This episode dissects Hyperliquid's explosive growth, questioning if its massive on-chain revenue justifies its valuation amid significant centralization and regulatory risks.
Hyperliquid's Unignorable Revenue Engine
- The platform is generating approximately $3.5 million in daily fees, a figure that has doubled or tripled since the beginning of the year.
- Over the last six months, Hyperliquid has generated $409 million in fees, surpassing Ethereum ($332 million) and Solana ($233 million) over the same period.
- This revenue is driven by a concentrated but highly active user base of 40,000-60,000 daily users, with an average revenue per user of $1,600 per month—far exceeding other crypto applications.
The Investor's Dilemma: Overvalued or Undervalued?
- The token currently sits at a market cap of around $12 billion, with a fully diluted valuation (FDV) of $44 billion, placing it just outside the top 15 crypto assets.
- This rapid price increase forces a deeper analysis of its fundamentals, product, and long-term potential to determine if the current valuation is justified or inflated.
The Inception Story: A Fair Launch Model
- The project launched without any venture capital (VC) or angel investor involvement, a rarity in the space that eliminates the typical sell pressure from early-stage investor token unlocks.
- It airdropped 31% of its token supply directly to early users, creating what Michael calls "$1.2 billion of wealth creation" that fostered immense community loyalty and a powerful marketing flywheel.
- Strategic Implication: While the launch was clean, investors should note that the team's token unlocks are scheduled to begin in November, introducing a new supply dynamic to the market.
Product Analysis: A CEX Experience On-Chain
- Perps (Perpetual Futures) are derivative contracts that allow traders to speculate on an asset's future price without an expiration date, representing one of crypto's strongest product-market fits.
- The platform offers deep liquidity and a seamless user interface, attracting traders who want the performance of a CEX with the self-custody benefits of DeFi.
- It has also established a powerful distribution model through integrations with wallets like Phantom and trading terminals like Axiom, which receive referral fees for directing user flow to Hyperliquid.
The Team Behind the Engine
- Jeff comes from a quant trading background, having worked at Hudson River Trading, a major Wall Street firm. This experience in market structure and algorithmic trading directly informs Hyperliquid's high-performance design.
- Michael notes that the team appears mission-driven, focused on building a superior product for the crypto ecosystem, which strengthens the long-term investment thesis.
The Ecosystem Play: From App Chain to Layer 1
- The Hyper EVM is compatible with the Ethereum Virtual Machine (EVM), the computation engine that runs smart contracts on Ethereum. This allows Ethereum developers and users to seamlessly interact with applications built on Hyperliquid.
- Unlike typical L1s that raise VC funds to attract builders, Hyperliquid bootstrapped a vibrant user base and deep liquidity first. Michael states, "Builders are attracted to users and liquidity," and Hyperliquid now has both, creating a strong foundation for ecosystem growth.
- Actionable Insight: The expansion into a general-purpose L1 is a pivotal shift. Investors should monitor the growth of new DeFi applications (e.g., lending, yield) on the Hyper EVM, as this could create new, sustainable revenue streams for the protocol.
Decentralization and Property Rights: The Critical Trade-Offs
- The network is currently secured by a small, permissioned set of approximately 24 validators, similar to the Binance Smart Chain. This raises concerns about censorship, fund seizure, and collusion risk.
- Users must bridge assets, primarily from Arbitrum, to use the platform. This introduces bridge risk, as a hack on the bridge could result in the loss of user funds.
- The code is not fully open-source, meaning validators run software they cannot independently verify. This places Hyperliquid in a hybrid category—more transparent than a CEX but lacking the trustless guarantees of a true L1 like Ethereum.
The Regulatory Elephant in the Room
- Drawing parallels to the legal challenges faced by BitMEX's Arthur Hayes and Binance's CZ, they note that Hyperliquid operates in a legal gray area.
- The apparent strategy is to scale rapidly and become "too big to fail," similar to Tether's trajectory.
- Strategic Implication: This regulatory ambiguity represents a major market risk. A shift in the political climate or targeted enforcement action could severely impact the protocol's operations and token value.
On-Chain Metrics: Dominating the Perp Market
- Its open interest represents roughly 10% of the combined volume of major centralized players like Binance, Bybit, and OKX.
- Michael asserts, "They've already won the sort of decentralized perp game," noting that Hyperliquid's volume is approximately 10x that of competitors like dYdX, Jupiter, and GMX combined.
HYPE Tokenomics: Direct Value Accrual
- The protocol uses approximately 95% of its top-line revenue to buy HYPE tokens from the open market. In July alone, it used $90 million of its $92 million in fees for these buybacks.
- While these tokens are held in the treasury and not burned, this creates a constant buy pressure and functions like a corporate share buyback, reducing the circulating supply and increasing existing holders' proportional ownership.
- Michael notes this provides an "annualized buyback yield" of around 4.3%, offering a tangible form of value accrual rarely seen in other crypto projects.
Valuation Deep Dive: Is It Fairly Priced?
- Using a traditional Price-to-Sales (P/S) metric, Hyperliquid trades at a ratio of around 22. When adjusted for buybacks and a more nuanced view of supply, this comes down to a more reasonable 15-16.
- This is comparable to a high-growth fintech company and appears undervalued relative to other L1s, especially considering its growth rate and the future potential of the Hyper EVM ecosystem.
The Bull Case: Unmatched Capital Efficiency
- Hyperliquid generates an astonishing $102 million in revenue per employee, surpassing tech giants like Nvidia and Apple, and even the famously lean Tether ($93 million per employee).
- Ryan argues, "Nothing really scales compared to crypto," suggesting that traditional valuation models may fail to capture the explosive potential of a protocol with global, permissionless reach and near-zero marginal costs.
Michael's Strategy: Patiently Watching
- He is adding Hyperliquid to The DeFi Report's core coverage alongside Bitcoin, Ethereum, and Solana, signaling his conviction in its importance.
- His approach is to monitor the ecosystem's development closely and view any future bear market as a prime opportunity to build a position, emphasizing patience and a fundamentals-driven investment thesis.
Conclusion
Hyperliquid's product-market fit and capital-efficient model create a powerful investment case, but investors must balance this against centralization and regulatory risks. Key actions are monitoring the Hyper EVM ecosystem's growth for fundamental value expansion and tracking team token unlocks in November for potential supply-side pressure.
