Why can Hyperliquid kick open the door to on-chain derivation?

“Derivatives are the holy grail of DeFi.” Regarding the fact that on-chain perp protocols are the ticket to the second half of DeFi, the market reached a consensus as early as 2020.

But the reality is that over the past 5 years, perp DEX has always faced a difficult trade-off between “performance” and “decentralization” due to both performance and cost. During this time, the AMM model represented by GMX has achieved permissionless trading, but it is difficult to compete with CEX in terms of trading speed, slippage, and depth.

Until the emergence of Hyperliquid, which achieved a seamless experience comparable to CEX with its unique on-chain order book architecture on a fully self-custodied blockchain, the recent HIP-3 proposal has further dismantled the barriers between Crypto and TradFi, opening up infinite possibilities for on-chain trading of more assets.

This article will also take you deep into the operational mechanism of Hyperliquid, the sources of income, objectively analyze its potential risks, and explore the revolutionary variables it brings to the DeFi derivation track.

The Cycle of the Perpetual DEX Track

Leverage is the core primitive of finance. In mature financial markets, derivative trading far exceeds spot trading in terms of liquidity, capital volume, and trading scale. After all, through margin and leverage mechanisms, limited funds can leverage a larger market size to meet various needs such as hedging, speculation, and yield management.

The crypto world, at least in the CEX field, also confirms this rule. As early as 2020, CEX's derivative trading, represented by contract futures, began to replace spot trading and gradually became the dominant market.

Coinglass data shows that in the past 24 hours, the daily trading volume of major CEX futures has reached hundreds of billions of dollars, with Binance even surpassing 130 billion dollars.

Source: Coinglass

In contrast, the on-chain perp DEX has been a long journey of five years. During this time, dYdX explored a more centralized experience through an on-chain order book, but faced challenges in balancing performance and decentralization. The AMM model represented by GMX has achieved permissionless trading, yet still falls short compared to CEX in terms of trading speed, slippage, and depth.

In fact, the sudden collapse of FTX in early November 2022 stimulated a surge in trading volume and new user numbers for on-chain derivation protocols like GMX and dYdX for a period of time. However, due to the market environment, on-chain trading performance, trading depth, and various trading experiences, the entire sector quickly fell back into silence.

To be pragmatic, once users find that on-chain trading carries the same liquidation risks but cannot obtain CEX-level liquidity and experience, their willingness to migrate will naturally drop to zero.

So the key issue is not whether there is demand for on-chain derivation, but rather the persistent lack of a product form that can provide value that CEX cannot replace while also addressing performance bottlenecks.

The gap in the market is very clear: DeFi needs a perp DEX protocol that can truly deliver a CEX-level experience.

It is also against this background that the emergence of Hyperliquid brings new variables to the entire track. What is less known is that although Hyperliquid only officially came into the spotlight this year and entered the vision of many users, it was actually launched as early as 2023 and has been continuously iterating and accumulating over the past two years.

Is Hyperliquid the ultimate form of on-chain CEX?

Faced with the long-term dilemma of “performance vs. decentralization” in the perp DEX track, Hyperliquid's goal is straightforward— to directly replicate the smooth experience of CEX on-chain.

To this end, it chose an aggressive path, relying not on the performance constraints of existing public chains, but instead building a dedicated L1 application chain based on the Arbitrum Orbit technology stack, and equipping it with an order book and matching engine that operates entirely on-chain.

This means that from order placement, matching to settlement, all trading processes occur transparently on-chain, while achieving millisecond-level processing speed, therefore from an architectural perspective, Hyperliquid resembles a “fully on-chain version” of dYdX, as it no longer relies on any off-chain matching, with the goal aimed at the ultimate form of “on-chain CEX.”

The effects of this radical approach are immediate.

Since the beginning of this year, Hyperliquid's daily trading volume has been on the rise, reaching as high as $20 billion. As of September 25, 2025, the cumulative total trading volume has exceeded $2.7 trillion, and its revenue scale even surpasses that of most second-tier CEXs. This fully demonstrates that on-chain derivation is not lacking in demand, but rather in truly DeFi-compatible product forms.

Source: Hyperliquid

Of course, such strong growth has quickly brought ecological attraction. Recently, the bidding war for USDH issuance rights sparked by HyperLiquid attracted heavyweight players like Circle, Paxos, and Frax Finance to publicly compete (for further reading, see “Where is the pivot of DeFi stablecoins based on HyperLiquid's USDH becoming a hot commodity?”). This is the best example.

However, merely replicating the CEX experience is not the endpoint for Hyperliquid. The recently passed HIP-3 proposal introduces a permissionless, developer-deployed perpetual contract market on the core infrastructure. Previously, only the core team could launch trading pairs, but now any user who stakes 1 million HYPE can directly deploy their own market on-chain.

In short, HIP-3 allows the creation and launch of any asset's derivation market on Hyperliquid without permission. This completely breaks the limitation that past Perp DEX could only trade mainstream cryptocurrencies. Within the framework of HIP-3, in the future we might see on Hyperliquid:

• Stock Market: Trade top assets in the global financial market such as Tesla (TSLA), Apple (AAPL);
• Commodities and Forex: Trade traditional financial products such as gold (XAU), silver (XAG), or euro/usd (EUR/USD);
• Prediction Market: Betting on various events, such as “Will the Federal Reserve cut interest rates next time?”, “The floor price of a certain blue-chip NFT”, etc;

This will undoubtedly greatly expand the asset classes and potential user base of Hyperliquid, blurring the lines between DeFi and TradFi. In other words, it allows users globally to access the core assets and financial mechanisms of the traditional world in a decentralized, permissionless manner.

What is the other side of the coin

However, although Hyperliquid's high performance and innovative model are exciting, there are also significant risks behind it, especially at a time when it has not yet undergone large-scale crisis “stress testing.”

The cross-chain bridge issue is paramount, as it is the most discussed topic in the community. Hyperliquid connects to the mainnet through a cross-chain bridge controlled by a 3/4 multi-signature, which also constitutes a centralized trust node. If any of these signatures encounter issues due to accidents (such as loss of private keys) or malice (such as collusion), it will directly threaten the asset security of all users in the cross-chain bridge.

Secondly, there is also the risk of the treasury strategy, as the returns from the HLP treasury are not guaranteed. If the market maker's strategy incurs losses under specific market conditions, the principal deposited in the treasury will also decrease. While users enjoy the expectation of high returns, they must also bear the risk of strategy failure.

As an on-chain protocol, Hyperliquid also faces conventional DeFi risks such as smart contract vulnerabilities, oracle price feed errors, and user liquidations in leveraged trading. In fact, in recent months, the platform has experienced multiple large-scale extreme liquidation events due to malicious manipulation of the prices of some low market cap coins, which exposes the areas that still need improvement in risk control and market regulation.

Moreover, objectively speaking, there is another issue that many people have not considered, which is that as a rapidly growing platform, Hyperliquid has yet to undergo a large-scale compliance review or face a serious security incident. During a phase of rapid expansion for a platform, risks are often overshadowed by the halo of fast growth.

Overall, the story of perp DEX is far from over.

Hyperliquid is just the beginning. Its rapid rise proves the real demand for on-chain derivation and demonstrates the feasibility of breaking through performance bottlenecks through architectural innovation. HIP-3 further expands the imagination to stocks, gold, foreign exchange, and even prediction markets, blurring the boundaries between DeFi and TradFi for the first time.

Although high returns are always accompanied by high risks, from a macro perspective, the appeal of the DeFi derivation track will not diminish due to the risks of a single project. In the future, it is not ruled out that new on-chain derivation projects may emerge to take over as the next leaders like Hyperliquid/Aster. Therefore, as long as we believe in the charm and imaginative space of the DeFi ecosystem and the derivation track, we should give enough attention to similar seed candidates.

Perhaps looking back several years from now, this will be a brand new historical opportunity.