This episode reveals how two traditional finance titans are creating a NASDAQ-listed vehicle to unlock Hyperliquid, a decentralized exchange generating over a billion dollars in annualized free cash flow.
From TradFi Skepticism to Crypto Conviction
- David Schamis and Bob Diamond, both veterans of the traditional finance (TradFi) world, recount their journey from healthy skepticism to active participation in digital assets. Schamis, CIO of Atlas Merchant Capital, notes his early, cautious investment in Bitcoin in 2015 and how his perspective has evolved.
- Bob Diamond, former CEO of Barclays, draws parallels between the early days of sales and trading technology at Morgan Stanley and the current state of crypto infrastructure. His experience investing in Circle, the issuer of the USDC stablecoin, provided deep insights into blockchain technology and its potential to democratize finance by removing intermediaries.
- Key Insight: Their journey highlights a significant trend of experienced financial leaders recognizing the foundational power of blockchain beyond speculative assets. As Diamond states, “Both of us believe that 10 years from today, we'll see that [blockchain] as the underpinning of the infrastructure of even the convergence of new and existing financial services.”
Innovations in Financial Rails: The Hyperliquid Model
- The conversation shifts to the specific financial rail innovations being pioneered by protocols like Hyperliquid. David Schamis explains that Hyperliquid’s permissionless architecture is a key differentiator from traditional finance.
- Permissionless Integration: Unlike TradFi partnerships that require months of negotiations, developers can integrate with Hyperliquid’s system without direct approval. Schamis points to the Phantom wallet integrating perpetual swaps trading as a prime example of this efficiency.
- HIP-3 Protocol: This feature allows others to build their own perpetual exchanges using Hyperliquid’s technology backbone. Perpetual swaps (perps) are derivatives similar to futures contracts but without an expiration date, kept in line with the underlying asset's price through a funding rate mechanism.
- Strategic Implication: The development of permissionless, composable financial infrastructure like HIP-3 allows for rapid innovation. Investors should watch for novel use cases, such as the pre-IPO equity trading market mentioned by Schamis, which could disrupt traditional price discovery mechanisms.
Blockchain's Power to Disintermediate
- Bob Diamond provides a clear example of blockchain's efficiency in cross-border transactions. He contrasts a multi-day, high-fee international bank transfer with a near-instantaneous, low-cost transaction settled on a blockchain, which acts as the trusted, neutral ledger.
- Diamond observes that major banks like JPMorgan, despite initial resistance, are now investing billions in blockchain technology. He argues that this adoption is inevitable for survival.
- Actionable Insight: The convergence of TradFi and DeFi infrastructure is accelerating. Researchers should monitor how incumbent institutions adopt public blockchain technology, as this will signal which protocols are gaining long-term institutional trust.
The Debate: Public vs. Private Blockchains
- The discussion addresses the tension between public, permissionless blockchains and private, corporate-led initiatives. David Schamis expresses concern that a proliferation of proprietary L1s (Layer 1 blockchains, the foundational networks like Ethereum or Hyperliquid's custom chain) could recreate the siloed systems of traditional finance.
- Bob Diamond adds that while there won't be a single winner, the market will consolidate around a few dominant public chains. He notes that the value of a stablecoin like USDC comes from its broad accessibility, a feature that a bank-specific stablecoin cannot replicate.
- Strategic Consideration: The "L1 wars" are not over. Investors should assess a protocol's strategy regarding its foundational layer—whether building a custom L1 for performance or leveraging an existing one for network effects—as this choice has long-term implications for interoperability and adoption.
Hyperliquid Strategies: A Public Gateway to a DeFi Powerhouse
- The core of the episode focuses on Hyperliquid Strategies, Inc., the new NASDAQ-listed digital asset treasury company created to hold the HYPE token. David Schamis outlines the compelling case for both Hyperliquid and this new investment vehicle.
- Explosive, Bootstrapped Growth: Hyperliquid was built in under three years by a team of 10 with zero external capital and is now generating "$1 billion to a billion and a half a year on an annualized basis" in free cash flow.
- Solving Scarcity and Accessibility: The Hyperliquid exchange is not accessible in the United States, creating a significant barrier for US investors. The new NASDAQ-listed company provides a regulated and familiar way for a large market to gain exposure to the HYPE token.
- Quote from David Schamis: "We are solving a scarcity problem... by making this easily accessible through our digital asset treasury company that will be publicly listed on the NASDAQ."
A New Valuation Paradigm: Free Cash Flow and Token Buybacks
- The conversation highlights Hyperliquid's unique economic model, which sets it apart from most crypto projects. The protocol uses 99% of its free cash flow to automatically buy back its native HYPE token every day.
- This mechanism provides a direct link between protocol revenue and token value, allowing for traditional financial analysis metrics like price-to-free-cash-flow. Schamis, a self-described value investor, notes this makes Hyperliquid a compelling investment beyond typical crypto speculation.
- Actionable Insight for Investors: Hyperliquid’s model of generating real cash flow and executing automated buybacks represents a new, more sustainable valuation framework for DeFi protocols. Investors should prioritize analyzing protocols with similar transparent, value-accrual mechanisms.
The Macro Environment: An Accelerating Convergence
- Bob Diamond argues that the macro environment for crypto has turned decisively positive, driven by a more supportive regulatory landscape and accelerating institutional adoption. He emphasizes that institutional involvement is still in the "top of the first inning," signaling massive potential for growth.
- David Schamis offers a more grounded perspective, cautioning that while DeFi is innovative, it won't immediately replace established systems like public equity markets, which are already highly liquid and efficient.
- Key Trend: The narrative around blockchain is shifting from speculative risk to foundational technology. Researchers should track the pace of institutional adoption and the "convergence" of TradFi and DeFi as a primary indicator of the market's maturation.
The US Debt Question and Stablecoins
- The episode concludes with a discussion on the macro-level challenge of US national debt. While acknowledging that stablecoins could marginally increase demand for US dollars, both speakers are skeptical they offer a real solution.
- David Schamis points out that capital in stablecoins likely originated from bank deposits or money market funds that were already buying US debt. Bob Diamond frames the debt as a "dark cloud" requiring political will to solve, far beyond the scope of financial innovation alone.
- Sobering Takeaway: While crypto can innovate on financial rails, it is not a panacea for deep-seated macroeconomic and fiscal problems. Investors should maintain a realistic perspective on the scope of blockchain's immediate impact on sovereign debt issues.
Conclusion
This episode highlights a pivotal shift as TradFi veterans embrace DeFi's cash-generating models. Investors and researchers should scrutinize protocols with strong free cash flow and automated buyback mechanisms, as these represent a new, more sustainable valuation paradigm that is attracting serious institutional capital.
