Unchained
December 17, 2025

Lighter vs Hyperliquid: Fees, Fairness, and ADLs - The Chopping Block

October 10th was a wild day for crypto perpetuals, triggering unprecedented auto-deleveraging (ADL) events across exchanges. This episode unpacks the ensuing firestorm between Hyperliquid and Lighter, revealing a deeper struggle for DeFi: can it truly improve upon TradFi's opaque systems, or will it succumb to the same centralized pitfalls?

ADL: The Unseen Hand of Risk Management

  • “The goal of decentralized exchanges is to improve upon centralized exchanges. And one thing is a lot of people who worked at centralized exchanges DM'd me and said like, 'Hey, these ADL like repeated events have happened before at centralized exchanges.' But no one knew because you can't really see it.”
  • Loss Socialization: ADL is an exchange mechanism to close insolvent positions by cutting into profitable traders' gains. Think of it like a company declaring bankruptcy – everyone takes a haircut to reset the balance sheet, but if it happens too often, the system is broken.
  • Transparency vs. Predictability: While DeFi exposes ADL events, the lack of open-source algorithms and clear documentation (e.g., Hyperliquid) creates unpredictability for large traders. This hinders institutional adoption, as market makers need to forecast when and how their positions will be affected.
  • Lighter's Alternative: Lighter prioritizes its insurance fund (LLP) to absorb losses before triggering ADL, aiming for a less aggressive, more trader-friendly experience. This approach, while impacting the LLP, prevents forced deleveraging for users.
  • The TradFi Threat: If DeFi cannot offer a superior, predictable, and transparent ADL solution, it risks reverting to a Futures Commission Merchant (FCM) model, where third parties custody assets and absorb risk for a fee, effectively re-centralizing derivatives.

Crypto Research Enters the "Pharma Era"

  • “I think it was a good lesson in how research has changed in crypto in my opinion over the last 5 years. Like 5 years ago you write a paper, people are not immediately like, 'Oh, you're fudding my bags. Like get the [expletive] out of here. You wrote this research strictly for FUD, right?' Whereas now it's immediately assumed that you invested in Lighter or Drift or whatever, so you must be [expletive] my bag.”
  • Research as FUD: The crypto research landscape has shifted from collaborative exploration to an adversarial environment. Critical analysis is often perceived as an attack on "bags" or a marketing ploy for competitors.
  • Conflict of Interest: Researchers with investment ties, even when conducting rigorous analysis, face immediate accusations of bias. This "pharma era" mentality scrutinizes every action for financial motivation, eroding trust in public-good research.
  • The "King" Metaphor: Challenging dominant protocols requires impeccable data and methodology. Any perceived flaw is weaponized, making it difficult for researchers to contribute without facing intense backlash.

Token vs. Equity: The M&A Conundrum

  • “The M&A thing actually reminds me a lot of what's happening in AI where someone will buy the management team and then dump the rest of the company... there's no token holder lawsuit rights, which I think maybe that's the real problem.”
  • DevCo vs. Protocol: Recent M&A events (Axelar/Circle, Tensor/Coinbase) highlight a disconnect: acquirers buy the development company (DevCo) for talent and IP, often leaving the protocol token and its holders in limbo.
  • No Token Holder Rights: Unlike equity shareholders, token holders typically lack legal standing for lawsuits or governance claims over the DevCo's M&A decisions, leading to potential value destruction for token holders.
  • DAO Governance Flaws: DAOs often struggle to fund and retain top talent due to overly critical and "cheap" governance processes. This makes it difficult for protocols to "buy back" their DevCos or compete with M&A offers.
  • TVL as a Robust Metric: Total Value Locked (TVL) remains a strong indicator of a protocol's health and user trust, especially for perpetual exchanges where it primarily represents stablecoin collateral, making it harder to game than volume or open interest.

Key Takeaways:

  • Predictable Risk Management is Paramount: DeFi's long-term success hinges on building transparent, predictable, and fair risk management systems that demonstrably outperform TradFi, especially for institutional players.
  • Incentive Alignment is Critical: Investors and builders must scrutinize the relationship between DevCo equity and protocol tokens. Misaligned incentives can lead to value destruction for token holders during M&A or other strategic shifts.
  • The "So What?": The next 6-12 months will see continued innovation in DEX fee models (Lighter's zero-fee tier for retail), RWA derivatives (FX, fixed income), and composability (Lighter's ZKVM sidecar). However, the underlying tension between decentralization ideals and market realities will persist, demanding robust solutions for ADL, governance, and value accrual.

Podcast Link: https://www.youtube.com/watch?v=FCizHksGCC8

This episode dissects the contentious auto-deleveraging (ADL) practices of perpetual futures exchanges, contrasting Hyperliquid's approach with Lighter's innovative fee model and ambitious ZKVM roadmap, while exposing the volatile intersection of crypto tokens and corporate equity in M&A.

The ADL Controversy: Hyperliquid's Aggressive Deleveraging

  • Context: Tarun's recent paper ignited a firestorm by claiming Hyperliquid "overaggressively auto-deleveraged (ADL) traders" by hundreds of millions. ADL is a process where exchanges forcibly close positions to maintain solvency during rapid market moves. This research, the first of its kind, scrutinizes an under-analyzed mechanism.
  • Details:
    • Tarun's paper initially estimated $650 million in "counter-fractional P&L" lost on Hyperliquid due to ADL on October 10th, a day of record liquidations.
    • Hyperliquid's founder, Jeff, and Paradigm's Dan Robinson vehemently disputed the claims, leading to a public academic sparring match.
    • Tarun later corrected the magnitude, stating the over-liquidation was closer to $100 million, acknowledging an error in calculating "profit plus principal" versus "profit" haircutting.
    • The core directional truth remains: Hyperliquid's ADL algorithm, which ranks positions by profit and leverage, disproportionately impacts top traders and lacks transparency due to its closed-source nature and undocumented parameters.
  • The Quote: "The goal of decentralized exchanges is to improve upon centralized exchanges. These ADL like repeated events have happened before at centralized exchanges, but no one knew because you can't really see it." - Tarun

Decentralized Exchanges vs. TradFi: The Fairness Imperative

  • Context: The ADL debate extends beyond specific algorithms to the existential question of whether decentralized exchanges (DEXs) can offer a superior, more transparent system than traditional finance (TradFi) clearing mechanisms.
  • Details:
    • Don Wilson of DRW argues that if crypto cannot fix ADL, it risks reverting to the Futures Commission Merchant (FCM) system, where third parties custody assets and absorb risk for a fee, effectively centralizing derivatives.
    • Historically, exchanges like Huobi initially covered bad debt from their balance sheets until moral hazard (traders taking excessive risk knowing the exchange would pay) forced the adoption of ADL.
    • ADL, analogous to corporate bankruptcy, should be a rare, "stop-the-world" event for market reorganization, not a frequent occurrence. Repeated ADLs signal a design flaw.
    • Centralized exchanges often concealed ADL events, paying out aggrieved traders, a practice difficult for transparent DEXs.
  • The Quote: "If crypto ends up just with FCMs like these clearing agents, that's sort of just like a sad ending for derivatives. The point for bare custodial stuff is you shouldn't need that." - Tarun

Lighter's Zero-Fee Model and Market Expansion

  • Context: Lighter challenges conventional perpetual futures exchange fee structures with a zero-fee tier for retail traders, aiming to democratize access and expand the overall market.
  • Details:
    • Lighter offers zero-fee trading for standard users, while professional traders pay for lower latency and API access.
    • This model attracts significant retail volume, which in turn benefits professional market makers who adjust to the fee structure.
    • Vlad argues this approach expands the universe of traders and strategies, promoting a healthier market long-term.
    • Lighter has seen substantial growth, becoming a leading exchange by 30-day and 7-day perpetual volume, partly driven by anticipation of its Token Generation Event (TGE).
  • The Quote: "There hasn't been much innovation there [in fee models]. Whereas in TradFi, as you said with Robinhood and others that follow, there has been a lot of innovation there." - Vlad

The Perpetual Futures Arms Race: RWAs, Cross-Margin, and ZKVMs

  • Context: The perpetual futures market is experiencing intense product competition, with Lighter and Hyperliquid pushing innovation in real-world assets (RWAs), cross-margin capabilities, and underlying infrastructure.
  • Details:
    • Hyperliquid launched Trade XYZ for RWA trading (NASDAQ, Tesla perps), while Lighter introduced FX perps (Euro, etc.), seeing unexpected high volumes in non-crypto assets.
    • Both platforms are developing cross-margin features, allowing users to collateralize positions with various assets beyond stablecoins.
    • Lighter's roadmap includes a Zero-Knowledge Virtual Machine (ZKVM) sidecar, enabling smart contracts to run on Lighter's sequencer, facilitating universal cross-margin and tokenization of Lighter positions.
    • This ZKVM sidecar aims to transform Lighter into a developer platform, allowing other DeFi protocols (e.g., lending) to build directly on its infrastructure.
  • The Quote: "Any asset on Ethereum can be collateral on Lighter and vice versa. A Lighter position can be tokenized and live on Ethereum as well." - Vlad

Token Generation Events and the Equity-Token Divide

  • Context: The impending Token Generation Event (TGE) for Lighter and recent M&A events (Axelar, Tensor) highlight the complex, often conflicting relationship between protocol tokens and development company (DevCo) equity.
  • Details:
    • Lighter anticipates its TGE, with Vlad emphasizing a "marathon, not a sprint" approach, focusing on long-term product building over immediate token value spikes.
    • The acquisition of Axelar's DevCo by Circle, without acquiring the token, caused a 15% token price drop, sparking debate on token holder rights versus equity holder payouts.
    • Tensor's DevCo acquisition by Coinbase saw its token rise, suggesting market perception of acquirers matters.
    • Avara (Aave's DevCo) collecting fees from a front-end swap, bypassing the protocol, mirrors early Uniswap Labs controversies, raising questions about fee capture and incentive alignment.
    • Steve argues that DevCo acquisitions are legitimate exits for talented teams when a protocol's market value declines, and token holders lack legal standing for lawsuits.
  • The Quote: "The opportunity to do incentive alignment, once you lose that, then yeah, I mean you get into you might get into some unhealthy outcomes." - Vlad

Investor & Researcher Alpha

  • Perpetual Futures Market Maturation: The intense competition between Lighter and Hyperliquid signals a maturing perpetual DEX market. Investors should scrutinize not just volume and open interest, but also underlying ADL algorithms, fee structures, and composability roadmaps (e.g., ZKVM sidecars) for long-term value.
  • RWA Trading Surprises: The unexpected liquidity and volume in FX perps (Euro) on Lighter, and Nvidia/index perps on Hyperliquid, suggest a significant, untapped demand for non-crypto RWA exposure within DeFi. This challenges previous assumptions about which RWAs would gain traction.
  • The Equity-Token Conundrum: The Axelar acquisition underscores the precarious position of token holders in DevCo M&A. Researchers should explore mechanisms for formalizing token holder rights in DevCo governance or M&A processes, potentially through protocol-level rights of first refusal, to prevent value divergence.

Strategic Conclusion

The ADL debate and Lighter's market innovations force a re-evaluation of decentralized exchange design, emphasizing transparency, fairness, and novel fee models. The industry's next step involves integrating advanced ZK infrastructure and formalizing token holder rights to truly surpass TradFi's limitations and unlock composable, capital-efficient markets.

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