Hyperliquid’s Rise: Revenue, Valuation & Risks | Michael Nadeau
Ryan:
[0:03] Hey, Bankless Nation, special episode for you today. It's something that I've
Ryan:
[0:06] wanted to dig into for some time. What is the bull case for hype? Hype, of course, is the hyperliquid token. This is the perps exchange that is taking all of crypto by storm. They also have an EVM chain. The question on my mind is, is it too late to buy? Should I buy hype now or is it overvalued? That's the question, overvalued or undervalued at current price. And what is this project? And also, what are the risks? As a user, what sort of property rights do I have? And is Hyperliquid a threat to other layer ones? Something like Ethereum or the L2s or Solana?
Ryan:
[0:39] We get into all that and more with our guest, Michael Nato from the DeFi Report. All right, guys, we're talking about hype today. We've got Michael from the DeFi Report. And you wrote this memo over the weekend that I had a chance to read. Actually, it was published on Friday and I've read it this weekend. The Hyperliquid memo, is the hype warranted? And I think we got to start here with the objective truth. which is hype is minting and printing a lot of money right now. These revenue charts look incredible. What are we seeing on the hype revenue side from like daily fees perspective?
Michael:
[1:10] Yeah, printing money, I think, is the story here. And it was something that we just like kind of couldn't ignore. So we've been kind of, you know, watching Hyperliquid from afar for a little while. And the protocol just continues to print cash. It's a perps. Dex and really start as an app chain and really started with a product focus. And we're going to get into, I think, the inception story, which is really a lot of the story here. But yeah, just really making a lot of money and challenging the fees that some of these larger L1s are producing as well.
Ryan:
[1:42] On this chart, we're seeing $3.5 million in daily fees. That's what Hyperliquid as kind of a protocol, as a perps exchange is doing right now. That's the revenue that it's generating, 3.5 per day, yes?
Michael:
[1:55] Yes.
Ryan:
[1:57] And this has been on an upward trajectory. It's kind of like doubled or tripled since the beginning of this year, yes?
Michael:
[2:02] Volumes are up. Open interest is up. You know, animal spirits are on chain right now. And so, yeah, Hyperliquid is really kind of attracting a lot of the energy in crypto right now.
Ryan:
[2:12] I was talking to Hasib on the roll-up yesterday, and we had some charts because it just sort of crescendoed. It kind of hit a moment. It felt like last week where people were noticing all of this activity on Hype. And, of course, every time there's a big trade, because it's all on chain, you can see the big trade. And so they'll be like, oh, Bitcoin whale, you know, swapping this amount of Bitcoin for like some other asset. And everyone notices that everyone sees it because it's in the billions of dollars. So here's a tweet. Hype is doing 36 percent of all crypto revenues, while its market cap is 1.2 percent of total crypto market cap. And here's a chart where you see hyper liquid. This is in dark green here compared to all of the other sources of network revenue compared to other layer one chains and other layer twos, etc. And that's a massive amount of all of crypto's revenue that's now happening on Hype. Another way to look at this is compare it directly to Solana and Ethereum. This is a post saying, no one is psyopsing me into thinking Hype is anywhere near fair value, because this is a poster comparing the value, the revenue generated by Ethereum and Solana to Hyperliquid. And over this time period, Ethereum was like $3.3 million, Solana $1 million.
Ryan:
[3:24] And Hyperliquid like $28 million, okay? And you're seeing some of those stats too when you put together your memo. This is six-month fees. This is Hyperliquid fees in terms of millions, $409 million versus Ethereum over the last six months, $332 million, and Solana $233 million. So what is this story telling you?
Michael:
[3:47] It's telling me that Hyperliquid has a really, really active core user base. What's pretty interesting about this is there's only those fees of $409 million over the last six months is coming from a subset of users that is in the range of like $40,000 to $60,000 per day. So the story is interesting because when you zoom out, I mean, they launched less than a year ago. To be printing that much money over six months is pretty wild. But it's coming from a very kind of small subset of users that are very active on Hyperliquid. And actually Artemis has some data on the average revenue per user. And it's like 1.6K per month that Hyperliquid users are spending on the protocol. This is it.
Ryan:
[4:36] You have a chart, right? So 1.6K per user?
Michael:
[4:41] That's per month per user. Yeah. Per month per user. So that's a monthly chart. Is that a lot?
Ryan:
[4:44] That doesn't feel like a lot, but I guess that's way more than any other crypto app. For sure. Yeah. I mean, when we look at some of this for, you know, some of the other larger L1s, it's definitely much lower than that.
Michael:
[4:57] You know, much more users on these larger chains. But it's interesting to us that that's basically paying all the bills for the entire ecosystem. This is, you know, kind of our understanding of how crypto trading works. There tends to be pretty concentrated subset of really active users that drive most of the economics. And we're certainly seeing that play out on Hyperlink right now.
Ryan:
[5:18] These are like the whales. Okay. So anyway, the story here, the objective truth is that hype is printing money right now. There's a massive amount of revenue. I want to maybe for the rest of this episode, talk to you about the subjective question for the investor, for the analyst in the space, which is at the current market price, is hype a buy? Is it overvalued or is it undervalued? Because certainly if you look at the charts, you know, we can see this like max charts. It's definitely gone up quite a bit about, you know, November of 2024. The price of hype was $6.50.
Ryan:
[5:55] And now we're almost above 40, so almost 45. And so there's a massive appreciation in less than a year's time. So it's kind of a question. Well, Mike, I don't know, man. It's cool to see all the revenue. But are we late to the game? I guess you can look at the fully diluted valuation and you got 44 billion right here. The market cap, that's just tokens that are outstanding is 12 billion. And then I guess if you look at the top crypto market cap, it's not in the top 10 right now, but it is number 17. So hype is number 17 there. So there's always the question of valuation. Maybe to answer that question, we should talk a little bit about the inception story and then talk about the product and just unpack this a bit more.
Ryan:
[6:41] So maybe starting there with the inception story of Hype. So you said it's only been active for a year or so. How did this project come to be? What is it?
Michael:
[6:51] Yeah, so, you know, Genesis event when they, you know, dropped the token and did the big airdrop, that was in last November. So less than a year. The protocol has been around for longer and they had early users that got those tokens. But this is like a really big part of the story to me. They launched at a time when I think there were a lot of perps traders that were looking for an alternative to Binance, or sorry, to FTX in the aftermath of FTX. And what they're offering here is basically a centralized exchange sort of Binance-like experience, but on-chain, where you get the self-custody, you still get that performance. But they paired that product with this incredible inception story, which I think is probably the best story since Ethereum launched, I would think.
Michael:
[7:41] And what they did was they dropped 31% of the token allocation to their early users. That was at like a $3 hype price when they dropped that token. And it was about $1.2 billion of wealth creation that they gave away to their users. So they bought a lot of loyalty, I would say, right off the bat. And they did this with zero VCs, no angel investors. Like they really, it seems to me like, you know, they're trying to solve for, you know, a great product and like a focus on users and in doing so building trust, you know, with their community. And so I think they've done a really good job of this. And this has created, I think, a flywheel when you combine it with the product that is very interesting. And we'll get into sort of what's being built there. And it's kind of growing into a layer one ecosystem now. But this, you really can't, you really got to focus on this because it's created so much loyalty. Then you have a really loud community on crypto Twitter that are now evangelists for the product. And it just kind of kicks off an interesting flywheel with the way that they launched the product. So you're saying this
Ryan:
[8:50] Is maybe one of the best token inception stories as far as quote-unquote fair launch that we've seen in a long time, maybe since something like Ethereum even you're saying, because there's no VCs, there's no angels, the focus is on users and the whales that bring liquidity to this platform, and they got all of the token. So there's not that, you know, typical VC sell pressure, you know, the 12 to 24 month unlocks. Although I believe that the hype founders and the hype team does have token unlocks. Is that correct?
Michael:
[9:22] Correct. Yeah. So they've got almost 24% and they're investing. Well, some of their unlocks are starting in November. So their vesting schedule starts. Some of those unlocks are going to start to leak out. There's starting to be some talk, you know, in the market. Are they going to sell? Are they going to dump on the community? I think they've put some stuff out that they're going to limit the amount that their team actually can sell. But yeah, I think this is very interesting because a lot of times when you're studying a project, you really have to pay attention to, you know, how many of the tokens went to VCs? What do those unlock schedules look like? We've seen a lot of charts in crypto where after that year, and especially if you're in a bear market, when those unlocks come, it's a tough time to be holding the token. And so, you know, in sort of eliminating all that, they're building a lot of trust with not only the users, but also people that might want to invest in this protocol.
Ryan:
[10:11] Okay, so a nice, clean cap table that's user-focused, clean launch for the token. Let's talk about the product itself. So when I pull up Hyperliquid, it looks like an exchange, basically. It looks like something I'd seen, you know, Coinbase or Kraken or Binance or back in the day, maybe an FTX, right? I see charts. I see things, all crypto assets I can buy and sell. I can see my portfolio. It looks essentially like an exchange. Now, all of this is on-chain, and the product, it seems like the central product.
Ryan:
[10:41] You can buy Spot, I believe, but it's Perps, which is really BitMEX and crypto pioneered, fantastic way to kind of lever up on your positions as well. And if you want to 4x, 5x, 10x long, you can do that on this platform. It's probably crypto's strongest product that it's built. And they've laser focused on the Perps market. So it's interesting, too, though, because, Mike, there have been many tries at creating on-chain BitMEX, on-chain Binance perps in the past, and some have had levels of success. I remember past cycle DYDX was attracting a lot of the on-chain perps liquidity. It was still nowhere in size compared to an FTX or a Binance, but it was doing fairly well. Now, this product from Hyperliquid seems to be competing with the big boys. So I was looking last week and I think Hyperliquid was like number two just to Binance. Binance was a little bit higher in terms of spot Bitcoin volume on a particular day. So it's competing with all of the big centralized exchanges and the experience that you have. You connect a crypto wallet, of course. So you could use a Rabi or a MetaMask or even a Phantom, I believe. But it feels like you're on a centralized exchange and you have centralized exchange levels of liquidity. So what accounts for the product success here?
Michael:
[12:06] I think that's it. I think they solved this, you know, sort of sex-like experience with high throughput. It's got a really nice UX. It's fairly easy. You know, you do have to bridge over. So, you know, but it's fairly easy to get in there. And I think that's really it. They've given you the sex-like experience, but also you have self-custody of the assets. And that helps to build trust, obviously, in the wake of FTX. They've also just, I think, done a really good job of listing new product relevant new tokens you know pretty quickly when they come out and so whenever people want to be trading the the new and kind of fresh asset that comes out they're getting that up there they're capturing that market they've got like an interesting referral system as well so you now have like phantom and axiom users that can trade through them and they get and it's actually kind of an interesting business model where they're basically sending user flow user liquidity to hyperliquid. And then hyperliquid is actually kicking back a referral fee to these platforms, which is a very interesting model. So you kind of solve for distribution through some of these larger wallets, through some of these more attractive trading terminals like Axiom on Solana, which is like one of the fastest growing apps on Solana. So I think it just seems really well thought out in terms of how they've approached the market. And now they have these integrations that's driving more liquidity, more users to the platform as well.
Ryan:
[13:29] And are they just able to move faster than the Binance, for instance? Who are the big perps, I guess, centralized exchanges? Is it primarily Binance at this point, and they're just able to move faster than them?
Michael:
[13:39] So you've got Binance, you've got Bybit, you've got OKX. Those are kind of like the three kings, I would say, of the perp market. You do have CME, which has futures trading now as well. But yeah, I think they are moving fast. They've got a really loyal base. I mean, there's only 11 employees, which we can probably talk about at some point. So they're obviously a very talented team to be able to execute all of this. And yeah, I think they've got the flywheel. And once you get the flywheel and you get the, when you have users, what's interesting about this approach, and we'll get to sort of where they're going with building out the ecosystem. But when you start with a base of really active users, that's really, really interesting because it attracts builders, right? Builders are attracted to users and liquidity. And, you know, they have been able to bootstrap all that without VCs, without, with this kind of pure inception story. So it feels like they've got
Michael:
[14:33] a really, really strong foundation to now build this out as well.
Ryan:
[14:37] Okay. So there is an ecosystem story then, and we'll get to that in a minute. But before you mentioned the founders and the team, it's a small team, talented team. So you sent me over this interview over the weekend. I haven't had a chance to fully get through it, which with Jeff, he's one of the co-founders of Hyperliquid. What do you see when you think about the Hyperliquid team? What makes this team special and how have they been able to execute like this? Thank you.
Michael:
[15:01] Yeah, this is interesting. I have to say, like, after watching this interview with Jeff, I was getting more interested in the project, probably more bullish on the product myself, just hearing his story. But his, you know, he is coming from a background from quant trading. So he started off at Hudson River, actually, I think he was an engineer at Google for a little bit. Then he went to Hudson River Trading, which is a large quant Wall Street firm. And I think it was there for like less than a year or so. And then somehow ended up playing around in DeFi in 2021, 2020. And I think he just realized how inefficient the crypto markets were, developed some algorithms, probably made some money trading. And I think he actually retired or did some travel. And then during that experience, realized that he wanted to build something much bigger and much more meaningful. And that's kind of where Hyperliquid came from. So these guys, you know, understand markets, they understand trading, they understand perps, like they're the right guys to build this type of ecosystem, I think. And yeah, I would recommend people, you know, check out just whatever resources you can find on these guys, because I think that's always part of the analysis whenever we're looking at a project is who is actually behind this thing. And what are their motivations? Do they seem like mission driven type of people that are trying to build something, you know, for the greater good of crypto? And I think, you know, I feel like these are the right people to build a project like this.
Ryan:
[16:30] Let's talk about the ecosystem. So at first, Hyperliquid was an app chain for this perps exchange, and that's been very successful. They've attracted a ton of volume there, like a massive amount of size. Then more recently, they actually launched a general purpose, call it maybe a layer one, called the Hyper-EVM.
Ryan:
[16:53] Hyperliquid sits on top of the Hyper-EVM, At least I believe that's the case. But the HyperEVM is kind of a general purpose EVM chain. So other apps can come and essentially, I think, maybe I'm using the right term here, permissionlessly deploy. You can see on DeFi Llama, a number of these different apps.
Ryan:
[17:12] Pendle's there, for instance, Pendle and Morpho. These are from other DeFi protocols. And you can see some of them are liquid staking. Some of them are yield generating protocols. There's an entire what we call like a DeFi economy that seems to be springing up on top of hyperliquid. I noticed this tweet from the Ether.5 Ventures folks, and they're saying, we're going to just straight up back hyperliquid ecosystem projects. We're going to tackle credit collateral and yield like CDP type projects on top of hyperliquid, stake type liquidity, front ends and swaps. And I think the premise behind this, correct me if I'm wrong, is that Hyperliquid has been able to create a primitive, a crypto primitive, a money Lego, if you will, of liquidity. And now that we have all this liquidity, apps can build on top of that liquidity and do other DeFi finance types of things for its users. And so they've opened that up and that's what the Hyper EVM is. I should add, it's got to be, it's super performant, very, very scalable. We'll talk about the centralization versus decentralization aspects a little bit later, but this is really like fast block times.
Ryan:
[18:24] You know, I don't know how much in terms of throughput transactions per second, but far more performant than the layer twos that we generally see, including even the highly performant ones like Solana. So talk about this ecosystem a bit more.
Michael:
[18:38] Yeah. So what's really interesting to me about this is like most L1s, you know, start out, most of them have, you know, they have to raise capital and then they have to use the sort of VC money to find ways to incentivize other builders to come in to get liquidity, which then attracts more builders.
Ryan:
[18:55] They don't start with an app.
Michael:
[18:57] They don't start with an app. Yeah. They started with a great product and that's essentially the app chain of what the Perps deck is.
Michael:
[19:05] And that's really interesting to me because they've done that all organically. Now they have users. Now they have liquidity. And so now the flywheel of attracting other builders to this ecosystem has kicked off with them launching the hyper-EBM. And the way I sort of think about this is like if you just sort of analyze hyper-liquid
Michael:
[19:27] From the app chain perspective, it's quite impressive the amount of fees they're doing, the way that they, you know, brought this to market, the sort of trust and loyalty that they've already established in the market in a short period of time. And now you sort of open this up and you've got this EVM out of the entire, you know, Ethereum ecosystem. Everybody that has a EVM based wallet can now start to access these apps. And you're going to see, I think, more liquidity come in here, more users. And it was interesting to me even just we published a report on hype last week and had people reaching out to me that are building stuff on hype and it was just interesting to see you know the energy I think that's forming around this ecosystem so this now becomes a much bigger story of like okay should Hyperliquid be should we think about Hyperliquid's future value more relative to like a large like L1 right is that actually the game that they're playing and it's not really that they're competing with you know, DYDX and, you know, Jupyter perps and Drift, but maybe they're actually trying to build out something much, much bigger here. So I think this is quite interesting. And the way that they've approached it is sort of that path dependence of doing
Michael:
[20:38] it with users in liquidity first instead of with VCs is very interesting.
Ryan:
[20:42] Yeah. And on this ecosystem question, it is the case that we've seen chains like this before. The BNB chain maybe comes to mind. It's its own, you know, less restricted, kind of more open sandbox for DeFi protocols to come in. That's kind of what Hyperliquid is doing here. Although Hyperliquid is going even further and putting all of their liquidity on chain, whereas Binance has central order books. So that's an interesting analog here. But when we start doing layer one comparables, it does kind of beg the question of, okay, what are the property rights of the layer one in question? So if Hyperledger, sorry hyperliquid is a layer one then like there's questions about how decentralized is it and when i think of the question of decentralization i do think of it in terms of less like are you you know following this particular protocol or not and more of what are the the rights and abilities of users particularly around this question of of stealing censorship and freezing okay so the the scf if you will and so the question is and i was asking this question over the weekend, if hyperliquid goes down, can users withdraw their funds?
Ryan:
[21:51] In a layer two, we know how that would work as long as Ethereum secures your kind of property rights. If Arbitrum or Optimism or Base were to turn evil, as a user, you have the ability to kind of withdraw your assets back to Ethereum, back to the layer one. Unclear what happens in Hyperliquid in this case, but they have their own validator set. And also, if Hyperliquid turned evil or maybe the government shut them down, started to seize their validators, could they steal user funds? And these are pretty relevant questions, I think, when you're starting in the layer one game. So what have you uncovered about these questions and the level of decentralization that exists in Hyperliquid today?
Michael:
[22:31] Yeah, so I think there's a few ways to think about, you know, decentralization and all those questions that you just posed, Ryan, which are extremely relevant for crypto users. I think the way that I think of this is, you know, they started a little less than a year ago, and they've got about 24 validators today. So that is actually, we just mentioned Binance. That's kind of like similar to what Binance, you know, chain has. So pretty centralized, I would say, like, you know, almost more like a permissioned blockchain at this point, because a lot of those validators are being permissioned in. It's not fully open source and permissionless just yet. I believe that they are moving in that direction.
Michael:
[23:12] And there's reasons why they sort of want to keep that close right now in the early days of the protocol. So I think from that perspective, if those validators, like you said, tried to collude or turned evil, I think users are trusting that they're not going to do that and that would kill their entire project that they're building and maybe their incentives aren't lined up to do something like that. But because of the early stage of it, you do have not a ton of validators, which diminishes the decentralization of the project and the security of the project. So that's number one. number two is because it's its own you know layer one ecosystem to get your assets over there to to use the protocol you need to bridge in to do so there's a few different bridges and ways to get in there most of that is coming through arbitrum ethereum layer two and so what's happening there is you know users are essentially you know depositing into the arbitrum bridge and then there's like an accounting mechanism on the other side of that for hyperlib good where they're They're essentially minting you a version of that in their chain and then keeping all the accounting on the hyperliquid ledger from there. And so, yes, you are trusting that bridge, right? If something happened with that bridge or that bridge was hacked,
Michael:
[24:28] Similar to, you know, hacks that we've seen at other bridges, especially, you know, in the kind of 21 cycle, we saw a lot of this. I think bridging has become much more secure in this cycle. But if you did have something, then user funds are potentially at loss, you know, via that bridge. So I think those are the two things that I would think of. And For me, it's really difficult as an L1 to just sort of come to market and have a million validators like Ethereum does and some of these other more mature layer one ecosystems. So there is a process to decentralization. I think with that comes some trust in the early days for users.
Ryan:
[25:08] Yeah, that makes sense. I mean, so I guess the long and short of it is right now those validators can steal sensor freeze. There's some level of permissioning. You know, some of it may not be the hyperliquid team. It could be somewhat distributed and somewhat decentralized. So you have the validators at play there. You also have this bridge risk as well. And you also have underlying arbitrum risk. What's kind of interesting is, you know, I used to say about centralized exchanges, like you should use centralized exchanges like a public bathroom, right? Get in, do your business, and then get out. There's a difference between getting into hyperliquid and doing some trading. And then getting out and leaving your funds on Hyperliquid for a long period of time, like months and even years. And so, you know, this is, you and I have talked about this before, the difference between kind of like some fast DeFi type use cases and slow DeFi use cases, where the slow DeFi use cases are kind of like, you know, vaulting and lending and borrowing and store of value types of use cases where you just want to keep your assets in one place for like months and years. I don't know that Hyperliquid is quite ready for those types of use cases, if that makes sense. Like, you know, how many months or years are you going to store your funds on something like Hyperliquid? Whereas for fast DeFi, it's kind of great.
Ryan:
[26:29] Is it that much more risky than a centralized exchange? Like, probably not. Probably, in some ways, actually less risky. At least you don't have the Sam Bankman-Fried FTX style of risk because it's all open. You can see all of the assets on chain, and there's not really a way for Hyperliquid to kind of like cook the books, you know, take some of the assets and like actually use them for a separate side pocket hedge fund the way Sam Bankman-Fried was doing. So there are some benefits here. it's just not quite like it's not the property rights of a layer one which is the way I see this I don't know if you agree with this is I kind of see this as more competitive to maybe a an FTX if it was still around or a Binance or a Coinbase or a Kraken or some of these centralized you know perp exchanges because it's kind of a hybrid it's not quite a centralized exchange it's not quite DeFi. It's somewhere in the middle. I see it less of a threat to like a Bitcoin, for instance, or an Ethereum, or even at some level a Solana, although maybe Solana and Hyperliquid start to brush up against each other. But just because property rights are so key for that slow DeFi use case and the store of value use case, and you don't have those certainties here. It's not open source, for instance. So even as a validator, you're running code that you don't have open source access to actually see. So it's not quite in the same ballgame with respect to comparable to other layer ones. What do you think about that?
Michael:
[27:56] Yeah, I think that's right. I think it's somewhere in the middle right now. It's kind of got the performance of these more centralized counterparts. And it's trying to move in this direction where it can sort of be seen as something that's more decentralized that gives you those property rights that crypto users really value. And to your point on like, you know, sort of the slow kind of store of value DeFi use cases like What's kind of interesting, you know, when you kind of zoom out and just look at what's starting to play out in terms of where all the assets sit, you know, where the velocity of assets is happening, we're seeing like just some really interesting stuff, which is like, it looks like most of the stuff wants to be traded in places like Hyperliquid and places like Solana, but actually most of the assets sit on Ethereum. And so it's kind of an interesting thing where, you know, you have these kind of fast sort of online casino type environments. And then you have, which is what we're seeing with Hyperliquid and maybe more Solana. And then you have more of the Wall Street type, you know, use cases that are happening on Ethereum. And Ethereum has 100% uptime. It's trusted. It's decentralized. You have those property rights and those user guarantees, even on L2, where you can withdraw assets. So it's kind of interesting just sort of zooming out and thinking about how crypto ecosystem is starting to play out. It looks like Ethereum is the home to keep your assets. And these other places are sort of like little, you know, arms where people can go and do other things.
Ryan:
[29:23] It is interesting. I mean, because at some level, it is sort of a win for the Ethereum ecosystem because this is all EVM. It's kind of building that network effect and platform effect. At the same time, there's an element of like, well, why didn't they do this as a layer two? I mean, right? If the layer two strategy worked so well, how come Hyperliquid actually decided not to deploy this as a layer two? And I think when I've listened to conversations with Jeff and some of the other co-founders, they say the reason is they couldn't get the performance and all of the customizability that allowed them to produce a product essentially this good for purpose trading. So maybe at some point in the future, they become a layer two, maybe not. Maybe the L1 thing is going for them. But yeah, I agree. There's kind of like the slow DeFi type store value use cases. Then it does seem like there's a whole bunch of other things that are happening on centralized exchanges and layer one order books and that kind of thing.
Ryan:
[30:18] Another element of this that I was wondering, which is kind of like the AML KYC Bank Secrecy Act type of risk. And it's just like, do you remember, Mike, that Arthur Hayes for BitMEX, he spent six months on house arrest for not crossing all of the T's and dotting his I's with respect to AML KYC. And the US government came after him. CZ spent a year in jail over this type of thing. Okay. And Hyperliquid is not doing that, to my knowledge today. They're doing that for the validators, but they're not doing that for users. And it seems like because of the Trump administration, things have opened up. I don't think that there's going to be prosecution during the Trump regime of something like hyperliquid. But that is sort of a market risk that lingers, at least in my mind out there. And I guess hyperliquid strategy is just like, use the time we have to become as big as possible. Kick that can down the road and worry about it later once we're big. It's almost like the tether strategy here. It's kind of what Paulo and Tether did, right? Which is just, they were in this like weird gray zone for a while. And now look at them. They have the Genius Act and he's at the signing of the Genius Bill himself. And Tether is now completely legitimized. And that could happen with Hyperliquid, but they have to move fast during this time of open market because there is some gray area, I feel like, with the AML KYC question.
Michael:
[31:41] Yeah, no, that's an interesting observation as well. And yeah, I think, you know, they're doing KYC for the validators. They have, you know, geofenced the, you know, the perps decks and just accessing that. So you need a VPN to get in there.
Ryan:
[31:57] That did not say BitMEX or Binance.
Michael:
[32:00] Oh, really? Okay, okay. Yeah, okay. Interesting. So yeah, there's definitely some risk there. And I think you're right. That's probably is the strategy of just sort of let's get this thing to scale and be sort of like too big to fail or too big to shut down. And maybe that's a strategy, but certainly another element of risk that people should consider here.
Ryan:
[32:21] Let's talk about how big this is right now. So open interest,
Ryan:
[32:24] this is a metric that's important for these types of exchanges. What are you seeing on some of these fundamentals metrics like open interest?
Michael:
[32:31] Yeah, you know, just trying to, you know, get a sense for where they sit and where they compare to, you know, some of these other more centralized counterparts, Binance, Bybit, OKX, you know, CME. In terms of open interest, like they've got about, I think there's about 13 billion or so currently. And that represents roughly 10% of all the combined centralized players, including CME. So that's pretty interesting. And I think people think of them as sort of their competition is the decentralized counterparts, which is more of the Jupyter perps, DYDX, Drift, GMX. They are you know you know far and away much much higher from from those protocols i think doing about 10x the volume of them combined and so when you think about their their share of the market they're already to me they've already won these sort of decentralized perps game maybe too early to say that but they have such a big lead and so much momentum right now it feels like it's moving in that direction and the competition is you know by finance and by bit and these more you know centralized players. There is, you know, Robinhood is planning to launch this in the U.S. Soon. I believe Coinbase just launched Perps as well. So there's more competition coming as well.
Ryan:
[33:50] Okay. And you talked about the active users and the revenue per user, just extremely impressive here.
Michael:
[33:57] Very highly active, highly engaged users, I think is sort of the, I think what the takeaway with this is just the stickiness of the product. And it feels to be like if you're generating that much value off of your users, they're not trading anywhere else. They're just trading. They're trading on hyperliquid.
Ryan:
[34:14] Okay. So volume competitive with the big boys and seeing that from an open interest perspective, from just like the raw volume perspective. Now let's talk about one of the most exciting elements of this, which is the crypto native token that's associated with this.
Ryan:
[34:29] I feel like as token investors, we are thirsty for good token economics, particularly on the revenue side of things. And we talked about earlier how much revenue, 3.5 million per day was being generated by Hyperliquid. The story here, I think, Mike, is that this value is actually accruing to token holders. We already talked about the fair launch and the distribution of this token. Can you talk a little bit about the buyback program that they have, the burn program that they have, and how token holders are actually receiving this revenue in some form of value?
Michael:
[35:07] Yeah, and I think this is kind of coming back to what we were mentioning at the beginning and just how they're building trust with not only the user base, but now also with investors and people that are looking at maybe, you know, buying the hype token. What's pretty interesting is not only are they, you know, printing that cash, they're using about 95% of it to go out and buy the hype token on the open market. Those are not burned tokens. So it's not that it's not being, you know, completely removed from the supply. It is being held by them and their treasury. So we don't know exactly what the plan is for that. But for now, those are tokens that are coming off the market. And they did about $92 million of fees in July and they bought back 90 million of hype tokens. So they are just out there. That's a constant bid in the market. So not only do they not have the VCs dumping, potentially when unlocks come and their vesting ends, they're actually out there putting a bid and a floor on the token as well, which is very interesting.
Ryan:
[36:13] So this is a way that some of that revenue actually translates back, at least on paper, to token holders and reduced supply. So I guess this is very similar to, in the equities world, a share buyback of some sort, which is a very common investor-friendly way to actually distribute the gains that come from generally profits for equities types of companies. Now, this is not profits. This is actually top line revenue, right? You're saying is it 90% of top line revenue right now?
Michael:
[36:43] Top line revenue, correct.
Ryan:
[36:44] Okay. And that's going back to essentially token buybacks, right? Going back to the treasury. So the company balance sheet has it. And I guess as a token holder, there's some sort of implication that you have some rights to that balance sheet. It's not a legal implication in the way that equities would be. But I think token holders are generally assuming that they have rights, some sort of distribution rights to the treasury of Hyperliquid. And so that's how they're accruing this value. Yeah, I think if you're a hype holder, like the way to think about that is.
Michael:
[37:15] You know, your share of sort of the outstanding supply, the circulating supply of hype is increasing, right? Every time they go out and buy tokens on the open market, you know, again, they're not burning those tokens, but this is very similar to how you would see like share buybacks, removing shares from the circulating supply. And then anybody who holds those shares, their ownership is actually increasing relative. So I think that's the takeaway. You don't have the legal rights you have as a shareholder, but your relative percentage ownership of the protocol is increasing when they're removing supply from the market like that.
Ryan:
[37:55] Which I guess we should say is better than what, 99% of all tokens that exist out there? Yes. In terms of revenue distribution here, right? They have a fee switch that's on.
Michael:
[38:07] They have a fee switch that's on and we've seen just a lot of pushback, I think, just coming back to the VCs. We saw meme coins coming out with lots of narratives around no VCs and all this. I think they're just combining that now with this really nice mechanism where there's this automatic buyback of these tokens. And from like, you know, investor underwriting perspective, like it introduces new ways to try to understand, you know, what's going on and how to value the protocol. Like if you just sort of took the annualized you know, the tokens that they bought back over the last year, it comes out to like a 4.3%, you know, annualized buyback yield. I know people are throwing out, you know, lots of different terminologies around yield. That's not actual yield that's being paid to you, but it's sort of like accruing into your ownership of the protocol in some way.
Ryan:
[38:59] Are there any like guarantees as to how much they're going to buy back? So is there any way to kind of model out for guidance? Or do you just see after the fact? I remember there was a time with the Binance chain, as it was called, at the time, 2020, 2021, where it's like something like 25% of all Binance profits would be used to buy back the BNB token, right? But that was, I'm not sure actually, I haven't been back in the BNB chain to see if that program is still in effect, but it was basically management guidance and arbitrarily coming up with a number and they can, the subject to revision in the future, is that the same with Hyperliquid? Like you never know how much they're going to buy back. It's not an algorithmic thing. its kind of management discretion?
Michael:
[39:41] I think so. We weren't able to find any documentation where they were explicitly putting that out there. And it probably doesn't make sense for them to do that at this stage. I think there may come a time where they decide that they want to actually take some of those fees and invest in, you know, maybe they want to hire more staff or just invest into their operations. They may need those funds at some point. most startups, you know, are not, you know, buying back their tokens less than a year after launching. Most of them are using any fees that they can get from revenue and trying to drive that back into the business so that they can grow. So this is like an incredibly unique situation where they have the resources to grow this thing and they don't need to take their revenues to reinvest into the protocol right now. So...
Ryan:
[40:30] One thing that I find is interesting when we're looking at these assets from a supply perspective is the two sort of metrics we typically use are like fully diluted valuation, which is all possible tokens that are, you know, like mintable, multiplied by the price, right? So you get your fully diluted valuation. This is really important when you're looking at other layer ones, like something like Ethereum or Solana or Bitcoin. It's like important for that. And then there's market cap, which is basically the tokens that are available, not locked up, available, float, multiplied by the price, right? And that gives you a sense of, you know, okay, how much is liquid at this point in time? But these two numbers aren't, I feel like, precise enough to actually map on to what's going on in some of these tokens, and maybe in particular something like hyperliquid. And I was reading an Artemis post that basically outlines another metric that we should consider using that's used in the traditional equities world. It's not, you know, the total fully diluted valuation and the market cap, but it's basically outstanding shares or outstanding tokens. You might call it outstanding supply in the crypto world, which excludes everything that would be owned by the hype foundation. So all of the buyback tokens that they have excludes that, but it does include the unvested team balances.
Michael:
[41:52] And if you look
Ryan:
[41:53] At the Hype supply and you subtract all of the tokens that basically Hype Foundation owns, you get a lower supply versus the fully diluted valuation. And yeah, so what do you think about using that metric or that number for supply rather than some of the ones we typically use? Thank you. I like this framework that Artemis put out. I think it makes sense.
Michael:
[42:19] And it kind of like just raises, you know, the question of, I think every asset that you're analyzing in crypto, they all have different token economic schemes. They have different token allocations. Some do buybacks, some don't. So I think this is like every asset needs to be analyzed sort of on its own. But when you're looking at something like hype, I think this is particularly useful because of these buybacks. You need to factor that in somehow. So just taking the amount of circulating supply that's in the market right now, we know that they are out in the market buying that back. So it makes sense to pull that out. And then, of course, the team is going to be, their investing schedules are coming up. I believe those unlocks start in November.
Michael:
[43:02] And so that should be factored in, I think, on the other side of it as well. All right.
Ryan:
[43:07] So now we get to the question of valuation. So we went through the entire story of Hyperliquid and we talked about the revenue, we talked about the platform, the product market fit. It all seems fantastic. Revenue, the token has a story. The question is, what about at the current price, right? And how do you answer that question with respect to valuation? Hyperliquid, is it at these prices above 40? Is this still a good buy or have we essentially missed it?
Michael:
[43:36] But these are really hard questions to ask. And I think it's really hard to sort of model forward, you know, revenues and fundamentals in crypto because of the cycles. And so if you're just looking at this and looking at like Hyperliquid's last, you know, 30 to 90 day performance and then trying to model out from there, I think you're probably going to overshoot. It's going to look really undervalued if you kind of look at it right there because you're just kind of capturing the meat of the bull market. And so this is a challenge. And what we tried to do in the report that we shared was just kind of look at like, let's just look at actually what has happened instead of trying to look forward. And if you look at it from that perspective, we didn't factor in this like Artemis framework here with like backing out the buybacks. But you get to a price to sales of around $22 for Hyperliquid right now.
Ryan:
[44:29] Okay.
Michael:
[44:29] So that's like a little, you know, if you're just like comparing that to, you know, your average tech, fintech, high growth, you know, that's like a little bit higher than normal. If you're comparing it to like something like, you know, ETH or Solana, then it looks actually like extremely, you know, undervalued.
Ryan:
[44:45] So there's different ways to look at this. We looked at Coinbase.
Michael:
[44:48] Coinbase has a price of sales of around 10. And so there's different ways to view this. I think the way I think of it is like that valuation seems pretty fair, you know, based on when you do that sort of 12 month look back. And then the other piece of it that needs to get factored in is now the build out of the evm and all these other applications that are going to drive users and fees also to the protocol so you're adding in like another line of revenue to to the layer one itself so you know hard to say you know crypto valuations are you know can can totally detach from the fundamentals as well and And I would say this one, the fundamentals support the valuation today. And it'll be interesting to see, you know, if it actually does, if it did detach, then you're looking at like a pretty big move for Hyperliquid at some point, you know, maybe later in this cycle, potentially.
Ryan:
[45:45] What's kind of the annualized number right now? I don't know, a 12-month look back or something maybe more recent. Because if you look at something like Coinbase, Coinbase is market value of about $80 billion, right? That's the enterprise value on about $7 billion in revenue, I believe. Yeah, yeah. So what's hyperliquid in terms of annualized revenue?
Michael:
[46:05] On the annualized revenue, I don't have it in front of me. It was $409 million over six months. I want to say it was like between $600 million and $700 million or so from a 12-month perspective. Somewhere in that range. Impressive, yes.
Ryan:
[46:17] So, but still, I mean, I guess we're in kind of the low billions, maybe over a billion, something like that, one to two billion, whereas Coinbase is seven billion. And Coinbase valuation is 80 billion versus Hyperliquid. Again, it depends what we use. I don't think it's right to use the fully diluted valuation though here, right?
Michael:
[46:36] Correct.
Ryan:
[46:36] Which is $44 billion. It's probably somewhere between market cap and fully diluted valuation. So fairly valued, I suppose, in terms of a comp comparison to Coinbase.
Michael:
[46:48] Yeah, I agree. You don't want to use a fully diluted. You know, you can look at that. We kind of look at everything. But yeah, I think you want to come in somewhere around where the circulating supply is and you can actually adjust that down even for the buybacks as well. So if you adjusted that down, the price of sales probably coming in closer to maybe 15, 16, somewhere in that range, which is pretty reasonable for, you know, like a publicly traded, high growth fintech company. This thing is less than a year old. It's growing like a weed. So
Ryan:
[47:23] Yeah, I think the fundamentals support.
Michael:
[47:25] You know, that valuation, I think, as long as they continue to print cash and those users stay. And like, that's always the big question is like, if we go into a bear market, what do these fundamentals, you know, look like? Are the revenues going to drop 90 percent? You know, what does that mean for the valuation as well? So I think that's always the big question. But, you know, if you're just looking at the performance of the last year, it's the fundamentals support, I think, especially when you look at crypto valuations. It does look undervalued.
Ryan:
[47:55] My take on this too, and maybe on the bullish side of things, is the comparison to L1s is probably not quite where I'd go. Where I'd probably go is a comparison to something like Tether. And what's fascinating about a story like Hyperliquid and the things that you can do on-chain is how fast, how far, how quickly you can scale on-chain. Because again, it's globally available market, liquidity.
Ryan:
[48:20] It's instant access to this. And revenue per employee is a key metric to kind of look at, right? So you look at Hyperliquid. Hyperliquid has passed NVIDIA, Apple, even Tether. Also Meta in terms of revenue per employee. Per employee, Hyperliquid revenue, $102 million per employee. Nothing else is close. Of course, Tether is very famously incredibly profitable per employee. We had Paulo on the episode and he was like, yeah, we do profits north of $10 billion. We don't even bat an eyelash. I'm like, how many employees do you have? He's like 150. Okay. 93 million revenue per employee for Tether. Okay. The top two companies in terms of revenue per employee, if you call Hyperliquid a company, are Hyperliquid and Tether. The next up is OnlyFans and that's 37 million per employee. So incredibly profitable as well. So the level of scale that you can get with internet native on-chain platforms and the profitability levels are just off the charts incredible. And so like, if you're telling me that, you know what?
Ryan:
[49:26] Valuation metrics are somewhat like, you know, fast-growing fintech, maybe a little bit higher. I'm like, well, okay, this seems like a screaming buy because this is not growing like a fast-growing fintech. This is growing like an on-chain, product-market-fit, scale-to-the-world type of company. And the only thing that can slow it down is, I don't know, some sort of black swan regulation, even a crypto bear market, right? That presents sort of a buying opportunity if you believe that hyperliquid can still stay ahead. So I guess what I'm saying on the bull case is like nothing really scales compared to crypto. And that might be the most bullish scenario here and the story here.
Michael:
[50:05] I think so. And if you're a developer, entrepreneur, sitting in web two right now, maybe you're in, maybe we'll call them red ocean markets where there's just lots of competition and it's really hard to get to scale. And you look over the fence and see what's happening in crypto, I mean, this is just incredible what can happen and the scale that these companies can get to in such a short period of time with a global market and sort of this permissionless access. It's got to be pretty exciting for people to build. I mean, we saw this with Pump.fun and the amount of revenues that they're printing as well. So yeah, crypto is enabling just these incredibly, incredibly lean, efficient, scalable businesses. And I think that's the big takeaway.
Ryan:
[50:51] Yeah, what's nice is this all comes in the form of a liquid token that you can buy. I mean, you can't, I wish we had exposure to Tether. There's no way to get that right now. They don't have a token, right? Hyperliquid, you do. Okay, so in summary, I'm curious, what are you personally doing here, Mike? So I know you've got the DeFi report portfolio.
Ryan:
[51:08] And I mean, are you looking, are you a buyer here? Or what are you doing personally?
Michael:
[51:11] So, you know, my strategy historically, I'm usually not super early to things. I like to sort of do a lot of research and we, you know, we waited to even cover hyperliquid. After going through this research and, you know, spending a lot of time playing around with the protocol itself, we've decided that we're actually going to add Hyperliquid to our roster of ecosystems that we cover. So that's historically been Bitcoin, ETH, and Soule. So that gives you an idea of like how strongly I feel about it. We're going to be releasing a report with our pro members tomorrow and kind of sharing what we're doing in terms of portfolio management. But generally speaking like the way that i'm approaching this is to keep an eye on it you know as the evm is now building out and we're seeing a lot of energy around people that want to come and build on top of the l1 you know we're going to continue to follow the story and i think this could get really interesting potentially in in a bear market similar to like kind of what we saw with with solana hopefully there isn't some issue with like an ftx that causes something to happen there. But this is something that we're sort of like probably going to eye in the bear market. Interesting.
Ryan:
[52:22] So if I know you and your plays, you might be scaling into it a little bit now and definitely, you know, sharpening your analyst edge, looking at all the on-chain data and scaling into it a little bit, but then really looking for bear market buy type of opportunities that might come later. Because there's no rush on this at some level, right? You could be a patient investor and build into value.
Michael:
[52:42] Yeah. Yeah. And I could totally see this, I think we're almost at $50 billion FDV. We saw some stuff in the last cycle, sort of later stage of the cycle, a lot of stuff that didn't pan out over the longer term. I think this is hopefully different, but it's definitely possible that this thing could get to $100 billion FDV, I would think, this cycle possibly even higher.
Ryan:
[53:06] Well, Bankless Nation, if you want to see some of Mike's research, it's all on the DeFi report, at the defireport.io, the hyperliquid memo, excuse me, was part of the report that spawned this episode. So go check that out. Mike, thanks so much for joining us today.
Michael:
[53:20] Thanks, Ryan.
Ryan:
[53:21] Got to let you know, of course, none of this has been financial advice. Crypto is risky. You could lose what you put in, but we are headed west. This is the frontier, not for everyone, but we're glad you're with us in the bankless journey. Thanks a lot.