I hope you feel a little bit guilty about making everyone pay attention 24/7. We need a break.
I think it should be an option.
You can take a break!
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal and I'm Tracy Alloway.
Tracy, we're recording this... Trady! Yeah! That's appropriate for this episode. We're recording this October 13th. In a couple of days we're going to be in Chicago and we're going to, as we do when we go to Chicago, talk to some legends of the trading industry.
Yeah, it's great to go to Chicago. We've never done a floor tour of any of the actual trading places, and I know that we should do that.
Yeah, we should do that. But of course, it's always an exciting time to just sort of like talk to the trader community because there are just so many interesting things happening, like in the world of trading per se.
One of them is, of course, the rise of prediction markets, etc. Essentially, I kind of think like we're in this moment where so many different instruments can be expressed as other instruments in various ways. So you could have stocks that are like tokenized, you can have tokens that are ETFs.
Yeah, like crypto tokens that are put in ETFs.
You can have prediction markets that actually are sort of like functionally predicting a stock.
And then they become a stock.
Essentially you can replicate the economics of a stock. So all different types of things where people are like rejiggering the way you can express it with this incredible basket of like new instruments and platforms to do it on, financialization on steroids.
Can I go on a slight tangent for a second? So I have this media theory that I call the inverse pyramid. Yeah. And so the way I think about traditional media, yeah, it was sort of like a food pyramid. Right. And you had original reporting was the layer at the bottom. So you had sort of old school reporters versus phone calls making scoops, and then maybe you had in the next rung, you had some people writing editorials or opinion columns on them, maybe a little bit of like video eventually on top. Nowadays, the pyramid is completely inverse, where the smallest layer is the original reporting, and there's so much content built on top of that.
I often think about finance today in those terms, in the sense that the underlying is kind of the smallest part of the market now, and there are so many new instruments built on top of it, whether it's derivatives.
Yeah, futures and options, or now it's, you know, prediction markets and things like that. It just feels like, yeah, you know, derivatives have been a bigger market than the underlying for a while. But it feels like the inversion of that pyramid is just getting bigger and bigger.
That's a great take, right? And I didn't know where you were going with that until I did.
I got there, you go. But right. You think of something like a Skynet or something like that. And okay, there was some company and there is a stock that trades, and then there's a NAS, and then there's three x leveraged Anders, and there's tokenized versions of it and so forth. And then there's prediction markets on where we'll close in the next ten minutes. I don't know if that exists. If it doesn't, it will exist. It probably will, etc.
But like there is so much to do on this topic. And of course, you know, we did that episode not that long, a few years ago with Austin Campbell talking about the potential for sort of blockchain to sort of unify and bring together a lot of different markets. I think it was one of the more compelling, quote, crypto unquote conversations that we've had, etc. And one of the things that's getting a lot of attention that combined all these things is that this entity called Hyperliquid, which people who know it are obsessed with it, but it's not a household name yet, but the people who do know it are very into it. It's not a household name, even though it's been growing incredibly fast.
Yeah, the one thing I know about it before starting prep for this episode was the mascot. Yeah. Which we have here, who's called Hypurr. And I always approve of a company with a good mascot. So here we are.
Well, you know, the company is a little bit sort of known for being a bit secretive. There's not like, they don't do a ton of press. So we're actually going to have to interview the mascot today because we were... No, no, that's not true. Amazingly, we really do have fun.
Yeah, amazingly, we really do have the perfect guest on the podcast, someone we've wanted to talk to for a long time. When I've told some people that we're having this, they're thrilled that we're having them. Jeff Yan, the co-founder and CEO of Hyperliquid Labs, is here in studio with us. So Jeff, thank you so much for coming on Odd Lots.
Why don't you give us the sort of basic view of like what Hyperliquid is today? I mean, this is, we're going to go into this, but just big picture, like someone says, what's Hyperliquid? What do you answer them?
Yeah. So Hyperliquid is a protocol. Okay. The tagline or aspirational goal is housing all the finance. And I think the community is serious about that. So we can go into what that means. But the short of it is a neutral layer on which finance can ultimately happen. It's the same way that electronic trading was a step function improvement over pit trading only a couple of decades ago. We view Hyperliquid, the protocol, as a sort of step function improvement over electronic but fragmented markets.
So I know Joe said Hyperliquid is not necessarily a household name just yet, but it might be on its way to becoming one, because just a couple months ago, Donald Trump was talking about Hyperliquid and talking about US regulators working to bring Hyperliquid to the US. At the moment, if you're in the US, you quote unquote are not allowed to use Hyperliquid. Although my understanding is a lot of people get around it using a VPN. When Trump said that, and feel free to refute me on that, it's just what I read on Reddit. Okay, but when Trump said that, were you aware that he was going to be talking about Hyperliquid at that point?
I was not aware. So that was a huge surprise to me. Hyperliquid Labs, you know, works on the protocol. I suppose it may be good to give a bit of a breakdown of the various pieces. There's the protocol. It's a neutral blockchain. It's a collection of permissionless set of validators who operate a network collectively, which is sort of a global view of a single consistent state. Hyperliquid Labs is a team that builds technology for this blockchain. And we are a super small team.
Yeah, sort of like I think what the CFTC is referring to when they say they want to bring the protocol to the United States is that it is in fact against the terms of service of Hyperliquid.xyz and many other interfaces for US users to use the derivatives trading on the protocol. But the CFTC, I think the current administration, wants to kind of take a proactive approach towards on-chain rails for finance. I think it's a kind of technological view that markets can be improved and that the US should not play a sort of, you know, extremely restrictive, you should not have an extremely restrictive view on this, but rather should find ways where we can incorporate this technology into the existing financial system.
So let's talk more about, I guess, what maybe the ecology or the ecosystem of Hyperliquid and the players, because you mentioned the word protocol. And I have to say it's like at various times the Bitcoiners would say, no, this is the new protocol, the Internet of Money, and Ethereum people talked about, oh, it's a protocol. This word gets used a lot. So why don't you just talk a little bit about, okay, it's a blockchain, but it obviously has higher aspirations than sort of like a typical crypto project. But like I understand there's validators, deployer, etc. Maybe like give us the landscape of who does stuff on Hyperliquid and like what their roles are.
Yeah, it's a good question. It's a, this is a very deep question. Yeah. And maybe it's a, yeah, it's a lot of stuff. But at a high level, the protocol is basically, it's kind of what it sounds like, you know, like there's like an HTTP protocol, like a TCP protocol. It's a messaging framework by which different validators in this case agree to communicate by these rules. Okay. And the kind of the interesting thing about a sort of a blockchain protocol as compared to a purely kind of informational format protocol is that the rules under certain assumptions, in this case, in the case of Hyperliquid, that two-thirds of the stake of the network is what we call non-Byzantine, which is to say that they operate under the normal rules of the protocol, that you get all these great properties, which is that these validators can operate independently. And basically, that's all, you don't really need to assume much more. The network will come to a consistent view of the world.
And this is really important for finance, right? Because it's sort of a, it is kind of the first layer. We've talked about the pyramid of like things that need to happen for a global financial system. If you think about it, the very, very base layer of the sort of information in the system is that everyone needs to agree. If we don't agree on what the ledger of balance is, for example, then all bets are off. So at a minimum, we all need to agree like there's this much in your account, there's so much in Trace's account, this much in my account. And also like what the prices are of the like. There's some basic things that like every participant needs to agree on. And in a regulated exchange, that's pretty simple. We trust this company, they're going to market. But in a decentralized one, you need some trick to get... not a trick, but you need some like mechanism to get independent validators to all agree. Yes.
And there can, I would draw the distinction. There's kind of an orthogonal question of whether there is a regulated entity deploying the markets. And in fact, I think there very much will be. And it's not an either-or. I think you can kind of benefit from the resiliency of an on-chain network even if a single registered entity has permissions over the markets that they deploy. The benefits of the technology are that, in the, you know, if you want to run a 24/7, 365 exchange, it's not a simple task. And any sort of mistakes that you may make, whether it's with the matching engine, with the clearing, any of the vendors in the stack, ultimately that is a single point of failure for a very critical piece of infrastructure for the financial system. If the rails on which it is built consists of a diverse, distributed set of validators where one or even many can go down at any moment in time and the network still maintains its important properties, which is that everyone agrees on the state and that it continues progressing forward at the usual throughput, then all of a sudden you have a much more stable foundation on which to build your regulated exchange.
Maybe just to hammer this point home, could you walk us through an example of say, you know, I buy $1 million worth of a certain perpetual futures contract? What's your most popular perpetual futures at the moment?
It actually varies. So between real world assets or things like Bitcoin, I think right now the perpetual is on Bitcoin's price.
Okay. Well, let's say I buy a million worth of perps on Bitcoin. Who is actually taking the other side? Is there collateral involved? Where is the collateral kept? Who determines the liquidation price when the trade like ultimately unwinds? And who loses money if for whatever reason I can't actually pay?
I was going to say if by some miracle Tracy makes money, who is on the losing? Yeah, walk us through how that works.
Well, first of all, I just want to reiterate that as an American, you probably are not in a fair position.
Okay, okay. Pretend that I live in Singapore.
Okay. If you're a Singaporean living in Singapore or, you know, European living in Europe, for anyone who lives in a free country, no.
How can I trade on my Austrian passport?
This is an interesting... Oh, you know Austria. Yeah. All right. The mechanisms, all of which you mentioned, I believe, are not so different from futures contracts on this exchange. Perhaps the one that is interesting here is the, so that, you know, there's a counterparty in the order book. The liquidation is set by the system. So it's not a subjective... It's not like someone actively setting liquidation prices. It's rules-based. Yeah. As a property of the clearing system, the unique thing here is that the clearing system is on-chain. So the threshold at which it happens and the mechanism by which the liquidation happens, which we can get into, it's analogous to what is the traditional default waterfall in a US regulated futures exchange, for example, analogous, different names. That happens in an on-chain implementation. So the execution of what is called HyperCore, which you can get into as well, it's kind of like you can view it as like a submodule of the blockchain state itself, autonomously carries out the mechanisms of these things like clearing and liquidation.
Let's talk about, okay. By the way, I think a classic sign that something is going to be a big deal, in my opinion, is when like Bloomberg starts listing it. So for example, like years ago, I don't know, I think it was like 2012 or 2013 was the first time that on the terminal you could look up the Bitcoin price and it's like, oh, that's probably a sign of like maybe something is going to happen here. Recently, there is now a Hype page and you can look at 24/7 things like they trade Brent there and they trade WTI and they trade S&P 500 and Circle and SanDisk and Micron and a bunch of other stuff. And of course it's got a lot of engagement, I see.
Yeah, it's super cool. No, it's a big deal. Kudos to you all for integrating the technologies. Yeah.
There you go. Okay. So now here's a key thing. So I'm looking at, let's say, an Nvidia perp that trades on Hyperliquid. And I believe it is issued by an entity called Trade XYZ. So let's bring in who is Trade XYZ and how do they get in a position where they can issue an Nvidia perp? Like walk through how this emerged on Hyperliquid.
Yeah. So we use the word deploy. Okay. Because I think issue has many connotations. This is a technical process by which anyone can use the network in different ways. You know, on the Bitcoin network, the same kind of foundational idea from globally consistent state, distributed set of participants. But on Bitcoin, you can move Bitcoin around. That's all you can do. On Hyperliquid, it's a lot more complex as a system that ultimately can power the financial system needs to be. And so one of these functionalities is that the players can come, they stake some amount of the native token.
How many HYPE do they have to buy to become a staker or how many do they have to accumulate?
Yeah, they have to stake 500,000 currently.
HYPE, not $500,000 worth of HYPE, at 500,000 HYPE coins. Okay. Keep going.
And the stake is basically a way for them to unlock these deployment functionalities that are implemented on the blockchain itself. And they can effectively define an oracle, more of an oracle system. Suppose it is a mechanism by which a perpetual contract tracks the one number that is exogenous to the system, which is the index price. So it's kind of the beauty of a perpetual, right? It's so powerful, so expressive. And yet it really is kind of, ultimately boils down to one number.
And this is really important, right? Because like a cash, physical settled future, the future ends and you get the oil at the end. A cash settled future, there's some entity and it's like, okay, the future expires with the perp. There needs to be an oracle. It never really ends. But there needs to be a price oracle that it's always going to be, I guess. Why is it called an oracle as opposed to just like the underlying price?
Well, oracle here has the meaning of the word oracle in a blockchain context is something that is published by a single or multiple publishers that track something that is off-chain. So it is not knowable from purely on-chain characteristics. This will change in the future because I think as spot markets move onto Hyperliquid, you can imagine a system where the oracle is actually no longer published but rather derived from ongoing trades.
Okay, just to finish the question about how the Nvidia got there, how does, so okay, Trade XYZ, they're a deployer. They get, they accumulate the HYPE so that they're allowed to deploy. How do they get the right or the ability to actually, okay, issue the Nvidia perp?
It's a simple matter of sending a transaction to do the deployments. And the thing here is they're inheriting the technology of the order book, the clearing. Yeah. In this sort of like the existence of USDC itself in a way that's kind of well connected to the sort of entire Circle infrastructure is another example of something that a deployer inherits. And they simply send the transaction designating the specifications of the contract. And they, as suppliers push this, they or their system, in the Trade XYZ case, I believe there is a system of publishers of the oracle price. And then the magic of it is that it is truly a distinct set of responsibilities between the protocol and the deployer, but together they kind of form this incredibly compelling ultimate product for the end user. And this is kind of this idea of modularity that I think is unique to on-chain financial systems.
Where does the liquidity come from? Because this is a classic issue for new exchanges and new markets. How do you actually make sure that there's enough money floating around to take the other side of a trade?
The liquidity is just, it's a free market. So it's an order book. Of course, whoever places an order must have the collateral necessary to back the order. But other than that, it is not really the... the protocol is simply a mechanism by which buyers and sellers come together.
I'm trying to like come up with an analogy here. It feels to me like to some extent the deployer is like a Trade XYZ. But there are others. We keep measuring them. There's others, the Trade Paragon. There's some others I don't know all the names of. They're a little bit like an ETF issuer, right? Like in a traditional stock market, like they're a little bit like their deployer because some companies have like, you know, single stock ETFs, etc. They are responsible for this instrument maintaining a price to some underlying thing. In the case of ETF, no, it's usually a basket of conversion, etc. But like the thing I'm still trying to understand is like, like can people issue an Nvidia perp? Like how did they get this particular slot in the thing as opposed to someone else? Yeah.
So anyone can do it. So there's no protocol level semantics about what the perpetual is. The protocol, you can view it as a kind of basket of tools and like a deployer can come and use it, okay, as they see fit. And but you're, I guess the second part of your question is like, well, what is kind of the mechanism by which this kind of scarce resource might... Yeah, yeah. So that is governed by an on-chain mechanism. It's a Dutch auction. Yeah. It's, I guess in short, it's basically a way to kind of allocate the scarce resource of deployment slots. This is scarce because on each order book, each kind of clearing system for a specific market takes computational resources of the network. So as the network scales, I think these resources become less scarce. But ultimately they will always be a limiting factor of anyone that wants to deploy on the system.
And the Dutch auction is a way whereby in every 31-hour interval, currently 31 is simply chosen so that the time at which the auction resets changes time zones, as it's relatively prime to the number 24. But you know, approximately once a day, there's an opportunity for any deployer to deploy something. And the auction, the Dutch auction is nice because normal auctions have a few undesirable properties. The incentives are a bit odd, so you're kind of incentivized to penny the other bidders, you're incentivized to withhold information and then spam it at the very end. It has all these kind of like interesting, I would say suboptimal game theory properties. Dutch auctions are nice, especially launching systems, because they go in reverse. So the price starts at a value and it decreases linearly. And then it is kind of spam resistant because the first person who bids gets it. The price decreases in this case linearly, but I suppose it doesn't have to be linear, and it resets to twice the last clearing price. So there's a kind of natural correction mechanism by which it approaches the fair market value of the scarce resource.
Do you get excited to see who wins those auctions? And do you have any idea of like, oh, well, they plan to do this or issue or deploy whatever if they win this auction? Or do you have an idea of like this particular deployer has come up with interesting ideas before?
I don't, I don't know. So it is a permissionless system. I actually don't personally track. Okay. I know that there are tools that people have built where you can see, they're pretty cool stats. This is another nice thing about chain systems that the data is transparent and verifiable and auditable. So anyone can build these really cool analytical tools about, oh, like these deployers, like I said, like, you know, tend to build in these ways and they can use their tool in this specific way. But I personally am honestly just too busy to really look into this stuff in depth.
But I do think it is very cool broadly to see what is being done, which is taking these markets that are traditionally sort of confined in various ways and extending and making them more broadly accessible, whether that's temporarily in 24/7, whether that's sort of just giving retail or just everyone around the world a more equal access to the same financial opportunities. I'm a really big believer in that. And I think many people, whether they're building on-chain or even in traditional settings, I think many people who work in finance sort of towards the same end goal. We're really just taking different routes, but kind of all trying to make incremental progress. Ultimately, the thinking is that the financial system is there to better serve as many people on this planet as possible. And that is, I think that is, you know, many layers removed, but this sort of permissionless deployment system ultimately is accomplishing that goal.
Like one example here is the IPOs, especially this year. If you look at them, they're a really great example of how wealth is being created. And tremendous amounts of wealth are being created. But it's being created in a way where it's gatekept. I don't think this is done intentionally. I think it's just a byproduct of how the markets work right now. But if you have trillion-dollar, two trillion, three trillion-dollar companies IPO, you can pretty confidently say that most of the wealth creation has happened at that point. And so I think it is a failing or a sort of limitation of the existing system if up until that point very few people have been able to trade these opportunities.
