Hyperliquid Ethena Liquidity and USDe Integration

Summary

This proposal requests that Ethena integrate the Hyperliquid L1 (“Hyperliquid”) as an eligible venue for a portion of its hedging flow, subject to technical and legal due diligence by the Ethena Foundation. If approved, the proposed integration would be implemented slowly and in a controlled way with Risk Committee guidance as Ethena hedging flow scales alongside the growth of Hyperliquid, with maximum initial proposed allocations outlined below.

This proposal outlines synergies between Hyperliquid and Ethena and requests that the Ethena Risk Committee undergo due diligence of Hyperliquid’s suitability as a potential hedging venue.

Background

Hyperliquid has 200,000+ total users and typically sees daily volumes of between $1-4B. With over $1B in open interest (OI), Hyperliquid is significantly larger than all other onchain perpetual DEXs and would even rank among some of the biggest centralized exchanges.

So far in October, Hyperliquid has regularly accounted for roughly 40% of onchain perpetual volumes according to Artemis.

To date, Hyperliquid has maintained a clean security track record. The bridge between Arbitrum and Hyperliquid has been audited by Zellic, one of the top security firms in the space, and the results of those audits are publicly available here.

Below is a proposed maximum initial allocation for consideration by Ethena’s Risk Committee based on Hyperliquid’s OI on October 15, 2024, designed to keep Ethena’s exposure to Hyperliquid at or below 10% of Hyperliquid’s OI per asset as an initial roll out. Note this is an illustrative notional allocation and the size of the allocation should be adjusted depending on changes in Hyperliquid notional OI on an asset-by-asset basis.

Token Hyperliquid OI Ethena Max Allocation (10% of HL OI)
BTC $313M $31M
ETH $203M $20M
SOL $118M $11M
Total $634M $62M

Ethena x Hyperliquid Synergies

  1. Attractive Funding Rates

Funding on Hyperliquid is designed to closely match the process used by centralized perpetual exchanges. A more technical breakdown of the calculation behind funding rates is available in the docs.

1 year funding rates as per Hyperliquid’s app on September 27, 2024

Hyperliquid BTC funding over the last month has been at baseline (10.95%) more often than either Binance or Bybit and has touched as high as 100% for a brief period based on data from Velo.

Binance Bybit Hyperliquid
YTD 12.55% 10.74% 15.31%

YTD BTC Perpetual Futures Annualized Funding Yield

Source: Velo

As the short side of the trade, a more predictable and oftentimes higher funding rate is a more attractive proposition for Ethena than its current setup of hedging purely on centralized exchanges.

  1. Moving Ethena’s hedging flow onchain

Migrating USDe hedging flows to onchain venues can improve transparency for users while reducing counterparty risk over Ethena’s positions.

  1. Integration of USDe into the Hyperliquid L1

Ethena’s integration with Bybit and other centralized exchanges, offering USDe as margin collateral, is a model which saw significant success with over 450m USDe held on Bybit by its users at its peak. USDe has become the fastest growing USD-denominated asset on multiple chains outside of ETH L1 with integrations in a variety of DeFi applications. In addition to the above integrations, this proposal requests that USDe is added to the Hyperliquid L1 on launch of EVM mainnet.

Proposal

Request that the Ethena Risk Committee assess the proposed integration to move a portion of Ethena’s hedging flow onchain to Hyperliquid and USDe integrated.

9 Likes

We support this proposal as it represents a strategic and clearly value-additive decision for Ethena. We agree with the propositions above and see the value of the proposal in these, key areas:

Diversification and risk management: Integrating Hyperliquid reduces Ethena’s reliance on centralized exchanges, improving its systemic resilience and potentially mitigating / diversifying counterparty risk. The controlled implementation suggested above, limiting initial allocations to 10% of Hyperliquid’s open interest per asset, is prudent.

Financial optimization: Hyperliquid’s attractive funding rates would enhance Ethena’s hedging revenue, meaningfully contributing to the protocol’s sustainability. This, coupled with potential USDe growth through integration on Hyperliquid, could significantly expand Ethena’s ecosystem and increase the adoption of USDe.

Market positioning and innovation: By integrating onchain derivatives within its system, Ethena meaningfully positions and solidifies itself in the space, which is increasingly transitioning and relying on solutions that are clearly of more ‘onchain nature’, potentially gaining first-mover advantages in institutional-grade onchain hedging. This move could eventually lead to internal innovation, spurring the development of novel onchain, risk management tools and hedging strategies.

Regulatory foresight: As scrutiny on centralized exchanges intensifies, established onchain hedging capabilities could prove strategically valuable for navigating the regulatory landscape.

Transparency and community alignment: Onchain hedging improves operational transparency, which aligns with Ethena’s ethos and strengthens user trust and existing + future relationships with partners.

Market impact: Given Hyperliquid’s significant market share in onchain perpetual volumes, this integration could contribute to more stable and efficient onchain derivatives markets, indirectly benefiting Ethena’s operations.

Overall, we find the potential enactment and implementation of this proposal to activate a flywheel of positive, meaningful and mutually reinforcing effects for both Ethena and Hyperliquid. In the current context, we find more reasons for the adoption of this proposal rather than for its avoidance.

4 Likes

Is there any possibility for sENA take benefit from the integration, as the sENA should be used to provide security for the USDe in lots of scenarios?

2 Likes

This proposal has been sent to Risk Committee members for deliberation, who will revert within 7 days on the outcome of the proposal.

2 Likes

I support this proposals as diversification can only bring value to our ecosystem. Will there be any increase of the insurance fund ?

2 Likes

On behalf of the Risk Committee, we would like to clarify a few questions on the mechanics of Hyperliquid as it relates to an Ethena integration, to help increase the understanding of the associated risks.

Questions

  1. Are you planning to introduce OES functionality?

  2. Are you planning to enable multi-asset margining? Namely both the ability to receive margin credit for custodying BTC/ETH as well as requiring less margin if there’s the same delta offset?

  3. Who are the validators of the L1 and the bridge? Are they decentralized or concentrated among a few groups? Who controls the staking power? How can we monitor/independently verify this?

  4. Is the HyperLiquid team or the validators able to pause the exchange, the L1, or the bridge? If so, what are the conditions & has it happened before?

  5. The Terms of Use indicate they have no liability to their users in any situation & require us to indemnify them from any liability.

• What recourse does Ethena have if they disagree with a liquidation or trade?

  1. Given there’s no KYC. How do you actively monitor and manage sanctions/AML/specific country (USA) risks? Do any access restrictions from certain countries/territories apply?

  2. Who owns the bridge & maintains it? Is the owner able to upgrade or affect its functionality? Who has legal title of the assets in the bridge?

  3. How long is the dispute period for withdrawals exactly? What recourse do users have if an errant withdrawal occurs or if a user’s withdrawal is rejected? Is it possible for users withdrawal requests to be permanently rejected/disapproved?

  4. If the bridge gets hacked, what are users entitled to & how will withdrawals be handled?

  5. How is the matching engine, order state, etc logic applied on the L1? Is it in a series of smart contracts? Who owns these smart contracts? Are they upgradeable?

  6. How are malicious withdrawals validated between the L1 & the bridge? If there is a malicious withdrawal or a discrepancy between the bridge & the L1, how is that conflict resolved?

  7. Is there any intention to introduce withdrawal address whitelisting? Perhaps a time delay on new withdrawal wallet addresses being added?

  8. With respect to the bridge and assets on the L1/exchange, does anybody have preferential security or claim over assets? Does anybody have no liquidation clauses or differing margining rules?

  9. The most recent code audit was completed in November 2023, but it looks like there have been some new features and significant updates to the L1 since then. Is there a new audit planned or any other third-party verification in progress?

3 Likes

ACI supports this proposal and believe that Ethena should be expanding to wherever it is profitable to do so. We intend to vote FOR.

1 Like

Hi,
This is very informative. Thanks for sharing this information.

1 Like

Hyperliquid Integration Analysis

The below analysis is also available in document format here

To evaluate new exchanges as viable venues for Ethena’s hedging strategies, several key criteria must be met:

  • Security: The exchange must have a robust history of security, including regular and up-to-date smart contract audits by top-tier, reputable audit firms.
  • Open Interest: The exchange should offer sufficiently large open interest to ensure Ethena’s positions remain a small portion of the total, avoiding any market-moving impact or liquidity concerns.
  • Funding Rates: Funding rates must align with those offered on centralized exchanges currently used by Ethena, particularly avoiding lower funding rates.
  • Legal and Regulatory Compliance: A thorough legal due diligence process should be conducted and verified by the Ethena Foundation to ensure the exchange operates within acceptable regulatory frameworks.

This analysis is aimed at evaluating Hyperliquid’s suitability as a hedging venue, particularly by examining whether the proposed initial allocation limits are appropriate based on these criteria.

Security

Relevant questions have already been sent as a response to the initial proposal. Hyperliquid has maintained a clean security record to date, with no reported incidents. However, it has undergone only two audits, both conducted by the same firm, Zelic, with the latest audit completed in November 2023. Given that significant updates have been made to the protocol and the L1 since that audit, this presents a potential risk. To mitigate this, we recommend a fresh, comprehensive audit is completed by at least one different reputable firm to ensure the platform’s security remains up to current standards.

Open Interest

The following charts display the open interest trends over time for the relevant assets’ usd-margined contracts across the exchanges where Ethena currently holds positions. Additionally, we highlight Ethena’s current share of the total open interest on each exchange.

Total BTC open interest as of Oct 29, 2024 (11:00h):

Exchange Ethena’s Position Total Open Interest Ethena’s Share (%)
Binance $996.18M $9.12B 10.92%
Bybit $150.89M $6.44B 2.34%
OKX $169.24M $3.65B 4.64%
Deribit $48.86M $1.62M 3.02%

Total ETH open interest as of Oct 29, 2024 (11:00h):

Exchange Ethena’s Position Total Open Interest Ethena’s Share (%)
Binance $348.45M (+$176.24M LSTs) $4.32B 8.07% (12.15%)
Bybit $32.89M

(+104.42M LSTs)|$2.23B|1.47% (6.16%)|
|OKX|$127.21M|$1.58B|8.05%|
|Deribit|$62.35M|$558M|11.17%|

SOL has been approved as an backing asset for USDe but positions have not yet been opened.

Hyperliquid is currently facing an uncertain period, with open interest inflated by expectations surrounding the TGE. Given this volatility and the funding rate analysis below, we advise starting with a conservative allocation of open interest, anticipating a decrease. The proposal suggests that Ethena’s maximum allocation should be set at 10% of Hyperliquid’s open interest for each asset, based on the open interest figures from October 15, 2024. We would recommend limiting this initial allocation to 7% and to be restricted to BTC and ETH.

Funding Rates

Funding rates are typically calculated based on the difference between the contract price and the spot price of the underlying asset, incorporating both an interest component and a premium component. Hyperliquid’s formula closely resembles those used by centralized exchanges. The interest rate component is fixed at 0.01% every 8 hours, translating to 0.00125% per hour, or an APR of 11.6% paid to shorts.

The premium component varies based on the difference between the perpetual contract price and the underlying spot oracle price. Given Hyperliquid’s lower volume and liquidity compared to centralized exchanges, this difference is expected to be more pronounced. The funding rate formula is as follows:

Funding Rate (F) = Average Premium Index (P) + clamp (interest rate - Premium Index (P), -0.0005, 0.0005)

Analyzing past funding rates on Hyperliquid provides insight into the real-world performance of this formula. However, it’s essential to evaluate Hyperliquid’s historical data with caution, as direct comparisons with competitors over the same timeframe may not be entirely fair. During the first three months of the mainnet closed alpha, which began in April 2023, trading on Hyperliquid incurred zero gas fees and zero trading fees. In June 2023, a fee structure was introduced, consisting of a flat 2.5 basis points (bps) for takers and a 0.2 bps rebate for makers, with referrers earning 10% of their referees’ taker fees. It wasn’t until March 2024 that the fee structure was revised to incorporate a rolling 14-day volume basis, implementing a tiered volume structure similar to that of centralized exchanges. For this analysis we’re considering data starting from September 2023.

The chart above clearly illustrates significant volatility in funding rates, particularly for SOL, which aligns with our expectations. Annualized funding rates for BTC have spiked higher than 200% in March 2024 and have been lower than 50% since May.

When comparing Hyperliquid’s funding rates against those of exchanges where Ethena currently holds positions, it is usually higher on any given day for all three assets.

An analysis of the funding rate differences also highlights that Hyperliquid generally maintains higher rates compared to other exchanges, indicated by a positive difference, above the clearly marked zero line. This trend is particularly pronounced during periods of high volatility, such as in March 2024, when Bitcoin experienced a sharp price increase.

Overall, the observed period shows an upward trend or relatively stable crypto prices, as shown in the chart. Notably, Hyperliquid has not yet operated under comparable conditions during a bear market. However, Ethena is proactively exploring various strategies to navigate such scenarios, such as closing hedging positions and moving this capital to RWAs, so that comparing exchanges’ performance over prolonged weak market conditions becomes less relevant.

Taking a closer look at the distribution of funding rates in the different exchanges over the last year, allows us to further measure this difference considering how summary statistics, autocorrelation and duration of funding spikes compare.

The average annualized funding rate on Hyperliquid is more than double that of Binance, and that of any other observed exchange, suggesting that Hyperliquid has had significantly higher funding rates over the observed period. OKX was excluded from the analysis because only weekly funding data was available for data older than three months. The median (the middle value) on Hyperliquid is higher than on any other exchange, though the gap is smaller than the difference in the mean. This suggests that, while Hyperliquid had a higher mean, the central tendency is not drastically different. Hyperliquid shows a much higher standard deviation, indicating greater variability in its funding rates compared to other exchanges. The funding rates on Hyperliquid are more spread out, meaning there are more extreme values or wider swings in rates. All exchanges exhibit leptokurtic distributions (kurtosis > 3), meaning the distributions have fat tails, with more extreme values or outliers compared to a normal distribution. Hyperliquid’s kurtosis is higher, suggesting it has more extreme outliers than other exchanges, although this value is similar to Bybit’s. All distributions are positively skewed (skewness > 0), meaning they have a long tail to the right. The Bybit funding rates are slightly more positively skewed, which is surprisingly indicating more frequent extreme positive values compared to Hyperliquid. This basically tells us within Bybit’s data, there are some values that are much higher compared to the typical funding rates in Bybit (which could still be lower in absolute terms than Hyperliquid’s).

We conducted a Mann-Whitney U test to compare the distribution of Hyperliquid’s funding rates with those of other exchanges. The results indicate a statistically significant tendency for Hyperliquid to consistently show higher funding rate values relative to other exchanges.

The autocorrelation chart displays how the funding rate correlates with its own past values at various time lags (in days). Values near 1 indicate a strong relationship, while values close to 0 suggest little to no correlation.

Among exchanges, Binance exhibits the highest persistence, with autocorrelation values staying high over more days. This implies that funding rates on Binance tend to change more gradually. Hyperliquid, though exhibiting low persistence, shows higher autocorrelation than Deribit, suggesting that while funding rate trends on Hyperliquid are less predictable than those on Binance or Bybit, they still tend to be more consistent than Deribit’s.

After having established that Hyperliquid’s funding rates are tendentially higher and display more variability, it is also relevant to consider how long spikes in funding rates last, in particular negative ones.

The charts below identify events when an exchange’s funding rate is significantly higher or lower than Binance’s average funding rate. We use Binance’s mean and standard deviation as a benchmark for all exchanges and count an event as significant for any exchange where the funding rate exceeds a threshold around Binance’s mean (more than 2 standard deviations above or below Binance’s mean).

We can observe the event duration and frequency. Long durations indicate persistent deviations from Binance’s threshold (e.g., funding rate remaining high or low relative to Binance). Higher frequency in specific duration ranges shows how often an exchange’s funding rate behaves differently than Binance. For instance, we can see that Hyperliquid has very frequent events that last one day and with some frequency some events lasting 2 and 5 days. There is even an event that lasted 18 days. However, these were all positive funding rate events where Hyperliquid’s funding rate was much higher than Binance’s average. Only on two occasions were there negative events, one lasting one day and another lasting four days.

ETH

The results for ETH align with previous findings and do not provide relevant additional insights, so we include them for completeness but omit detailed analysis.

SOL

Although the Risk Committee has approved the governance proposal to include SOL as a backing asset for USDe, conditions like maximum open interest and the selection of exchanges for SOL positions remain under review. As such, comparing Hyperliquid to other platforms on SOL funding rates is still preliminary, given that benchmark standards for SOL have not yet been established. This is underscored by the notably higher standard deviation observed across exchanges.

For the three assets, both mean and median are significantly larger on Hyperliquid, with the mean being much larger. This means that generally funding rates are larger and that, besides generally larger values, there are relevant spikes driving this average up. This aligns with the high positive skewness of all distributions. Standard deviations are also much higher implying there are more extreme funding rates (both high and low). All distributions are positively skewed, which checks out with our assumption that funding rates tend to be more positive than negative.

Autocorrelation analysis reveals that Hyperliquid’s funding rates are generally less persistent than those on other exchanges, indicating a higher level of unpredictability. However, it is not the least persistent among the group. When examining extreme event duration and frequency, we observe that Hyperliquid frequently experiences substantial positive funding rate spikes above Binance’s mean, with these positive spikes tending to be both longer and more frequent than negative ones. This characteristic makes Hyperliquid a promising choice for hedging strategies.

Conclusion

Based on our funding rate analysis, Hyperliquid presents a promising opportunity for Ethena to transition some of its positions on-chain. Given the current expectations of a possible decline and the unpredictable nature of open interest, we recommend limiting Ethena’s positions to 7% of open interest and limit opening positions at the beginning of this integration to BTC and ETH, which translates to $21.9M and $14.1M, respectively, at the time of writing.

This recommendation is pending the receipt and review of responses to the previously submitted questions on security and legal considerations. Importantly, we can only support this proposal if at least one new code audit is conducted on both the exchange and the underlying L1. While we acknowledge that moving hedging flows on-chain enhances transparency and that integrating USDe into Hyperliquid L1 adds valuable use cases for Ethena, we must prioritize the necessity of the audit. Therefore, we have conducted this comprehensive analysis to facilitate the implementation of this effort as soon as the pending audit is completed.

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Hyperliquid Integration Review

Summary

LlamaRisk indicates overall support for the proposed integration with Hyperliquid but prefers to abstain from the decision until the questions forwarded by the Risk Committee are answered. The analysis presented below also prompts additional questions to the Hyperliquid team. The following points need clarification:

  1. Whether the audits covered the DEX contracts’ code, in addition to the Hyperliquid bridge contract.
  2. Whether Hyperliquid has the authority to adjust parameters for perpetual trading.

LlamaRisk believes that in the absence of an audit for Hyperliquid DEX contracts, the integration of Hyperliquid should not be considered. Therefore, we will support the proposal only if audits are performed on all contracts on the most recent version of the protocol.


See full analysis details below:

Hyperliquid Network

Hyperliquid Network

The Hyperliquid DEX and on-chain order book execution is enabled by Hyperliquid L1 network, an optimized Layer 1 blockchain. Utilizing a custom consensus algorithm called HyperBFT, the network supports a transaction throughput of up to 100,000 orders per second and achieves block finality in under a second.

Validators Diversification

Hyperliquid’s validator set was initially centralized under the control of its core team. While the organization has announced an initiative toward greater decentralization by inviting external validators—such as ChorusOne and Luganodes—to participate in the testnet, the limited number of external validators is insufficient to assert that adequate decentralization has been achieved.


Source: Dune, 5th November, 2024

Nevertheless, progressive improvements in validator diversification are anticipated over time, particularly following the mainnet launch, which may attract a broader spectrum of validators.

Network Maturity

Hyperliquid represents a nascent Layer 1 blockchain that has yet to undergo extensive audits and rigorous testing. Thus far, only Zellic has contributed two security reports. There is an absence of comprehensive evaluations from other esteemed auditing firms, and the network has not yet demonstrated resilience or stability over an extended period. In addition, it is unclear whether the audits also covered the code of DEX contracts in addition to the Hyperliquid bridge contract:


Source: Zellic Hyperliquid Smart Contract Patch Review, 27th November, 2023

The limited operational history and lack of third-party scrutiny raise concerns about the protocol’s robustness and reliability. If the Hyperliquid DEX has not undergone an audit, this significant oversight would make Llamarisk strongly opposed to its integration.

Possible Geoblocking

Under the Terms of Use, Hyperliquid reserves the unilateral right, without prior notice to users, to suspend or terminate their participation in any feature of the Interface at its sole discretion. This authority encompasses situations where Hyperliquid determines or suspects that a user’s engagement with the Interface is unauthorized, deceptive, fraudulent, unlawful, or intentionally undermines the Interface’s purposes. It can be reasonably inferred that these provisions implicitly include access from restricted jurisdictions. Notably, the Terms do not expressly identify or enumerate any restricted jurisdictions, leaving ambiguity regarding potential geoblocking measures.

Perpetual Futures Venue

Perpetual Futures Venue

A key feature of the Hyperliquid ecosystem is Hyperliquid DEX, a decentralized exchange providing an onchain order book for perpetual contracts. This DEX exemplifies Hyperliquid’s focus on delivering a responsive and open financial system, with future expansions planned for native token standards, spot trading, and permissionless liquidity pools.

Open Interest

In order to evaluate the suitability of onboarded collaterals, it is firstly important to evaluate the stability and size of open interest available on the trading venue. The historical data indicates that open interest for assets of interest has varied over time but the overall OI trend is upwards.


Source: Hyperliquid Stats, 5th November, 2024

In the past 3 months, the OI for BTC has never been lower than $150M and currently fluctuates around $350M. Nonetheless, the OI for ETH has been in the $200M level with a brief period of lower $125M OI. The overall ETH OI growth has been stalling, however, this is in line with the aggregate market situation where the same OI consolidation can be observed. Moreover, SOL has recently reached the $100M level and trends above it for the past 2 months.

All of that indicates that the Open Interest levels are sufficient and stable enough to consider onboarding USDe collateral. Since the OI evolution on Hyperliquid is similar to overall market trends, the position management strategy employed by Ethena would be similar to that already used for different CEXs.

Funding Rates

It has already been outlined that funding rates on Hyperliquid have constantly been trending higher than on other exchanges, including the CEXs already used by Ethena.


Source: Hyperliquid Stats, 5th November, 2024

While this mainly arises from volume and notional position size differences, it is important to analyze the underlying funding rate calculation processes for the perpetual venues that Ethena uses and compare that to Hyperliquid’s method.

Hyperliquid

The funding rate formula applies to an 8-hour funding rate. However, funding is paid every hour at one-eighth of the computed rate for each hour.

where the Interest Rate is fixed at 0.01% every 8 hours.

  • Impact Bid Price is the average fill price to execute the Impact Margin Notional on the Bid Price.
  • Impact Ask Price is the average fill price to execute the Impact Margin Notional on the Ask Price.
  • Price Index is the weighted median of CEX spot prices for each asset, with weights depending on the liquidity of the CEX.

Binance

On Binance, funding is recalculated and paid every 8 hours. Otherwise, this exchange uses the same calculation formula and the same 0.01% Interest Rate each funding period. Binance reserves the right to adjust the interest rate from time to time depending on market conditions.

Bybit

Bybit Funding Rate consists of the Premium Index P and the Interest Rate I. Bybit updates the Funding Rate every minute, and performs an N-hour Time-Weighted-Average-Price (TWAP) of the Funding Rate over the series of minute rates.

Current Funding granularity is 8 hours. The Interest Rate is 0.03%. During periods of significant market volatility, Bybit may temporarily adjust the upper and lower limits of the Funding Rate to encourage the Perpetual Contract’s price to return to a reasonable range.

OKX

The funding fee is settled every 8 hours on OKX. The funding fee settlement timing may be adjusted in real time according to market conditions. The funding rate is calculated as:

MA, also known as the moving average, refers to the average value of the premium index over the last N hours till the present. “N hours” refers to the number of hours between each settlement period. If funding fees are settled every 8 hours, N = 8. Variables a and b are the upper and lower limits for the funding rate.

The funding rate calculation mechanism on Hyperliquid is largely comparable to that of major CEXs currently used by Ethena, aside from minor differences in recalculation granularity. Therefore, the primary factors causing funding rate discrepancies are differences in user composition and trading behavior. Incentives offered by trading venues may also contribute to this variance. From a risk perspective, the correlation between funding rates across venues remains strong and is not expected to deviate substantially. As Hyperliquid matures and achieves higher open interest, its funding rate should align more closely with other venues.

Slippage Conditions

One important factor contributing to the effective management of perpetual positions is the slippage incurred when exiting the perpetual contracts. While the maturity of Hyperliquid DEX is not high, as the venue continues to grow, the price impact continues to decrease. The historical slippage incurred for a $100K position is the following:


Source: Hyperliquid Stats, 5th November, 2024

It can be observed that after the initial volatility just after Hyperliquid was released, growing volumes and open interest led to sharp declines in slippage levels. The most prominent slippage instance was during high market stress on the 5th of August, 2024 where SOL was projected to incur 0.04% of slippage for a $100K trade. While the potential worst-case impact for Ethena could be higher (due to larger trade sizes), it can be safely assumed that the trades could be executed within the 1% slippage range should the Open Interest levels remain similar.

Standard Safety Mechanisms

All Centralized exchanges use a set of standard safety mechanisms that are meant to protect the exchange from losses in case of extreme market volatility. They include:

  • Insurance fund covers the excessive losses (negative equity) caused by positions closed at worse than bankruptcy prices. It mitigates the risk of auto-deleveraging. The insurance fund is collected from the residual margin of liquidated positions that are closed at better than bankruptcy prices.
  • Auto-deleveraging strictly ensures that the platform stays solvent. If a user’s account value or isolated position value becomes negative, the users on the opposite side of the position are ranked by unrealized PnL and leverage used. Those traders’ positions are closed at the previous oracle price against the now underwater user, ensuring that the platform has no bad debt.
  • Ability to adjust interest and other parameters is an element that could be invoked in case of extreme market conditions in order to protect the exchange from losses.

Hyperliquid has implemented auto-delevarging, however, no insurance fund is deployed and it remains unclear whether Hyperliquid reserves a right to change perpetual trading parameters.

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