Hyperliquid’s New Power Shift | Shaundadevens & Carlos

Transcript

Yeah, I looked at it yesterday and I tried to run the napkin math, see how much it is. And my first reaction was overwhelmingly very, very positive for Hyperliquid. I mean, one, they're getting 90% of all revenues after costs. That's a huge thing. Plus, Coinbase and Circle have been willing to both stake 500k hype, so that's a million hype that they're putting in stake to be able to do this. And I kind of wonder what's the value there cuz Coinbase is already the dominant stable on USDC.

Nothing said on ZeroEx Research is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only, and any views expressed by anyone on the show are solely our opinions, not financial advice. Bocaccio, Ryan, and our guests may hold positions in the companies, funds, or projects discussed. What's up, guys? Welcome back to another episode of ZeroEx Research. Today, I am joined by Danny, Shonda, and Carlos, two of them from the research team. Danny is full-time podcast. Unfortunately, we don't get to read him write about Telegram, Boston, whatnot anymore. How's everybody doing?

Doing great. Doing great. Yeah, I'm great. This is part of uh I guess maybe I'll give a bit of an intro. I know like our listeners typically just watch me and Danny look at each other and kind of say two completely tangential points 15 minutes in a row, but now we're going to try and make the pod a bit more analyst-heavy, so we're going to have two other Blockworks Research analysts every week. Um and yeah, hopefully you guys enjoy it. Um just to kick us off, uh do you want to go a little bit of market thoughts? Um I don't know how much market we want to talk given that everything is kind of down today, but I'm a little bit surprised that we have Jensen and

everyone else in China um and the markets dumped like 6%. What's everybody's thoughts here? Is the market down 6%? I was not aware of that. You haven't been looking at at the stockies. I think Bitcoin is down quite a bit. And then also the most painful thing of the day, which I want to ask Shawn double down as well, is that they're trying to kill Hyperliquid. Um specifically the CME and the NYSE, according to Bloomberg. I have not been able to verify the source yet since I don't have a Bloomberg account. I'm waiting for James Kristouf to potentially send me a screenshot, but he hasn't yet. Um Yeah, apparently they're trying to move

against Hyperliquid due to sanctions evasion and then insider trading as well. Uh Anyone have any interesting thoughts on this one? It's really weird after a partnership with Coinbase was announced yesterday, you know? Like it seems like the Hyperliquid policies and Coinbase is moving things forward. Coinbase is sort of like, you know, embracing Hyperliquid finally. So I think, you know, I haven't checked out the news, to be honest, but it does seem like Hyperliquid is making more strides like towards like regulatory clarity than uh people moving against it, but I don't know.

Yeah, that's the same thought I had, especially another thing on top of that is like, yeah, A, like Coinbase is supporting Hyperliquid going against it. And we can talk a bit about like how smart that is from Coinbase's perspective versus like if it's good for Hyperliquid's perspective. Um it's also a bit weird because I think NYSE's parent company ICE owns uh Polymarket or owns a chunk in either Polymarket or Kalshi, I can't remember which one. Um which are like very rife with insider trading, right? Like they had a few weeks ago the headline that um there was a bunch of oil trading happen I guess this was also an April to

be fair. But there was a bunch of like Iran related trading happening on Bali market and Kashi um from like freshly funded accounts that were clearly in the right like five or six times in a row. Um so I was a bit surprised at that. What's everybody's feel on Coinbase partnering with Hyperliquid with that USDC thing? Sean, any hot takes? I mean, yeah, I looked at it yesterday and I tried to run the napkin math, see how much it is. And my first reaction was overwhelmingly very, very positive for Hyperliquid. I mean, one they're getting 90% of all revenues after costs.

That's a huge thing. Plus Coinbase and Circle have been willing to both stake 500k hype, so that's a million hype that they're putting in stake to be able to do this. And I kind of wonder what's the value there because Coinbase is already the dominant stable on USDC. USDH didn't gain traction as fast as I think a lot of people did um hope that it would do. Um so I'm wondering what's the rationale to now take their already existing dominant market share where they were earning 100% of the revenue and now earn only 10%. Um but it's extremely, extremely positive for Hyperliquid.

Is that confirmed that it's going to be 90% revenue share? Yeah, so it's 90% of all revenue after you account for costs. How's how's the calculation of costs Yeah, also where does Circle side? Circle doesn't like they don't have a lot of money net of costs, so it's like $8. Like I I I are the terms on that like um does it play in their favor or do they actually are going to get like effectively 80% of the interest revenue? Yeah, I mean that that that remains to be seen. Until now we just know 90% of all the cost adjusted revenue will flow to Hyperliquid. Um yeah, it depends on how they account for that. Yeah, but I

completely agree with you on that Shonda though. It's a bit surprising because I think it's like 1.7 bill on the hypercore, 3.7 bill, no, 1.6 bill on the hypercore, 3.7 bill on the opposite hypercore, 1.6 on hyperEVM. Um significant chunk of like supplies in USDC. Obviously majority of volume is denominated in USDC. They really didn't have to do this and I thought that was like the original intention as well when they didn't bid for the USDH ticker even though they were like clearly a I think they would have won. Um probably it would have just been And then instead like they didn't bid for it and now they're just giving it. Um giving Hyperliquid almost

a leg up in that sense. I don't know how the revenue will work. I I given like I agree with Danny they don't what is fees there. Also I'm not sure if it's even 90%. I can't find any I was looking for this this morning because everybody posted 90% but I couldn't see any like evidence about it. Um The AQAV2 doc states the 90% figure which so I'm I'm in alignment with Shonda here. I think the question mark is like what is what is net of cost mean for Circle um and offering up that fee revenue. I mean we'll see like if they if it effectively ends up being like 90% of the interest income then that's a huge win. I think I kind of I agree with

both you guys though like the question in my head is like why why [clears throat] are Coinbase and Circle doing this now? Like why are they make the one it seems like yes good good for hype. Two it seems like just an unfathomably like stupid acquisition from the Coinbase Circle side and like I don't know. Waste of money. Like you're you're one late to doing this, but two, there wasn't even a still a threat from US DH yet. So, I just like I'm not I'm not understand the motivations by any of this. Well, the motivation might be that Brian Armstrong really la- likes Max Fiege. He was like, "Look, I just want to give you a ton of money for this for this situation." Because that's what it seems like to me. Like

there's no reason apart from that to buy out native markets. I feel like that even the acquisition alone could make sense, but then to then equally agree to give up like they US DC dominates the exchange. So, it's like "Okay, we're going to buy out the only credible competitor on the exchange and then also give away all the revenue that we make from the interesting like what?" I don't see the positive return for them here for this. Yeah, I mean Coinbase is not historically great at acquisitions. They spent $400 million on a ICO platform um and 25 mil on on on an NFT, I think.

But aside from that, I think the US DH thing is interesting because I think it took a lot of people for sur- by surprise uh in the Hyper EVM ecosystem. Like I I saw something I think was Charlie from uh Felix saying he was as surprised as anybody else by CT wind down on US DH. Um so, I am like this is a huge win for Hyper liquid, but it also seems like it affected a lot of teams negatively who are maybe like building with an align stable coin on the Hyper EVM or like just on HIP 3 markets.

And I'm just uh I'm just curious your thoughts there. Like do do you think like um these teams will be affected by by this wind-down or it's not really that that that much of a factor. I'll give the I'll give the the negative take first. Maybe it's a hot take, but I got to imagine that those those folks building those products relying on USDH as like their winning sauce were probably a bit like rose-colored glasses already in the first place and like betting on a serious underdog. Um, and we're probably already not like main contenders for meaningful products.

Um so this is probably like a bit maybe a bit of a nail in the coffin for them, but it I don't know that they were necessarily like so in the race before now. I don't know, maybe you guys disagree with me. Okay, I have two things on this. First of all, I saw um Markets by Kinetic release something and said that they are working with native markets um and hyperliquid to transition the margin asset for the next 2 XCC. There's two things on my mind related to that. One is when you bid a ticker on whatever HIP-3, you bid it with the quote asset, right? Like you If I want to buy Tesla

um and like Tesla USDC is already bought by Trade XYZ, can I bid Tesla USDC again? It doesn't seem like it would work. Sean, then maybe you're more knowledgeable about this. >> you just you just need to change the ticker. Like you could still list Tesla, but it can't be the exact same Tesla USDC. You could still have the Oracle and market referencing Tesla, but you just need to name it something different. So So you have to Well, then it's worse, right? Because at one point you had TSLAUSDH, now you have to do TESLA or whatever else USDH. So it's it's it doesn't even look like the right ticker.

Um and the second thing is I think USDH had lower fees, right? Does this mean that fees get lower for USDC as well? No so that's that's another interesting thing with the Aligning Code Asset One and the Aligning Code Asset Two. Aligning Code Asset One to kind of further its adoption in the first place, they had lower fees and higher rebates. Uh but under the Aligning Code Asset Two, there are no discounts. So, it's again positive for Hyperliquid because they're transitioning their entire uh stablecoin to USDC without having to subsidize that with lower fees.

And And that's just like when you look The more you look into it, the more you realize like this is really an incredible deal for Hyperliquid. There are so many things that are different with this Aligning Code Asset Two. Like for example, even under the first Aligning Code Asset, you're only required to give away 50% of your revenues to Hyperliquid. You can keep 50% and now with the update, it's 90%, right? But Circle is still willing to for some reason accept those terms. Yeah. I mean, Sean, I I read your tweet yesterday and it was at 5 mil USDC, it could be up to like $160 million in annualized revenue for 3 and 1/2% yield.

Um which is 26% increase to current annualized revenue, which is like ridiculous. Um I think the only concern is HIP free markets where USDH was the quote asset. Um right? And then maybe that's just a way for USDT to come in. And maybe act as that asset. The opposite side of Box point about the USDH markets like this feels like it just locks in XY trade XYZ markets. Like they're they're all USDC quote, they're already all the biggest markets. Like they're they're clear winner here in the exchange now.

Yeah. Which I think is probably also a good thing. We just like reduce fragmentation as much as possible without actually [ __ ] over anybody. It does suck like I don't know. I'm an investor in Kinetic just like before I say this but like markets. Um, they have to either list like super exotic tickers now or they have to make their own ETFs or baskets. Um, which is interesting like for hyperliquid. Like if you want a long I don't know like solar only then maybe markets is going to be the one to list that and not Trade XYZ. But on the other hand it's like they don't ever get that benefit from um, like a Tesla USDC stock uh, market.

I mean it it probably makes sense for deployers to just assume that Trade XYZ is going to continue to dominate. There's like no reason that they won't. And even trying to list like more long-tail assets I think is kind of futile because as long as those like as soon as those assets get traction Trade XYZ is just going to launch it and um, take your volume. So, even in the best case um, you're just hoping to get a bit of volume until they eventually bid your ticker. That feels like a tough game too, right? Like you you've got a cost per ticker to bid, right? So, if like if you can't get meaningful traction like if you're trying to list these long-tail assets if you can't get meaningful traction on what it's like it's almost like

putting on meme coins at that point, right? Like you're like a meme coin dev and you're trying to like recoup your cost of maybe you're spinning up a bunch of tickers over and over again and just hoping that the the minimal fees on the volume will pay you back for, you know, listing it. While at the same time having to stake like 500k of hype. >> while having a huge capital requirement. Yeah. Oh, one other good thing for this is that uh, Coinbase and Circle have both been buying hype. Um, and staking it to run a validator.

So, that's just more uh, to run a validator I guess. I don't know what or they're going to launch their own markets, but um, it's another benefit for hyperliquid. It just seems like it's all positive for Hyperliquid, but it's like kind of confusing for like Coinbase, Circle, and also for like the other the smaller HIP-3 deployers who will probably have to scramble a bit to figure out what to switch the tickers to. Like probably just two more observations. One is I I also really like that it's a diversified revenue stream, right? Like you have the cyclicality of crypto. Now you're expanding to RWAs, which we still see muted uh revenues because of the fee discounts, because of growth mode. And

now we're also going to layer on top of that um like very, very stable flows from stable coins. Uh and my second coin is like maybe maybe one of you guys can answer this, but I'm really curious. What does this mean for other chains that have USDC? Like maybe Solana. Do they have any bargaining power to ask um Coinbase and Circle to do the same? Well, Lyra had the bargain power to do the same thing. So, if I'm thinking of Lyra had the um maybe the others can pull it off too, but I'll let our resident on-expert answer properly.

Yeah, I'm not sure about Solana, and the reason is that they really have like a diversified stablecoin base. So, where on other chains you see USDT or USDT dominate like 80% of the stablecoin supply, on Solana right now USDC is about like 50% of supply, I want to say. Uh then USDT makes up about 22%, and then you have a bunch of other players like USDG, USDS, and now Athena's making a big push with USDE uh with both like Jupiter and Kamino.

So, I'm not sure the Solana Foundation really wants to pick a winner in that sense. I know that Drift, for instance, on the recovery efforts had a big push from Tether, and the Solana Foundation was involved there. So, I know that the Solana Foundation is in one way trying to push USDT on on Solana as well or at least like you could imply that from the recovery efforts on the drift side. Uh so yeah, I don't think one of like I don't think the Solana Foundation is going to bargain with USDC to get the reserve yield if that makes sense.

Uh but that remains to be seen um and I and I think for some reason like a lot of the efforts still continue to be on just growing uh the diversification of stables on Solana as seen by the growth of like global dollar and like USD from Athena. Like to be fair though maybe to the other side that could be an argument or like operating leverage for them in which to get a deal for the interest rate like get more of that that fee revenue interest revenue from a USDC given that the mixture of stable coins has diversified the total dominance of USDC has decreased like

I don't know maybe it's a it's a reason it if Coinbase Circle is willing to go this route on hyperliquid to like prevent them from losing some dominance there. Um I mean what the supply of USDC on Solana is eight or nine billion I want to say. Um perhaps they would like to see that number go up and dominance increase in the future on more chains. So um maybe they do need to offer up some uh an olive branch in order to see that happen. I want to push back on Shonda your point that this means that hyperliquid is getting into I saw the stake a bunch of times about this being a diversified revenue stream and also this being

um good for RWAs like um this pushing RWAs as an income stream for hyperliquid. I don't see how that is I understand that this is like technically RWAs, right? Like stablecoins are technically real assets going on to the chain. But it still feels it's for deposits and the deposits are directly linked with um trading activity on the chain. Like it's not like hyperliquid Now, this is not for hyper core as this is not for hyper EVM because that has lending activity as well, which I think

you can argue. But for hyper core, the majority is what? $3.7 billion billion USDC. That to me doesn't feel like hyper liquid getting into a diversified income stream because it's the money is deposited there for trading activity. If volumes are low, I expect that people will withdraw money from hyperliquid and go elsewhere. Like it just makes sense if trading activity is low. Um on the other hand, I do think that generally it's the right call for all chains to do this.

Um Mega ETH I think also did it the right way. Um where they internalize or they're doing it the right way. But for them, it's like a very little amount right now, but um but I'm surprised that like larger I think this is part of the reason why it's kind of bad to be a very early chain like Ethereum and Solana. It's you don't you are kind of bounded to let this like competition and like free market thing win, but uh you can make a lot more money by having like aligned partners and doing things such that you like have better revenue share and stuff. Um On ironically, Coinbase has done this really, really well with Circle historically. Like just getting 50% of the revenues is fantastic, obviously. Um and then yeah, just something that older

chains can't do, I guess, because of optics things. I mean, right now, like even if Toly retweets like five tweets from the Phoenix Labs guys. Everyone's like, "Oh, they're like king-making them." But reality is like you should have control as to what protocols do well or like what products built on your chain do well. Um because they need to get them aligned and then you can control them to an extent. Um and you can revenue share. And I think that's not a bad thing necessarily. So yeah. Yeah, I think that's a really good point and like she just gave me a thought which is like with Hyperliquid it's so much easier because deposits, like USDC deposits just sit on the exchange and like you're not really doing that much with that USDC. Whereas on Solana like

it is sitting on every user's like different wallet. You're depositing on like one money market, then you're depositing like on the Phoenix perp exchange, then you're trading like on Jupiter, then like the the prop MM is doing whatever with the USDC. So, it's like a more productive uh use case if that makes sense or like it is cycling through like many different protocols. So, I don't think it makes a lot of sense for a like a general purpose chain to internalize it that way. Like maybe you had to have done it like uh Mega ETH did it like with US DM which is like the Athena white label stablecoin. But that has to be like from the beginning uh as as you said Buck. Uh so, yeah, I don't think it's going to happen uh for

Solana. For Coinbase like they're essentially doing what they're doing with like Coinbase Prime deposits, no? Like if you have like a Coinbase Prime account that you have a certain amount, they pay like a yield share for you. I think that's essentially what they're doing for Hyperliquid just on on Hyperliquid itself as opposed to depositing on on Coinbase Prime. Yeah, the only thing is that I don't with Coinbase Prime I understand why they would allow that to happen because Prime customers trade through them, so you make those fees.

But with Hyperliquid still doesn't make any sense because the fees that well, obviously like hyperliquid uses some exchange so there's no need for the fees. Well, for instance, Sky has like uh 3.5 billion dollars of USDC deposited on Coinbase Prime just for the Paxos stability module and they earn yield on that. So, it's not like they trade actively on Coinbase, but they still like earn yield on that just for depositing on like the Coinbase Prime uh earn program. Yeah, maybe the I guess maybe the question here is if we're modeling like the reason that maybe hyperliquid is a bit different is that you have um a very like activist investor community who everyone

who likes hyperliquid owns hype and so if the interest revenue goes to hype the token and buying the token, they're okay with that happening versus it going back to them from their own balances held on the exchange. It is quite a bit different from the traditional model where you have a brokerage account and like one of the features of that account is that when you have cash on it, they pay you the like you know, net 25 or 50 bips out of it and then they pay you the interest income. Um so that that is like one difference, one quirk is that people are very tied to like hype the token and so it they're willing to maybe forego something that would otherwise be paid out to you, it's paid out like to the token in essence.

Yeah, that's a good point. Okay, we I want to move on to the to what I made Shonda and Carlos prepare this morning to present to our dearest listeners. Cerebrus, CBRS was uh talk of the town. There's so there's we've done pre-token PTGE markets before. Um a lot of excitement discussion around pre pre-IPO with the Cerebrus IPO this week. Um opened yesterday. Uh had an immediate pop 100%.

Um Shonda, you covered it. I'd love to get you you know, your insight, your take here. Um the main the main takeaway that I've had is that uh it was a pretty highly anticipated. It's a semi name and we're in a semi market right now. Semi stocks are, you know, pick any name and then look back one or two years and they're all up 10 to 50 X um off their cyclical lows. Um so, having this name IPO and then uh people were excited basically to trade trade it sort of pre-IPO uh on Hyperliquid. Yeah so the pre-IPO model has been tried before.

I think uh this one CBRS was the first like validation that it could actually work at a larger scale. And I think the important thing is to understand how Trade XYZ has done it differently than other um issuers like Ventuals. And basically the the problem with pre-IPOs is that these tokens don't have a liquid reference that you can use for the oracle price, right? Like Ventuals tried to use some secondary market data that kind tries to project what it is and anchor that with a funding rate, but those references are just not liquid enough.

Uh so, what Trade XYZ did differently was basically use the Hyperb model that Hyperliquid did with the pre-tokens and apply that to um pre-IPOs and only use it for equities that are going to IPO like within the next month and within the next week and have all prices discovery internal, not reference any external oracle. So, that internal price feed becomes basically at that point the market's reference where it's going to open. And then as soon as the market launches and there's a oracle that you can reference as a external price, you switch the oracle from internal to external. And kind of the way to think about it is this is the exact same way that weekend markets work that on the weekends there's internal pricing

because traders know as soon as the market opens the oracle is going to switch to the external price. So, it makes sense to try to predict what that external price is going to be and they've applied it now to pre-IPOs, and it's worked incredibly well, I think. It's the only platform where you could trade it before the IPO. Did over 200 million dollars of volume pre-launch. And if if you look at the chart, it it opened incredibly close to where the Nasdaq actually opened. Do you think that 30 days is the right window to have as like to enable this pre-IPO exposure trading?

I'm just curious like how how long is too long, you know? Like it seems like, you know, 1 year before IPO is obviously too long, and you can't trade these things. Uh 30 days seems like kind of an arbitrary number. I'm just curious on your thoughts. As as you get closer to the IPO date, do you see more volatility around? Does markets we see more price discovery? Like what are your thoughts on it once you looked at the data? So, the closer you get to listing, the more information you have, and the more accurately you can project what it's going to open. You have more information on where they plan to open. Uh so, you can generally do a better job at pricing and even quoting it tighter. Um I think

1 month is already on the longer end. So, I think the markets for CBRS started on May 1st, and it transitioned to uh normal equity perp on 14th, so around 2 weeks. Um but the problem is just if you start with 2 weeks, and then someone else front runs you and does it for a month, like that trading activity is just going to go. People want to trade it, you might as well create the market. Let them trade. It'll be less liquid, but um it shouldn't be a problem. But it's just the closer you get to launch, the more accurate the price will be.

Can Can I I That point stands. I think Shonda, another thing here is if you look at like pre-market listings as well, I think majority of the volume happens the week before or the 2 weeks before. So, I I from a product I guess like a business perspective, it probably makes the most sense to I don't think you have to do it for a year because if you just list some cuz it costs money to list these things as well. Um so, if you just list something and like for 11 months, the total volume is a million dollars and then at month 12, in the first 2 hours, it's like 15 million dollars in volume.

It's not really worth listing that much in advance. Um Especially since those markets are usually so illiquid as well, and then people just like mess things up. So, you need as much information as possible like Shamus said. Yeah, for me like TradeXWC's strategy was really smart because they're waiting for that IPO as the catalyst event to just uh mark the Oracle price back to like uh a clear reference price. Whereas other like companies like Benz or like pre-stocks on Solana are just giving pre-IPO exposure to things people want to trade, but not necessarily are going to go public anytime soon. So, for instance, pre-stocks offers exposure to

like SpaceX, like Anthropic, OpenAI. Uh but the supply is necessarily constrained by, you know, how how how much can they buy of these SPVs that are directly or indirectly invested in the underlying like private equities, you know? Like it is a much more It is a much harder product to scale, and I I saw bug like with the with the signs. Like yeah, like sometimes you don't even you aren't even sure if you're getting the the, you know, indirect exposure to the underlying if that makes sense. It's a much harder product to to scale, basically. Yeah, you're getting like the sixth SPV with like 35% added fees, and the The one is out like out of Bulgaria

or something. So it's you're not really getting good exposure. And the other Hyper I guess Trade XYZ, it's very clear that it's a derivative and it's purely price based, which I think is what most people want. And then the other alternatives like pre-IPO stocks stock tokenized stocks that exist on other chains, I feel like are a bit you run the risk of one of the companies like Anthropic coming out and saying these are not real. Like don't don't invest in these. Um versus the other one is like clearly just people trying to put on um which I think is the same thing for the pre-IPO tokenized stocks as well. People they're just like treating it differently.

Um So yeah, like what you said is correct, I think. This is a much like cleaner way of getting exposure. Um and I think legally it is better as well. I am not a lawyer, um despite what some people might think. I don't really understand law that well, so I would To me it seems like it would be less like regulatorily scrutinized compared to like people saying that you can actually own the underlying asset with these. Um and like you said, like no one really wants to deposit, I guess, their tokenized Anthropic stocks onto whatever chain it is. So it's like hard to scale it. It's also hard to get allocation to those things also.

Yeah. Shaun, do you want to talk about the other exciting thing with Hyperliquid as well? Yeah, so following that, I mean, I feel like we really had a lot of exciting things on Hyperliquid, right? Like HIP-3 is doing great. Now we have HIP-4. We have really novel products being built on top um with pre-IPOs and now the USDC news. But just to take it back to Hyperliquid's HIP-4, um this now enables outcome markets on Hyperliquid. And I think like a good framework for people to understand how Hyperliquid is kind of approaching their end vision of being the house for all finances instead of starting as a general chain that can do a variety of smart contracts and activities like

Solana and then trying to improve the performance, they did the opposite. They started with very highly performant different type of primitives that they now try to expand, right? So, they started with just spot and perps, then they made spot open with HIP 1, perps open with HIP 3, and now with HIP 4, you're going to be able to create markets on different kind of outcomes that a deployer can settle at expiry. Um so, while that's interesting architecturally, I think the other thing we did want to point out in terms of our research is that the market's probably over waiting the revenue that HIP 4 is going to provide or at least it's definitely not going to be as

substantial as HIP 3 and also the natively deployed markets just because like prediction markets are very high margin for the retail layer that sits on top, like Polymarket, Kalshi, but they can only monetize that because they have a really strong retail distribution funnel and they've attracted those incentive retail users via marketing spend, advertising and stuff like that. Hyperliquid does not have that, right? Just because you now have the ability to create prediction market like outcomes doesn't mean you get the distribution of a prediction market. So, even if you were to take like pretty generous assumptions and apply the spot fees to prediction market volumes and say that let's imagine Hyperliquid would capture

100% of Polymarket's volumes, even that would just be around $62.3 million in annualized revenue and that is like very I would say unrealistic assumption of what these markets could actually capture in the beginning. But yeah, curious to hear what you guys think about HIP 4. I can share some slightly risque thoughts. I think Hyperliquid does one thing very well, which is like launching new products on top of their chain um and building out the infrastructure for others to build on top of it.

Um I do think that this has led to some things not being as successful and some other things being very, very successful. Uh I think this is the same for every chain as well, so it's not like Hyperliquid specific one, but what's the HIP for spot? It's HIP 2, right? Whatever, like spot tokens on Hyperliquid not very successful, more successful than like I I did the math back in the day and I sent actually this piece to Carlos and he said it was correct, so I'll use it here as well, but like it was crypto's mon station problem and I think Solana listed Monad and Hyperliquid obviously like through unit listed Monad. Um and Hyperliquid made like six to seven times

the fees of Solana even though Solana had more um volume. So I think like despite that, I don't think spot has been particularly successful for Hyperliquid. I think HIP 3 has been wildly successful for for Hyperliquid. I think it's part of the reason why it's still relevant today um while like all other chains are kind of irrelevant that's the currently um in the bear market while because I HIP 3 allows trading of stocks it's staying relevant. Um builder code's wildly successful, I would say, like just I looked at it the other day and MetaMask makes $25,000 a day off of it, which means that there's like enough volume on Hyperliquid through the use of

MetaMask such that MetaMask is actually making money on it. Um that was also wildly successful. I think HIP 4, my gut feeling is that it will be like the spot markets where like it technically does volume and it technically earns fees, but it's not like a super successful thing the way that HIP 3 and Builder calls has been. Despite that, I think it makes sense for them to launch this because I mean every other chain is going to have a prediction market. Um and the goal of a chain is to be used and such that I don't have to go from chain A to chain B to use another product.

So, I think it makes sense for them to launch it. I don't think it'll be as successful as HIP 3 is, but I think that's more of a of a like metric for I think that's more that because HIP 3 has been such a wild success as opposed to like HIP 4 is going to be [ __ ] Um I think it'll just be middling. Um and also like based off of this analysis, I still don't understand how Polymarket and stuff are meant to be very very revenue generating. Um or like actually cash flow positive assets, but um that's something for another time. I can't [ __ ] on prediction markets anymore. Makes me feel ill. Well, they can make money cuz they can charge

high take rates to retail users at the front end. Uh I think this is evidenced by, you know, IBKR and Robinhood like integrating with Kalshi and then them taking a fee on top of Kalshi's fee and still seeing a ton of volume. So, like the trader on that on on that at that point is like not concerned about the cost of fee to trade those markets. So, I I think they have a lot of like pricing power in that respect. Like obviously, you know, you couldn't charge 50 bips on a 100 bip contract or you know, at a at at a win 100 bip contract, but you can charge two, three, you know, whatever all-in cost um and make a ton of money if you're doing billions

in volume. I guess my maybe my view or my takeaway is that I think the I think you'd have to mark maybe the bull case for HIP 4 as the same outcome happening where a call sheet or a Polymarket partner and integrate and then just push their markets and maybe some some flow to a hyperliquid or a front end that's connected to that. Um and then hype gets to benefit from all the same reasons that they benefit in the way that their markets are constructed either you know, those guys have to buy some hype and and stake or you know, whatever the terms are of creating new markets. I don't know how the the terms there work. It maybe you can explain some of that Shonda like

if I wanted to spin up 100 prediction markets like is there a similar thing here where I need to pay a certain amount of hype to spin up a new market? Cuz I think in this scenario it'd be pretty tough like with how short duration and day-to-day a lot of these things like sports games I'm going to be spinning up, you know, 30 sports markets a day ideally. Yeah, uh so that's a good question and I just want to preface this with like a lot of the research we did for the HIP 4 report was looking at like um deconstructions of what hyperliquid is and not their official documentation.

But in that it looks like the HIP 4 is going to be a sub deploy action in the HIP 3 deployer. So it would be essentially like the same thing as listing a HIP 3 market that you'd have to win an auction for. But as soon as those auctions expired they can roll over and you can create them again. But I I do agree with you that it's going to be a barrier to entry like listing and bidding for these markets. And I wonder how many active markets you need. But once you have those markets, let's say you have like a daily expiry, they could roll over every single day.

You wouldn't have to like bid for a new market every single day. The the tough part there and like the way that I see that lending itself is we know there's cases where that that model could work well in the sense of like 2024 presidential election market. That was one very high volume for a long period of time where it's like sure, if you bid the market spin it up and it's live, it's going to be live all the way until the event happens. And you know, it did billions of volume in in um in that time period on multiple venues, but a lot of these So, to your point like if one closes down, then you can kind of spin up a new one in that slot.

Um but it I to your point, it feels it just feels like a more I don't know tedious tougher barrier to entry of like if I'm Kalshiur Polymarket and I'm going to or anybody else and I'm going to spin up markets here like I don't know. I think what we've seen generally speaking post 24 election is that the success on prediction markets is high volume um and high frequency of like smaller markets that expire quickly, get volume over 12 24 hours or even like 30 to 1 hour period 30 minutes to 1 hour periods and then they're done and then they the next one gets spun up. Um so, you're either going to need to have a ton of slots um

or this is going to be like a very slow like gradual ramp up of someone like building out markets on here. So, it could take some time. So, maybe that's like I guess in forward estimates for like an HIP 4, you you maybe you'd have to bake that in of like a a ramp up period just because it's going to it's going to take time to get all those markets spun up. I just want to chip in here. I think I agree with all of you that I think HIP 3 will be infinitely more successful than HIP 4 like the spot layer. However, I am kind of excited to see if there are synergies between HIP 4 and HIP 3 in the sense that you now have with the HIP 3 layer like uh perps trading for like uh equities for instance and you trade

it 24/7. So, with HIP 4, you could potentially enable like impact markets. And what I mean by that is like, for instance, let's say Nvidia has earnings next week, you could put up like prediction markets on what the price of Nvidia will be if they hit earnings. So, you have like a two-legged like bet, let's say, and you bet on the price of Nvidia if that uh you know, if earnings hit or if you have an earnings miss, for instance. So, you could create like very interesting derivatives around like the HIP 3 markets with the HIP 4 layer on top.

Although, I'm not sure like exactly how the technique like the mechanics of HIP 4, but these types of like impact markets could really be really interesting like for traders to express their views on like um on equities for instance, uh without having to necessarily bet on the purse, because sometimes you can be right and like, "Yeah, I'm right that Nvidia is going to hit their earnings, but maybe the price didn't move as I expected." So, with this, you can like really have a more much granular control over like what you're uh getting exposure to.

Maybe to your to your point, Carlos, what I think is interesting is it would be cool. I don't know if it's if there's a way to make this work necessarily with binary option outcomes, but to create a mechanism to effectively have actual options on assets that are listed on the exchange. So, to your like you I think you it's it's quite similar in nature like if you had something bounded, you know, what's the price going to be at expiration and maybe there's a you know, it either goes to zero or one like you're correct in that outcome.

So, you couldn't necessarily I think with this construction have like a you know, infinite upside uh scenario, but you could maybe craft some outcomes that are like, you know, if you're buying this at 2 cents, like it's a 50x if you're right, if the upside's like priced high enough. So, maybe it leaves some room to play there. Um but I don't know, maybe that comes in the future where more traditional options get get baked into the exchange as well. That that feels like an untapped area still. And we've seen, you know, like there's a excitement in derive as of lately. So, maybe that's something for them to explore later. Sean, guys, that possible on the on on >> [laughter] >> on on HIBOR, like having these types of impact markets or no?

Yeah, it is. And that's also one thing that I mean if we still had the slides, that was one of the examples that we gave that like now we have all these things within the same composable environment, and you can create like multi-legged payoff structures like that. So, yeah. The example that I thought is like there's a lot of fraud in the market, and as a trader, you still want to get upside to that with with still having fundamentals in mind, right? So, maybe what you could do is you could have a hedge a long position with like an option that Apple's going to miss their earnings because you know, like you have a you have a strong understanding of their fundamentals, but you still don't think it's going to reflect in the price. So,

you hedge your position like that. But yeah, it it all comes down to like maybe this isn't as interesting as hyper liquid is, but when you're building out an exchange that can just house a broader range of activities, not everything is going to be as interesting, right? It's just about like layering on options and options and options. All I know about this is that whoever builds out the first sports markets with sports betting markets on HIBOR is going to make a killing. If they manage to make it work, right? With a builder code, god imagine another $50 million for Phantom.

Thanks for [ __ ] playing. Okay, Carlos, I'm going to force you to explain Sky, but before we start I want you to explain to me the the structure of Sky and the shifts we're making down so that people don't get confused when you say, "Oh, this is a subprime mortgage agent." Okay so Sky, as you know, previously MakerDAO has evolved a lot since the MakerDAO days, and the way it functions today is that Sky is supposed to remain a very simple base protocol that sets the risk framework known as the Atlas.

Whereas, they outsource capital allocation decisions to external parties, which are known as agents, previously called stars of or subDAOs. So, these agents currently are Spark, Ovex, and Grove. And what they do is that they can borrow USDS from Sky at a wholesale rate that's known as the base rate. This base rate today is set at 3.95%, and then they can make allocation decisions earning whatever they make above that that rate as the spread.

So, it is essentially like you can think of it as a central banking analogy, where Sky is the central bank. So, they set the rate. Commercial banks, which is like Spark, Grove, and Ovex in this example, can borrow at that wholesale rate, and they can make the decisions of where they allocate that money, and they get to keep the all of the money that they generate above that base rate that they have that they have to pay to Sky, if that makes sense. I hope that was a I have a very good explanation. I have three questions around this, but maybe you want to run over Do you want to run over it first, or would it be more helpful if I ask first?

No, just ask, and we can go. When you want to get exposure to some form of a lending product within crypto, you have three options. One is Morpho, one is Aave, and one is Sky/Spark. I will say this is how I would classify it. Um now Morpho's price to sales you have to give me the figure, but it is very high. It's like above 100, right? Versus Aave's like 20 to 30 or something. I don't know about Spark's one, but MakerDAO was historically a really low one, so I assume it's relatively low.

Um Yeah, so so just to give some figures, like for Morpho you have to make assumptions because they don't even charge a take rate yet. But if you assume they charge 10% of like the interest generated, they would still be trading like at a over 100 x price to sales, which I think is stupidly overvalued. Uh with Aave you have like a 20x price to sales right now, but the problem with Aave is you have a lot of uncertainties regarding like are they going to get users trust back? Is liquidity still going to flow out of the protocol after the Aave exploit incident? So you have a lot of unknowns, let's just say that maybe you want to wait before sizing

into Aave. Uh with Spark, I am not entirely sure about the price to sales multiple, but but with Sky I know it's about 10x price to sales. Uh the current net interest uh income that they're generating annualized is around $160 million. And and the protocol is trading like about 1.5 billion, 1.6 billion um FDV, so yeah, like a 10x price to sales. And why do the follow-up question here is like you said Morpho doesn't even have a figure, but if you put What do you What did you put? Did you put 10 100 basis points?

As a fee? 50 50? What did you say? >> 10 10% of interest income. Even then it's like four times Aave and what like 10 times 9 10 times Sky what has not happened for Sky um versus like what is happening now such that he he you would say it's like at least something to be considered to be bought or considered to be looked into. My personal take is that Sky is misunderstood and it is under covered by the market due to its perceived complexity in the sense that they have seen a series of like

restructures over the years where people just gave up on trying to understand what it's doing. Um I think that's part of the reason why trades had a low multiple is just people misunderstand the asset and haven't had the time to kind of like look into it and how it actually works. Uh so I think like Sky still is one of the pillars of like on chain credit. If you look at who subsidizes like the on chain credit activity Sky is actually a big part of it. Like for instance Maple has like uh 900 million dollars of liquidity that's provided by Sky essentially. Um Morpheus at some point

on the Coinbase uh vault that they have with with Coinbase for borrowing against BTC. The Sky liquidity layer was providing a significant amount of USDC on that on that specific vault. So Sky is really like a pillar of like the on chain credit ecosystem. However, I think it remains misunderstood. I also think like one of the issues first of all I agree with you like Sky is one of those things where you have to spend like three days to understand it. Um and then they change it like every six months and then you have to spend another three days to understand it. Um and I think this just is in general with how they want to position themselves as like this banking thing as well. I think

that makes it a bit more complicated for people because I I think vast majority of people don't understand banking. And we actually just did a pod. I think it should be out today. It wasn't with Carlos, it was with Luke, but it's with Spark. Um And they talk a bit about the intric- uh Sam from Spark uh talks a bit about the intricacies of Spark and Sky. So, I recommend people listen to that together. But Anyway, about the Sky USDs growth. I think historically also Maker just didn't push as much as maybe maybe Aave did. And definitely not as much as Morpho. That like Morpho has had a tremendous year.

Um they've grown quite significantly. Um but this chart says something different, right? Yeah. Essentially, like USDs supplies up only since it launched in 2024. Like September 2024, Maker DAO rebranded to Sky. You DAI rebranded to USDs. And since then, as you can see on the chart here, like USDs supply has been essentially up and to the right. Uh right now, uh USDs supply is about $8 billion combined with DAI. That brings Sky's total stablecoin supply to like $12.5 billion give or take. And that makes it like the third largest stablecoin issuer

behind Terra and Circle. Um I think one of the main advantages of USDs is that their wedge to generate demand for USDs is the Sky Savings Rate, which is a native yield that you can access without any lockups and it remains like freely transferable and composable across DeFi. Uh that you as USDs rate is very different than what you get if you deposit on Aave or if you deposit on Morpho or if you deposit on zero USDC because the rates that I mentioned here are very variable and depend on demand for leverage. Whereas SUS DS rate is set by Sky governance and is

very stable over time. So if you go to next slide, I think you can see that. Uh where you see that the Sky savings rate is actually quite stable over time and it is much less volatile than what you have uh with other like products. Um yeah, Danny, if you can go to the next slide. Um But but yeah, I think that is one of the I I think that's one of the key reasons like Sky's has grown so much. As you can see here like the kind of the blue dots there is the Sky savings rate. It's very stable over time. Whereas with like

something like SUS DE, you have like these huge swings up and down with a rate and that makes it really hard for a depositor or saver that it's just seeking a stable yield source. Um just separate from that, I kind of agree with you, Buck, on the part of like it's hard to understand like banking, which is like what Sky kind of looks like today, but they also give really silly names to stuff. Uh which I think it's hard to understand. So for instance, like the agent network, like when you think about agents, you're maybe thinking about AI or whatever. Uh like they should just call it capital allocators because that's what they are,

right? Like they should just give things names that already exist like in traditional finance. I think that would go a long way for helping people understand Sky. Um So yeah, that's that's just like a like a parenthesis, but I I do think that they should stop giving silly names to things like uh Yeah, I also like even like SSR I think is kind of a like just call it USDS yield rate and then DAI yield rate or whatever it's going to be called. Um so that people could uh instead of DSR and SSR. Danny, would you mind going to the scenario analysis slide? Just so that Carlos can run over some of his assumptions and then we can wrap it up.

Yeah, I was maybe to kick it off for you, Carlos. I'll I'll agree with your point. I think um it's for whatever reason even the more serious protocols within crypto still struggle with a lack of being serious about their business. Um that could be improved certainly for many. Uh maybe the question I think worth asking, you talked a lot about the mechanics and the relevant players. For me, I'm curious. I don't really follow the lending sector at all. It's never been one of interest for me, but like is Sky attractive here? Why yes, why no? Or like are the competitors a better bet from this point forward? I'm curious what your take and what what are you thinking in terms of scenarios here?

I think if you're a value investor, it could be a really good bet. Uh like what I did for the valuation framework is I did a dividend uh yield analysis basically, which is how much can a Sky staker earn uh on an analyzed basis based on Sky's revenue. So actually, like it would be really helpful for the scenario analysis if we turn back one slide, which is Sky is moving towards a programmatic like revenue distribution. So after like agents or like capital allocators pay Sky the base rate, what Sky does is like it functions literally like a bank and they pay depositors into

the SSR product like their savings rate, right? What they keep from that spread is essentially net interest income, same as a bank. Uh the difference with Sky is that all of the revenue that they keep after net interest income will be programmatically distributed to certain parties according to this waterfall. So, 20% of net interest income will flow to security and maintenance of the protocol. Uh the remaining 80% will flow towards growing aggregate backstop capital, which in banking terms is just like the equity coverage.

Uh and when the equity coverage is above 1.5% of USDs supply, which at this rate it would be like um $180 million, uh uh 80% will go towards token holders. Uh so, 45% of that would be uh Sky buybacks distributed to stakers, 45% would be USDs staking rewards, and the remaining 10% would just be will just be Sky back back buyback and burn.

So, due to the fact that you have a very programmatic like revenue distribution, you can make assumptions like on the scenario analysis on what is the percentage yield that Sky stakers will earn. So, if you go back to the scenario analysis uh tab, uh you can see that Sky stakers could earn up to 25% analyzed yield in the bull case, which has some aggressive assumptions. But in the base case, they could earn 10% uh analyzed yield, which still frames Sky as a cash uh flowing asset, uh and could be like an attractive value uh value play. I don't think Sky is one of these like things

you go for like three to five x multiples, but I do think it could be like a value play. Uh they have in your portfolio like to get exposure to the on-chain credit sector as a whole. Maybe one last question for you, Carlos, since we talk frequently about token holder rights, MakerDAO, etc. Um I don't know. I'm I guess I'd be curious like if it's a value play, squaring a value play with being in crypto and dealing with tokens, I think is historically it's like a tricky business to be in because on one hand something might look attractive or cheap or you know, undervalued, and then on the other hand it it might be that way because

you know, communication from the team is bad or historically they've not done things that benefit the token while the revenue you described is like programmatic in some ways. Like I guess the history of Maker and the subDAOs and Sky. Like I don't know. I think there's a lot going on there. So, I don't know if like does that you think factor in at all? Does it have you dis- counting Sky's in some way just their history of history of operations and how they've approached the business and the token? Yeah I it objectively does. Like I was speaking to an investor and he mentioned that he's worried with Sky is that he's he never knows what's going to happen at the governance level. Like maybe tomorrow they decide to uh change

capital allocators mandates or change the net interest income waterfall. So, I do think like in the investors' minds it is kind of one of the primary concerns that you don't have as much forward visibility as you'd like to even though it can be programmatic because at any point in their minds, I'm not saying this is like my opinion, but in their minds at any point uh Rune can go and propose on the Sky governance forum to do whatever he wants, and then that maybe that go that will get approved, and then you you get a completely different scenario. So, I do agree with you on that. I I think those concerns are overblown in my opinion. I think uh the Atlas is a really incredible like

the the level of detail that they put in there like the Atlas which is the risk framework is is incredible and I recommend everyone to to read it if they're kind of interested in like uh you know, just risk management and the and the policies that Sky has for like their capital allocators. Uh I think the model right now can work incredibly well and I am constructive on on the Sky ecosystem as a whole. Uh but yeah, I think it's just a matter of like, you know, making it durable and convincing people that that's the case.

Yeah. Yeah, but I I completely agree with you on that, Shawn. Although, it's a bit surprising because I think it's like 1.7 bill on the hypercore, 3.7 bill, no, 1.6 bill on the hypercore, 3.7 bill on the opposite hypercore, 1.6 on hyper EVM. Um significant chunk of like supplies in USDC. Obviously, majority of volume is denominated in USDC. They really didn't have to do this and I thought that was like the original intention as well when they didn't bid for the USDH ticker even though they were like clearly a I think they would have won. Um probably

it would have just been And then instead like they didn't bid for it and now they're just giving it. Um giving hyper liquid almost a leg up in that sense. I don't know how the revenue will work. >> Yeah, and I don't know if people know this, but the Spark like core team was part of the Maker DAO core core team. Like they were the same risk contributors to Maker DAO and Maker DAO itself has like I don't know, at this point it has like 7 years of uh track record in DeFi, which is the longest DeFi standing team uh with like no major security incidents or like the major bad debt except for one very long long long time ago for Maker, but

so yeah. Yeah. Yeah, hopefully this doesn't turn into uh yeah, hopefully Thanks for coming on, guys.

Thanks, this was fun. Yeah, pleasure as always, guys.