Jeff Yan's Plan to Bring the Entire Financial Industry Onto Hyperliquid

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0:18 Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.

0:23 And I'm Tracy Alloway.

0:25 Tracy, we're recording this.

0:27 Tradie. Yeah.

0:29 That's appropriate for this episode.

0:31 Slip already, tradie. Tracy, we're recording this October 13th. In a couple 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.

0:43 Yeah, it's great to go to Chicago.

0:45 We've never done a floor tour of any of the actual trading places in Chicago.

0:50 We should do that.

0:51 Yeah, we should do that. But of course, it's always an exciting time to 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 ETF-ized, 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

1:35 types of things where like people are like rejiggering the way You can express a view with this incredible basket of new instruments and platforms to.

1:43 Do it on.

1:44 Financialization on steroids. Can I go on a slight tangent for a second?

1:47 Yeah, sure.

1:48 So I have this media theory that I call the inverse pyramid.

1:52 Yeah.

1:52 And so the way I think about traditional media, 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 who were making phone calls.

2:04 Making scoops.

2:05 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 then 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, futures and options, or now it's prediction markets and things like that. It just feels like You know, derivatives have been a bigger market than the underlying for a while, but it feels like the inversion of that

2:46 pyramid is just getting bigger and bigger.

2:48 That's a great take. Right. And I didn't know where you were going with that until I did.

2:52 I got there.

2:53 But right. You think of something like SK Hynix or something like that. And OK, there is some company and there is a stock that trades. Then there's ADRs. And then there's 3x leveraged ADRs. And there's tokenized versions of it and so forth. And there's prediction markets on where will SK Hynix close in the next 10 minutes. I don't know if that exists. If it doesn't, it will exist at some point. It probably will.

3:14 Et cetera.

3:15 But, like, there is so much to do on this topic. And, of course... You know, we did that episode 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, et cetera. And one of the things that's getting a lot of attention that combines all these things is 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.

3:48 It's not a household name, even though it's been growing incredibly fast.

3:52 Yeah.

3:53 The one thing I know about it before starting prep for this episode was the mascot.

3:58 Yeah.

3:58 Which we have here, who's called Hyper. And I always approve of a company with a good mascot.

4:04 So here we are.

4:04 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. And so we're actually going to have to interview the mascot today because we weren't able. No, that's not true. Amazingly, we really do have. That'd be fun.

4:17 Yeah.

4:17 Yeah.

4:18 Amazingly, we really do have the perfect guest on the podcast. Someone to move on to talk to for a long time. 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.

4:30 Thanks for having me.

4:31 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?

4:42 Yeah. So Hyperliquid is a protocol. Okay. The tagline or aspirational goal is housing all of 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.

5:12 We view hyperliquid, the protocol as hyperliquid. a sort of step function improvement over electronic but fragmented markets.

5:21 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 of 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, feel free to refute me on that. That's just what I read on Reddit. OK, but when Trump said that, were you aware that he was going to be talking about hyperliquid at that point?

6:02 I was not aware. So that was a huge surprise to me. Hyperliquid labs are 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. And 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 HyperLiquida XYZ and many other interfaces for US users to use the derivatives trading on the protocol. But the CFTC,

6:59 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 U.S. should not play a sort of, you know, extremely restrictive. We should not have an extremely restrictive view on this, but rather should find ways where it can incorporate this technology into the existing financial system.

7:26 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, deployers, et cetera.

8:01 Maybe like give us the landscape of who does stuff on HyperLiquid and like what their roles are.

8:07 Yeah, it's a good question. This is a very deep question.

8:10 Yeah, I know. Maybe it's a little.

8:12 Yeah, it's a lot of stuff. But at a high level, a 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. And the interesting thing about a sort of a blockchain protocol as compared to a purely 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

9:02 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, if you're talking 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 balances is, for example, then all bets it off for money.

9:29 So at a minimum, we all need to agree, like, there's this much in your account, this much in Tracy's account, this much in my account, and also, like, what the prices are. 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.

9:47 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.

9:57 Yes, and there can... I would draw the distinction It'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 is has permissions over the markets that they deploy. The benefits of the technology are that if you want to run a 24-7, 365 exchange, it's not a simple task.

10:29 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.

11:09 Maybe just to hammer this point home, could you walk us through an example of, say, you know, I buy a million dollars worth of a certain perpetual futures contract. What's your most popular perpetual futures at the moment?

11:23 It actually varies. So between real world assets or things like Bitcoin, I think right now it is the perpetuals on Bitcoin's price.

11:32 OK, 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 ultimately unwinds? And who loses money if, for whatever reason, I can't actually pay?

11:51 I was going to say, if by some miracle Tracy makes money, who is on the losing end? But anyway, yeah, walk us through how that works.

11:57 Well, first of all, I just want to reiterate that as an American, you probably are not opening this position.

12:02 Pretend that I live in Singapore.

12:04 If you're a Singaporean living in Singapore or a European living in Europe.

12:08 For anyone who lives in a free country.

12:10 No.

12:10 Can I trade on my Austrian passport? This is an interesting question.

12:13 Probably in Austria.

12:14 Yeah. All right. The mechanisms, all of which you mentioned, I believe, are not so different from futures contracts on a futures exchange. Perhaps the one that is interesting here is the, so 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 a liquidation price.

12:36 It's rules-based.

12:37 Yeah, it's 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 a traditional default waterfall in a U.S.-regulated futures exchange, for example. Analogous, different names. That happens in an on-chain implementation. So the execution of what is called a hyper-core process kind of like you can view it as like a sub-module of the blockchain state itself, autonomously carries out the mechanisms of these things like clearing and liquidations.

13:31 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. It's like, oh, it's probably a sign.

13:46 It's 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.

14:02 And of course, it's got a lot of engagement. I saw it was super cool. It's a big deal. Kudos to you all for integrating the technology.

14:08 Yeah, there you go. OK, now here's a key thing. So I'm looking at, let's say, NVIDIA, an NVIDIA perp that trades on hyperliquid. And I believe it is issued by an entity called TradeXYZ. So let's bring in who is TradeXYZ? And how do they get in a position where they can issue an NVIDIA perp, like walk through, like how this emerged on hyperliquid.

14:32 So we use the word deploy because I think issue has many connotations. Um, 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 of globally consistent state distributed a 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 deployers can come. They stake some amount of the native token.

15:09 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.

15:16 Hype.

15:18 Not $ 500, 000 worth of hype, but 500,000 hype coins.

15:21 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, I 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.

15:48 That'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.

15:57 And this is really important, right? Because like a 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 a PERP, it never really ends, but there needs to be a price oracle that it's always going to be, I guess, tethered.

16:15 Why is it called an oracle as opposed to just like the underlying price?

16:19 Well, oracle here has a specific... 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 on-chain properties.

16:47 Okay, just to finish the question about how the Hynix or the NVIDIA perp got there. So, okay, TradeXYZ, they're a deployer. 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 or the Hynix perp?

17:09 It's a simple matter of sending a transaction to do the deployment. And the thing here is they're inheriting the technology of the order book, the clearing, 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 deployers, push this, they or their system.

17:44 In TradeXYZ's 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.

18:10 Where does the liquidity come from?

18:11 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?

18:21 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 protocol, simply mechanism by which buyers and sellers come together.

18:36 It feels to me like to some extent the deployers like a TradeXYZ, but there are others. We keep mentioning them. There's others, the TradeParagon. 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 response. ETF deployer. Yeah.

18:58 But like, okay, like I'm good 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, there's usually a basket of conversion, et cetera. But like the thing I'm still trying to understand is like, can 10 people issue an NVIDIA perp?

19:22 Like how do they get this particular slot in the thing as opposed to someone else?

19:28 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 so that that is governed by an on-chain mechanism uh it's it's a dutch auction yeah and i guess in short it's basically it's it's a way to kind of allocate the square the scarce resource of deployment slots uh this is scarce because uh on-chain the Each order book, each kind of clearing system for a specific market takes computational resources of the network. So as the

20:16 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 or changes time zones as it's relatively primed to the number 24. Um, but you know, approximately once a day, there's an opportunity for any deployer to deploy something.

20:49 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. Uh, you're, you're incentivized to withhold information and then spam it at the very end. Um, it has all these kind of like interesting, I would say suboptimal game theory properties. Dutch auctions are nice, especially in on-chain 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

21:31 a kind of natural, there's a natural correction mechanism by which it approaches the fair price. market value of the scarce resource.

21:39 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?

21:55 I don't know. So it is a permissionless system. I actually don't personally track the auctions. I know there are tools that people have built where you can see they're pretty cool stats. This is another nice thing about on-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 you said, like tend to bid in these ways and they tend to use the tool in the specific way. But I personally am honestly just too busy to really look into this stuff in depth.

22:26 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 them, making them more broadly accessible, whether that's temporally, 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 work in finance worldwide.

23:00 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 employment 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.

23:36 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 IPOing, 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.

24:00 But I guess one question that I always have with this type of stuff is, OK, if you're buying shares in Anthropic or whatever, when they IPO, you're getting a claim on the company's dividend, right? Like there's going to be some Assuming they have a dividend.

24:18 There's going to be some.

24:19 Free cash flow.

24:19 Right.

24:20 There we go.

24:20 The net present value of all future cash flow. Whereas if I'm an unaccredited investor purchasing something that's tracking anthropic shares on a platform such as Hyperliquid, I'm not getting that cash flow.

24:34 But you're not getting the cash flow if you're trading futures on something as well, right? So I'm not saying that it's a strict improvement over the system. And I'm not saying that everyone... it doesn't actually make sense for everyone to trade these things. It's more that there are a non-zero number. There's like, I think an order of magnitude more people who benefit, who could benefit from something.

24:53 And of course there's a, there's a parallel track of work, which is like, we should all be kind of working hard to educate as many people as possible so that, you know, the kind of like financial opportunity is just that it's an opportunity. I think the, you know, whether it fits someone's specific risk profile, I think is more of a question of education. But I think if the opportunity itself is completely gated off, then that's a non-starter.

25:17 There's no way, no amount of education is going to get you out of that. So I think you kind of need both. And I think right now it's just, it is, there is just so much work to be done. But I think the first step is taking the system itself and making it fair and democratized.

25:31 You know, we've been talking a lot about just sort of like market structure of hyperliquid. And I do, I would like to get back to that, et cetera. But like, maybe people would be interested in a little bit about you and your background. You used to be at Hudson River Trading. You started Hyperliquid a few years ago, kind of after like the insane 2021 year that crypto had, et cetera. What were you, you're looking out into the world and it must've been kind of a, people might've thought it was a contrarian bet. Like, hey, crypto, that was just a bunch of like meme coins and stuff that was over. That was 2021, we moved on to AI.

26:07 Why don't you talk to us a little bit about like, This choice. Oh, so you didn't raise any VC money? Talk to us about this choice to like pivot your career and take this big shot of building something new. And what did you see out in the financial system such that you thought there was this big missing piece that was lacking?

26:24 To your first point, Hudson River Trading, I worked there right out of college. Had an amazing experience and only positive things to say about them. They're obviously a wildly successful company, but when I was there, it felt like, You didn't, you didn't feel that day to day. Like it felt a lot like a startup, like a tech startup.

26:42 And I think, I think they worked hard to kind of have that culture. And so, you know, learned a lot about markets and met great people. The idea with building an on-chain in, in 2023, the, the vision was a bit more laser focused and narrow. It was to build something on chain that people actually need. And when we look like that, when we looked around and, you know, just looked at what people were doing in the world and like, where could on-chain technology really improve things. You know, we didn't, we actually didn't see it as, oh, like crypto is only about meme coins, whatever, right? Like there are these exchanges that were offering perpetual futures in a centralized context and they were very clearly offering something that

27:22 users benefited from and wanted. And there was amazing product market fit. And I think now you see this in traditional contexts where I think perps have kind of like crossed that threshold of acceptance, which is really cool. But even 2023, there were many venues in crypto offering these, but they were all doing it in a centralized manner.

27:42 And so it was very clear to us, at least, that there was an opportunity to bridge the gap between the user experience and product experience on the one hand of a centralized perpetuals venue and the on-chain technology and the properties such as self-custodianship of your own capital, which is very important. I think the kind of counterparty risk of using an exchange is always going to be there, whether it's in a crypto or non-crypto context. And so if you could have your cake and eat it with those two properties, the idea was that this would be something that would be a step function improvement over what people had access to at that point.

28:41 How serious are you when you say you want to house all of finance? And what are you looking at next other than perps? Can we go old school and have physically settled commodities futures or something?

28:52 Is that possible for you?

28:54 I think we're very serious about the idea. Of course, it is aspirational. I think even 90% of all of finance would be a huge success and we're a long ways away. I think physical settlement is... Well, one is it's always going to have a very important place in society. I think this is kind of like a misconception about perps and honestly, just about our general vision. Like we're not trying to displace anything. In fact, I think the technology can benefit everyone who currently operates markets in a kind of a more traditional setting. And whether these markets are perpetual markets or settled dated futures, is irrelevant because ultimately you what you really need is an order book clearing system and you know global distribution concentration of liquidity

29:48 all these properties kind of doesn't really matter what the underlying is and i personally am not very opinionated about you know what ought to exist i think the system to house all the finance should be a collection of tools we call these things primitives because i think they're kind of it evokes a lot more kind of interesting so you know how these things can compose with each other but anyway tools effectively tools for people to do what they need.

30:13 To do it's funny there's no hyper liquid uh wikipedia page really yeah i look because i was trying to see and uh it was or maybe there was and it was deleted and one of the moderators said typical crypto spam very doubtful this is a The page was deleted, but if you guys house 90% of finance one day.

30:32 That sounds like my bio, which got deleted because I was a journalist of little notability.

30:39 You've got to stay humble.

30:41 I'm not going to call this person out by name, but this moderator is going to feel pretty dumb one day if you guys host 90% to 100% of finance. And he's like, very doubtful this is a notable time. Anyway, we'll be revisiting this page in the future. So you decide to build it. And you coded yourself. And this was when coding was still hard because now anyone can code.

31:02 Can you talk a little bit about like what that was like, like building an exchange at your computer and like how that all worked, how long that took?

31:11 Well, we don't view it as building an exchange. It's really building kind of like a network. Yeah, so the important thing here was that we kind of looked around and tried to find something existing at that moment in time that could effectively, with an incremental improvement, How is all of finance? And the conclusion, unfortunately, was that there were many technological gaps. And it's a bit like probably if you were building consumer tech, something like that, in the early 2000s, maybe you realize, you kind of go down this rabbit hole of like, oh, wait, no, we got to do, oh, we got to buy computers. Like, oh, maybe the internet doesn't actually work that well. Like, maybe we should kind of work on some networking things. And

31:53 this is where kind of the vision of, you know, like an AWS kind of analogy comes did come up i really think that the thought process and realizations and ultimate generalization of the infrastructure probably has some parallels between these two stories albeit of course hyperliquid at a much earlier stage in a smaller scale but that was effectively the the realization like okay i guess this thing is a lot bigger of a project to do it well it's a very big project and maybe a bit of just blind optimism or i think the fact that It was hard, was almost more inspiring to me. Like it felt, made it seem more worth doing. And it felt more like, well, if, if we don't at least give it a shot, like who will? And so, yeah, it kind of involved digging

32:40 down way deep into the consensus layer of like, just how do these different nodes talk to each other? Questioning all of the assumptions about how networks were built at that time to kind of come up with a solution that ultimately can house all the finance. Because I think if you look around at even blockchains today, They're very admirable and they all have their own selling points, but I don't think any of them other than Hyperliquid has this precise vision of a global financial system can actually just have one global state.

33:10 You know, you mentioned computational resources as a constraint on not listings, deployments earlier, deployment auctions. What's been the evolution, I guess, of like your data needs? I'm really curious how big you guys are now. Are you running like 18 data centers that are all the size of three footballs or whatever cliche people like to use now? What's your token spend like now? And how much of a constraint is this really?

33:40 Yeah, that's a good question. It's, I think this is also a misconception about a few there. Um, the, first of all, like we actually don't run these things. Um, The foundation runs some validators, but ultimately it's currently the set of validators is 30 something and the top 27 of them by stake at any moment in time operate the network. The specifications for running a node are actually very minimal, which I think is quite cool and counterintuitive.

34:10 Like I remember a validator at some point, I think tweeted something and was like, wow, my mind is blown. I just realized that on this machine, this like very, this kind of humble rudimentary machine that anyone can procure. There's no three-year line or exclusive contract needed with NVIDIA or anything like that. Like anyone can procure one of these.

34:28 It's basically consumer hardware. You can run the global financial system on it. Of course, you know, not there yet, but that is the vision of like, it doesn't matter how many things are built. The network should not be prohibitively expensive to operate. That being said, you can't run it on your cell phone. So there is like some sort of trade-off here. I think a reasonable approach to take here is like, It should not be, like you said, data centers the size of football stadiums to run this thing.

34:56 Like right now you need 128 gigs of RAM. Like that's not, you know, that's not like the cheapest laptop you can buy anywhere, but also you can buy a laptop with that spec. So yeah, that's kind of the sweet spot, I think.

35:10 So you have this vision, maybe get to 100% or swallow all the finance, which pretty cool. Very ambitious. Hyperliquid itself, you don't do a lot of media, which is why we're thrilled to have you on. I believe you have a completely pseudonymous co-founder. There is not much known about your team in general.

35:33 People know more about the mascot than the team members.

35:35 I think people don't know if there's a specific address or whatever that they could call. Do you envision eventually that changing? Do you think there is going to be a demand for like, look, we're running a lot of the financial system through this platform. We sort of want to know the people who are running this, or do you envision it where it's like kind of like this sort of supreme neutrality? Like we don't know who's running the internet. We don't know who is running Bitcoin. Do you see, or do you see it that way where eventually like you and your team truly can like fade out and it's just a protocol like TCP IP is?

36:12 Well, the team, I actually view the team as much bigger than labs. So who runs the thing? Well, it's really, it's really a collection, a constellation of different teams. So we mentioned per earlier, right? The NASDAQ traded ETF or digital asset treasury company. They're part of the team, right? They're, they're the team going to investors and explaining what this technology is.

36:36 Right.

36:36 And they're, you know, Dave is very well known. And, um, so I don't, I think this is, this is kind of like a miscategorization of, uh, who, runs the thing. Because like you said, who deploys a market? It's the deployer. Well, the deployers, there are many of them and there will continue to be more. And I think, you know, Kraken announced earlier.

36:54 You, for example, set the rules for each. So HIP3, you set the rules. You set the 31 hours. You set the thing about 500,000 hype tokens to be. You are a governing entity.

37:07 Well, this is no different from the Ethereum blockchain where the developers of the chain.

37:11 Yeah, but they don't have 90% of the world's finance either. Like what I'm saying is if you want to get, like, if the world is going to eventually have all finance beyond this chain, like, yeah, it is, like, the Ethereum blockchain, they've, like, gone sideways for several years. If the world is going to, like, be on this thing, do you think people are going to expect to want to be able to know more about the.

37:32 People governing this platform? I guess what I wanted to say there was that the Ethereum blockchain is a, you know, it's a kind of collection of developers taking community feedback, but ultimately to you know, it has to be kind of written by developers, right? Like, unfortunately, maybe you're right.

37:47 Like maybe at some point, software will no longer require developers to kind of oversee the conversion of thought and ideas, which is a very democratic process into code. Like maybe there will be no human intermediary of that process in the future, but for now there is. And so there's this kind of like role that developers play, but I would not say that the core ideas behind network are kind of owned by the developers. I would say it's kind of a, It's a manifestation of what a system should be. It should be fair. It should be transparent and like it should have, it's just support these kinds of, um, these tools.

38:22 Maybe a slightly different way of asking this question is like, okay, so with hip three, a builder can deploy a market and they set the Oracle for pricing and they set the leverage limits and settlement or whatever. And I trust the builder to do all of that. And it's all laid out very clearly and transparently. What exactly am I trusting Hyperliquid to do in that scenario? What is the provision that Hyperliquid is doing for me? And what am I trusting you will do?

38:57 Well, if the question is for Hyperliquid Labs, then I think the trust assumption is that it really isn't the output of the The kind of like node software that exists. Right. And so there would be an assumption that it works. It kind of like adheres to the specification. And I think this is kind of true of any blockchain. Right.

39:20 Like Ethereum has a specification. It has multiple client implementations. When you run a node, you pick an implementation and you run it. And I suppose you are trustee. that that implementation or you can read it, but you're generally trusting this very complex, you know, I want to say like millions of lines of code ultimately adhere to the rules of the blockchain. But like you said, all of the kind of quote unquote running of markets is done by a combination of the deployer specifying the specifications of the contract and publishing this Oracle price, which is a tether to some real world thing. And then the kind of technology itself is sort of a reflection of the deployer's intention. And when a user, I don't think there

40:07 is an inherent trust going the other way from the protocol to the deployer because really users who use the a deployer's market trade, a deployer's markets, that's where the, trust is right like if you're trusting a contract to track the price of gold then the you are trusting implicitly that the deployer is pushing something that represents what they said it would do.

40:50 I don't know if this is like a great analogy or not, but, you know, like with the rise of ETFs and passive investing, there's all these questions about like, well, how far can that go? Don't we need some people like trade the underlying thing? Right. And I'm curious if like there's some sort of analogy with the concept of like oracles and how much like, you know, for example, several years ago, there was an incident with a Solana based thing called Mango Markets. where someone was accused of, it was something, I forget the token, but the size of the PERP trading relative to the underlying token, it got so extreme that it was very easy to manipulate the underlying price that transmitted through the Oracle, and then

41:33 you'd make a lot of money because then the thing moves price. What are the constraints on how volume of PERPs relative to the underlying trading, and does that create a constraint for hyperlinked. There was also an incident, I think earlier this year, like there was a bad quote from Hynex and the Oracle price deviated very dramatically, causing some losses. But like, talk about the Oracle constraint.

41:59 Yeah, so I'll take those in reverse order. The Hynex thing, this is, you know, TradeXYZ, I think published a very detailed postmortem. So I'm just quoting here, but that falls in the category of implementation issue. Like their, you know, their system kind of worked as intended, but their system perhaps was not intuitive. And I think they indeed found it was not intuitive. I think there was, there were refunds and ultimately they sorted it out. And I think these things happen, but this is kind of, this is not unique to hyperliquid nor trade XYZ, nor even blockchain.

42:29 This is just a software property that, you know, Apple ships operating systems with bugs and they patch it. So the first question I think is interesting. I think a priori, you might assume that the volume ratio needs, it's kind of capped. Like maybe you would say, oh, if there's more volume in purpose, then it doesn't work because the underlying trades less. But I don't actually think that's true.

42:48 I think you can, I think it's healthy. And if you look at, for example, you know, futures tracking the S & P 500 versus the underlying components or even ETFs, right? Like there is a big volume differential there. I think the important thing is that the underlying can, needs to have smart people, smart people with the ability to provide liquidity into, price moves that do not reflect the underlying value of the thing. And so this is where the market design, the mechanism is really important. But you can imagine in a world where it is just perfect information about the underlying companies and someone trades a bunch of the perps because there's a lot more volume going on there or the futures, right? For the S & P 500.

43:31 And then the underlying is traded very thinly and then the price moves 1%. Well, the fact that it's traded thinly does not really matter. What matters is someone needs to be like, that 1% move is not correct. Whatever size you want, I'm here to trade against you. And I think they are very, like, if you look at the S & P 500, I'm very confident that there are market makers who would happily trade at far less of a dislocation. And so you get this effect where the price discovery can happen on a derivative, and the underlying can still be, you know, a reflection of some, you know, some real value in the world.

44:04 Can deployers ever get rejected for having an oracle that you know, you just think wouldn't work because the underlying isn't liquid enough or like it's too hard to trace a price or something like that?

44:16 The protocol does not even understand what that means. There's kind of like no semantic encoding in the protocol. What the protocol does know about is, well, if the, for example, there's a constraint at the protocol level where between two Oracle price updates, the relative difference between those two prices cannot be more than 1%. But this is like a hard enforced rule. And in fact, when you try to push an oracle price that's say 2% away, what happens is the protocol clamps it to be 1% away so that then you can push it again. It's actually relatively user-friendly.

44:45 But this constraint you might think is important because given the sort of like set of leverage in the system, if you move it too quickly, then perhaps the system cannot mutate its state machine in an orderly way. But if you break it down into a composition of something that's more like a continuous price movement, then it's fine.

45:00 So these kinds of like mathematical constraints, the protocol very much has a lot of intentionality sort of design mechanism, design around, but whether it's like, well, like this thing doesn't make sense. I just don't think that question can be answered.

45:11 It can't do subjective liquidity judgments.

45:15 It's the same way that like, if you have, if you're running a traditional exchange, futures exchange, and you have a, some vendor that provides the order book software, like that vendor surely does not, cannot know whether you are using, the order book represents something appropriate. They say, well, here's the thing, here's the technology. Like it allows people to place buy orders and sell orders. You can specify a price and a size and like, this is how it works.

45:35 So we mentioned at the beginning, Hyperliquid, not a household name yet, but it is getting there. And it did get some attention this spring after the war in Iran broke out because here is a venue that had 24-7 WTI and Brent futures trading out. And so people are sickos and they want to know, or maybe they're not sickos.

45:54 They really want, you know, unfortunately, the nature of war is it doesn't, you know, it's like all the time people want to see, OK, what's happening now. with the price of Brent at 1am on a Sunday morning, et cetera. Where's the price coming from? There's no Oracle, right? That's like transmitting. There's no actual live spot cash trading or anything.

46:13 So talk to us about like what's happening at 1am on a Sunday, such that there is a price of a WTI perk.

46:20 Yeah. So this is up to the deployer, kind of like the previous question, the kind of semantics of what it means is a bit, it's kind of like up to the deployer to define. This is part of the specification of the contract, not in the protocol, but I do think an interesting thing to point out here is that the fact that perpetuals by and large today have an oracle source that is based on an underlying price 24-7 is interesting, but it's not necessary. You could actually have funding. So the mechanism of funding is basically is to kind of make the derivative trading no matter, sort of like over time converge to whatever the underlying price is.

46:55 You can get that effect with periods of free-floating derivative trading. price and then periods of funding payments based on the discrepancy between the derivative and the underlying. Like if you work out the math for funding, you can relax that constraint and just, I think it will converge slower if there are periods with less funding, but I think the mechanism itself still accomplishes the goal.

47:17 Do you have any institutional traders on.

47:20 The platform now? I think many of the larger traders are institutions. It just requires significant sophistication to for example, market make in any setting.

47:31 So you're thinking, okay, look, you're here in the U.S. and you want to get a lot more finance. So presumably at some point, if that's going to happen, there are a lot of, quote, legacy institutions that may be interested in figuring out how their business can work on with hyperliquid beyond just the sort of trading shops, which are probably active. Like, can you talk about, like, what is the sort of like the volume today of Who do you see in five years? Could you see the VanEcks of the world or the Roundhills or the State Streets becoming deployers, issuing stuff? Like when you think about where Hyperliquid could become, could you imagine some of these household names like slotting into some of the part of

48:14 the ecosystem here?

48:15 Yeah, I think I would push back on them being quote unquote legacy. I think that's very much not the vision of Hyperliquid, at least not how we are sort of seeing an ideal future, you know, legacy implies that they will be disrupted, right? Or displaced. And I think the, the vision here is that, you know, the institutions you mentioned have great relationships with a bunch of their users, right?

48:38 Like the users want to use them. They trust the brand and they provide a valuable service. I don't think any of that should change, but, but I think to your latter point, I think they should, it's in their interest to adopt new technology that improves their offering. There's a bit of like, The analogy here with the cloud in AWS, I don't know if back then when AWS first came out and went around telling people, this is a great technology, why don't you consider using the cloud?

49:04 I don't know if the companies were like, wait, no, we built our own servers. Are you trying to disrupt us? I think there could have been that pushback, right? But then now, if you you know, fast forward to today.

49:15 But basically you could see the VanEck's and various like eventually becoming deployed.

49:19 But like that, I don't even think that's, I think it's remarkable and I think it's an important development, but I don't think it's a remarkable fact that that could happen. Okay. Right.

49:28 This is a slightly weird question, but if you were to be regulated by the CFTC or the CME, could you see a world where the deployers are the ones who get regulated versus the protocol?

49:40 I can very much see that world. I think that's an astute way to kind of frame it. I think it's a good kind of understanding of how, like we said, there are different roles in the setup. And I think in the same way that internet technology, TCP, IP, for example, is a technology, it It is used to kind of build financial stacks, but it is not regulated, right? The regulation sits at the layer where there are controls. And indeed, the deployers are the ones that exercise these controls. And so it's a very natural way for the protocol to continue playing its role as a networking liquidity infrastructure layer.

50:20 So just, you know, as Tracy mentioned, President Trump called out hyperliquids that come here. But what actually would have to happen so that an American could trade on hyperliquid in the good way without having to use a VPN? Like what needs to happen from a regulatory standpoint such that that actually could happen?

50:40 Well, again, if you're an American using a VPN, you're breaking the terms of the service.

50:44 Don't do that, kid.

50:45 Yeah, I mean, again, it's strictly, it's not a laughing matter. You're breaking the rules. But for it to happen, there needs to be, the CFTC in this case needs to, it's a good question, like what they need to do, right? Like the, in some sense, the core principles of the CFTC are agnostic of the underlying technology, right? That's why they're called core principles, not like technological rules or something.

51:10 But on the other hand, I think there is a certain gap in kind of just understanding of like, what is this stuff? It's kind of like hot off the presses in some sense, right? And then the kind of regulators, obviously, I think are, to everyone's benefit, they're conservative. I think they kind of, want to move quickly. They want to embrace innovation, but there's a very heavy responsibility with that because there's an existing system that by and large works well, serves many people and has protections built in place. So I think there's very naturally this gap of wanting to understand like, is this technology truly compatible with our core principles?

51:43 And I think that's the kind of gap because ultimately I think the technology has a lot of benefits. And I think many people are beginning to see this. I think deployers see this because they are day in, day out using the technology. I think regulators you know, more conservative, slower to see it, but beginning to see it, that maybe if actually you can provably, anyone in the world can provably audit that the sum of user balances equals the amount of USCC sitting at this address. Like that is actually a really good property because even in traditional settings, there are a lot of regulations in place, but there's kind of a trust there, right? Like if someone asks, you have to tell them, right? Like, okay, like here's

52:21 the bank, show them the bank account, show them the ledger of user balances. But like that is a sort of, process whereas if this is a property rather than a process all of a sudden i i just think this kind of like aha moment is it's quite beneficial so it's not like it's not like compliance or new tech it's kind of yeah i hope you.

52:38 Feel a little bit guilty about making everyone pay attention 24 7 yeah break i think it should be an option you can take it yeah all these.

52:45 Poor financial journalists working on weekends.

52:47 Now i like being able to check quotes on the weekend jeff yen thank you so much for uh coming on the podcast Many more questions and things to dive into, but that was a fascinating introduction, and please come back sometime.

53:01 Thank you for having me.

53:14 Tracy, that was a lot of fun. You know, I feel like we threw a lot at the listeners there, some of these terms.

53:20 Yeah.

53:21 And I would recommend people who are listening to do a little more research on what these things are, particularly how perps work. If you're in markets, if you care about futures, et cetera, I think it's very much worth knowing a little bit about the market structure of perps and how they fund, et cetera. Because regardless of what happens with hyperliquid specifically, et cetera, this, quote, primitive, unquote, of perps has been growing for a long time. And I think it's Very good reason to believe like they're going to be with us for a long time as a popular trading instrument.

53:57 It feels very inevitable, as does 24-7 trading.

54:00 At this point.

54:01 Do you have a take on why so many of these crypto things end up inventing their own language to go along with it?

54:11 So, like, Deployer?

54:12 Deployer, Oracle.

54:15 I don't totally know. Like, I would imagine that, like, the idea of, like, a price Oracle is probably one of these things that maybe even existed in computer stuff prior to trading. I don't know. It would be interesting to know. But the structure of Hyperliquid, to me, clearly feels distinct in many ways. One thing that we didn't get into, although we did, so, for example... Okay, so Ethereum exists. There are different exchanges that exist on Ethereum, right?

54:44 So Uniswap exists on Ethereum. One thing that's interesting and distinct about Hyperliquid from Ethereum is that in the protocol itself, it sets the rules for the exchanges. So this idea that like, okay, there's this 31-hour interval via which a deployer can bid to list an item of their choosing.

55:07 Yeah.

55:08 The fact that that's like baked into the HIP3 version of the protocol is very interesting and distinct. And the fact that the lab takes active governance in how these exchanges are run. I mean, look, you know, like we know, for example, that like on Solana or Ethereum, each probably has 10,000 dog coins, right? Those don't exist on Hyperliquid because there is this auction process. So you don't. You can't just like spam the network. It's like, oh, dog coins are hot. I'm going to list 100 dog coins.

55:41 I think one other thing we didn't get into, but I think it's interesting. Let's say you and I assembled 500,000 hype tokens such that we could then be a deployer and bid into these auctions. Now there's already NVIDIA perps. There's already SK Hynix perps. For us to have a successful thing, part of our strategy is like, well, what's going to be the next big thing? such that maybe like Central Asian ETFs, like the Kazakhstan index, we think it's going.

56:07 To be hot.

56:08 So maybe our strategy is like, oh, let's build those. But there's probably this whole other metagame, and maybe at some point we should do an episode with one of the deployers, how you think about, look, what am I going to bid on such that my instrument becomes the thing that everyone wants to use? Lots of interesting questions.

56:24 Oh, totally.

56:25 Lots of game theory for deploying those new markets.

56:28 But shall we leave it there for now?

56:30 Sure, let's leave it there.

56:31 This has been another episode of the All Thoughts Podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway.

56:36 And I'm Jill Wiesenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashiell Bennett at Dashbot, Cale Brooks at Cale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And you can chat about all of these topics 24-7, including markets and crypto, in our Discord, discord.gg slash oddlots. And for even more OddLots content, check out our daily newsletter, which you can find at Bloomberg.com slash OddLots.

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57:27 Thanks for joining.

57:28 Thank you. Thank you.