https://colossus.com/article/beyond-the-sky-jeffrey-yan-hyperliquid/
There's so much to this article. The writing is lovely, but the insight into a side of the financial markets I didn't understand is key. I did not understand perpetual futures and spot pricing until reading this. I can't say I fully do now, but I understand it much better. The intersection of that with a custom built blockchain makes this a fascinating technology. The founder being who he is, in such a dangerous industry, makes this all the more interesting.
There's so much to this article. The writing is lovely, but the insight into a side of the financial markets I didn't understand is key. I did not understand perpetual futures and spot pricing until reading this. I can't say I fully do now, but I understand it much better. The intersection of that with a custom built blockchain makes this a fascinating technology. The founder being who he is, in such a dangerous industry, makes this all the more interesting.
The market he meant was perpetual futures. They were born out of an insight Robert Shiller, the economist, had in the ’90s. A traditional futures contract has an expiration date. When it arrives, a trader either takes delivery of the underlying asset—oil, wheat, pork bellies—or closes their position and opens a new one, paying fees each time. Shiller asked the obvious question: If almost nobody who trades a pork belly future wants pork bellies, why force the contract to expire?
I love when technology takes a theoretical question from many years in the past and makes it possible. Futures are powerful and I'm still grasping them. But applying the idea of 24/7 futures (not yet widely available, especially in the US) to something like the current oil markets is fascinating. In a recent International Intrigue newsletter, they pointed out the US and Iran are timing strikes around the markets, dodging market movements. That strategy would fall flat in a world with 24/7 perpetual markets. What are the downstream implications of that? More strikes, less strikes, overnight strikes? I'm not sure, but certainly the math would change.
By late 2022, no one had built a decentralized version worth using. The reason was the underlying technology. In most modern markets, trading runs through an order book. Buyers say what they will pay. Sellers say what they will accept. When the two line up, a trade happens. The more people in the market, the smaller the gap between those prices. That is broadly how markets from the New York Stock Exchange to Binance work. But an order book does not just process trades. It also has to keep up with a constant flood of updates as traders move their prices again and again, often many times before a deal is struck. Existing blockchains were bad at this. They were too slow, too expensive, and too awkward. Every update cost money and took time to clear. Running an order book on them was like trying to run the New York Stock Exchange over dial-up.
I fear that blockchain as a technology became subsumed by crypto as an industry. Blockchains are fascinating technology and an interesting way to create decentralized yet trusted agreement on certain things. Right now we use a mix of technology and legacy relationships to make agreements. The blockchain is an interesting alternative that embeds technology more at the center, though it is not the decentralized utopia many imagine (nor should it be). Part of the article demonstrates how Hyperliquid's algorithm was exploited by a trader in a small volume coin and everyone was made whole by a unanimous rollback of the blockchain via all of the validators. Pure libertarians would hate that, but I am skeptical of the ability of a market to regulate itself. We need to trust something, somewhere. Blockchains can in theory make those relationships more transparent, which I'm in support of.
The interesting story here of Hyperliquid is the layer at which they operate. Many people talk about crypto, some understand the underlying blockchain, very few can build their own. In my career, I'm looking for some type of technology I can get to that level of understanding of. I've yet to find it and it's unclear if I can pull it off, but the folks at Hyperliquid certainly have.
Then, in May, Yan took the strategies that had made Chameleon one of the most successful anonymous trading operations in crypto and put them into an on-chain vault called HLP, the Hyperliquidity Provider. You could deposit $10 or $10 million. There were no fees and no carry. The vault ran automated strategies, and every dollar of profit flowed to whoever had put money in. The accounting was entirely on the blockchain. If you deposited $10, you could watch, in real time, as your $10 grew. If FTX had been built this way, Alameda’s hole would have been visible to the world.
The consistent choices of Hyperliquid to avoid the sins of crypto are fascinating. At every point, Yan made an orthoganal choice. Fascinating, but I'm curious about the governance structure that makes those choices constiant and sustainable. It's one thing to trust a person, another to trust an institution.
He asked people who had run startups and the VCs themselves to explain to him what exactly the point of raising was. But they could not convince him their money was worth more than their money. At some point, he told me, it felt right to say no. And once it felt right, that was the end of it.
There is enormous power in taking risks that you can fund. It is hard to acquire enough capital or otherwise to allow yourself to do so. But if you've got it, man do you have options.
What the market maker found when he plugged in confirmed what the users were discovering on their own. The infrastructure was thoughtful in ways that only a trader would notice. Hyperliquid had built in a kind of speed bump that made it harder for the most aggressive quantitative firms to pick off other market makers. The feature has since been copied across the industry. The effect was that market makers could display deeper liquidity without needing to be at the bleeding edge of latency to survive. Yan had effectively chosen to sacrifice some exchange volume—the kind generated by firms sniping each other—in favor of better prices for ordinary users. It was a trade-off that reduced Hyperliquid’s own revenue.
Skin in the game is the only way to make great products. Hats off to this team for finding a niche, complex and yet useful product.
By the spring of 2024, the team had moved. It suited Yan because the city-state was boring. He has two modes: working and working out. He swims, he runs, he’ll do anything that will exhaust him without risking injury, a principle he arrived at after a moped accident in Puerto Rico left a scar on his face and cost him a week away from his keyboard. Exercise exists to clear his head so he can go back to building. His one concession to leisure is Sunday mornings. The rest of the week belongs to Hyperliquid. He even cuts his own hair because, well, going to a barber takes time.
Lots of interesting things here. A Munger like devotion to utilitarian choices. The influence of policy and geopolitics on the location of start ups.