDK provides a smooth entry point for non-native crypto users to explore various strategies.

While users may not be able to surpass Wintermute in the market, they at least have an equal opportunity, a paradigm that didn't even let them play. Additionally, users can utilize Hyperliquid's native liquidity pool HLP to earn around a 10-20% annual percentage yield.

Through the above means, Hyperliquid has created an equitable market. I am particularly excited about the following developments in Hyperliquid's future:

1. Unhosted BTC/SOL/ETH and related applications: People want an on-chain venue to trade and lend out their BTC. Through @hyperunit, Hyperliquid offers one of the most seamless ways to bridge BTC to an on-chain venue. By providing spot and perpetual contracts on the same platform, Hyperliquid enables low-latency trading strategy settlements. Therefore, I look forward to seeing use cases such as on-chain spot-futures basis trading, spot Delta hedging, and real-time settlement of options positions.

2. Stocks and other RWA + Hyperliquid backend/TradFi frontend: The Unit team is reportedly building a solution to bring stocks and RWAs into the Hyperliquid order book. While I anticipate on-chain demand for this, I am more excited to see Hyperliquid serve as a blockchain and liquidity channel, bringing opportunities previously out of reach to emerging markets. For example, imagine offering AAPL stocks to non-US markets through an interface using the Hyperliquid order book backend while hiding the "blockchain" part on the frontend; this is not unrealistic.

3. BTC and HYPE as collateral: Currently, Hyperliquid only allows USDC as collateral for perpetual contracts. With BTC and HYPE being used as collateral for perpetual contracts, traders will liquidate assets due to margin calls. Providing BTC and HYPE can reduce selling pressure and improve capital efficiency.

4. Native USDC: Hyperliquid currently offers USDC bridged from Arbitrum. Therefore, without bridging it back to Arbitrum, it cannot be redeemed for USD as it is locked in a smart contract. Additionally, bridged USDC is incompatible with CCTP. Therefore, with the deployment of native USDC, Hyperliquid will unlock more capital efficiency.

5. Launch of the lending market: This will bring more activity as HYPE airdrop holders can now lend out their HYPE and become more active market participants. I look forward to seeing lending protocols like @felixprotocol go live.

6. Direct Onboarding: Solutions such as @HanaNetwork allow you to deposit and withdraw directly from Apple Pay, PayPal, Wise, and debit cards. Reducing onboarding friction will increase activity.

7. Bringing Non-Crypto Users Onto the Chain: Hyperliquid is the first crypto application some of my non-crypto friends have started using. Most of them were onboarded through @pvp_dot_trade, where we had a trading competition. Even after the rewards program ended, they remained sticky users.

Long-Term Outlook

Based on the factors above, I believe Hyperliquid will become a powerful liquidity magnet. As we have seen many times in the crypto space, liquidity begets liquidity. Therefore, I see Hyperliquid becoming the leading trading and liquidity hub for all on-chain activity.

As mentioned, native non-custodial BTC will unlock a range of new opportunities at the intersection of high-performance CLOB and BTC liquidity. This will bring deeper liquidity to the CLOB itself, AMMs on EVM, and lending pools. To some extent, we may also see spot ETH/SOL + other altcoin migration to Hyperliquid. This will take market share away from DEXs on other chains, depleting their order books and liquidity pools.

I also believe Hyperliquid will compete with CEXs for token listings. This has been evidenced by projects like Swell and Plume buying code on Hyperliquid. Purchasing code on Hyperliquid grants you access to Hyperliquid's liquidity. As code auctions occur every 31 hours, there are only about 282 auctions per year. As Hyperliquid becomes the de facto on-chain trading venue, the "code space" will become increasingly expensive but may still be cheaper than giving 5% of your token supply to Binance. If Hyperliquid successfully becomes a liquidity hub, I believe we can expect the average code auction price to be around $500,000.

Lastly, as mentioned above, I believe Hyperliquid's backend/retail frontend application will bring financial opportunities to non-U.S. markets that were previously untapped and unlock liquidity from user groups currently untouched by crypto.

Potential Obstacles

1. Regulatory Pressure: Hyperliquid does not ally with MAGA, while several other chains have been catering to Washington politicians. The World Liberty Finance token purchase is a clear example of this. Additionally, some VCs are investors in competing chains and DEXs. Since its inception, Hyperliquid has been taking liquidity and mindshare away from these chains and DEXs, and they have strongly opposed the regulatory legitimacy of Hyperliquid. As Hyperliquid lacks advocates in the U.S. like they do, some regulatory pressure should naturally be expected in this regard.

2. EVM Rollout: The quality of the Hyperliquid EVM alpha version is not as good as HyperCore. Issues such as low Gas limit, occasional slow block times, and lack of native USDC have led to slow application deployment on HypeEVM. Therefore, improvements are needed and are expected to be rolled out soon. Additionally, if EVM applications fail to bring new applications or have low TVL/transaction volume, we may see a loss of mindshare, leading to TVL flowing to other L1/L2 solutions such as Monad and MegaETH. However, based on my conversations with developers, the Hyperliquid team is actively collaborating with applications to gather feedback on HyperEVM and implement improvements at a rapid pace.

3. Validator Network: While Hyperliquid is moving towards a permissionless validator system, the details of what validators specifically do are obscured by an opaque binary file. To become a secure liquidity hub through true decentralization over time, Hyperliquid needs to become more transparent.

HYPE Comparative Valuation Model

Below, I attempt to provide a simple price-earnings ratio analysis for Hyperliquid's native token, HYPE, over the next four years.

I believe it is crucial to perform this analysis with an understanding of the Impact Fund Buyback. Inspired by @Keisan_Crypto's analysis, we introduce the concept of Adjusted FDV, where Adjusted FDV = Price * Adjusted Fully Diluted Supply. Here, we define the next year's Adjusted Fully Diluted Supply as the previous year's Fully Diluted Supply - AF Buyback - Burn.

For those unfamiliar with the Impact Fund, fees collected on Hyperliquid flow into an Impact Fund, which buys back HYPE from the open market, reducing the supply. In this analysis, we assume that HYPE bought back by the Impact Fund will never re-enter the open market, similar to being burned.

Hyperliquid has three main revenue streams: transaction fees, EVM fees, and auction fees.

Note: We assume a HYPE token price of $15 in the calculations below.

Transaction fees are collected when users open and close perpetual contracts. To predict Hyperliquid's annual transaction fees, I first obtained 12 months of weekly revenue from December 23 to March 10. Then we annualize the four-week rolling average revenue in eight instances to estimate the annualized transaction fee. Therefore, I estimate that Hyperliquid should collect approximately $6 billion in transaction fees in 2025.

However, while this can serve as a nice proxy for 2025, it is difficult to infer the year-over-year growth rate from this approach for 2025-2028. Therefore, we referred to the smoothed historical perpetual trading volume on CEX and assumed that Hyperliquid would occupy a certain percentage of the CEX total trading volume. This allows us to better capture the cyclicality of crypto trading volume. We then assumed that Hyperliquid's percentage share would be within a certain range each year. Simply assuming a 5% market share in a particular year could lead to generalized conclusions. Therefore, we assume that in 2025, Hyperliquid will account for 3-6% of the trading volume, and frame the captured volume as 3% + [(6%-3%) * RAND()]. This range-based analysis provides a more realistic monthly trading volume capture scenario. Furthermore, assuming an average fee of 0.025% of the trading volume for Hyperliquid, we can conclude that Hyperliquid will earn approximately $600 million in transaction fees in 2025. We observe that this figure is close to our previous 4-week rolling average method, thereby reinforcing our findings.

Continuing the trading volume capture analysis, we assume that Hyperliquid's market share increases year by year. Therefore, we assume that Hyperliquid will hold 3-6% in 2025, 6-8% in 2026, 8-10% in 2027, and 10-12% in 2028. We summarize our findings below.

We estimate EVM fees as a function of the annual revenue of other L2 solutions (such as Base). Given the novel nature of HypeEVM and its inherently low Gas costs, I expect HypeEVM to capture 50% of Base's annual revenue in 2024. Therefore, I estimate that Hyperliquid should collect approximately $54 million in EVM fees in 2025.

Finally, as mentioned earlier, Hyperliquid conducts a code auction for its spot market. To estimate the revenue from code sales, we first need to consider the distribution of the code prices themselves. By analyzing previous data and based on our prior code space theory, I believe a normal distribution is sufficient to map out the auction prices for a year. The following graph describes the distribution and the revenue at each price range. Therefore, I estimate that Hyperliquid should collect approximately $40 million in auction fees in 2025.

This means that only in 2025, Hyperliquid will collect approximately $700 million in fees. Considering that the majority of fees are expected to flow to the Aid Fund for HYPE buybacks, this alone brings $700 million in buying pressure to HYPE from the Aid Fund.

Assuming the HYPE held by the Aid Fund is effectively burned (never to re-enter the market), along with the projected 176,113 HYPE burned from HyperCore transaction fees, around 46 million HYPE tokens will be taken out of circulation in 2025.

Therefore, with fee increases and a decrease in supply, HYPE's price-earnings ratio decreases annually, making it a more valuable asset. Furthermore, this periodic removal of HYPE from supply also helps better absorb token unlocks from the Hyper Foundation, team, future emissions, and community rewards.

We will assume that EVM and auction fees roughly follow the same year-over-year growth rate as transaction fees. This allows us to compile the final financial statements as shown below:

Finally, we will compare HYPE's price-earnings ratio with its FDV price-earnings ratio and market value price-earnings ratio, as well as with existing projects like Solana and Ethereum, related stocks like Coinbase and Robinhood, and TradFi assets like Apple, Nvidia, and the S&P 500.

PS: A Note About the Hyperliquid Community

I often write about the Hyperliquid community on Twitter, so I won't go into too much detail here as it deviates from the main purpose of this article. However, I'd like to share a passage from one of my previous tweets that truly captures the Hyperliquid community for me:

"Whether making money or losing money, I will gain new friendships. Hyperliquid is the first crypto app that has allowed me to do this—a very important feature for me."

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