Inside Hyperlend: Building a Lending Protocol on Hyperliquid | Ness

Transcript

I think that if you have like any K hype or state hype, like feel free to loop that a hyper lane. You can do a lot of size here and like and I generally mean that. Like you can borrow like 10 million of hype now and the rate is still going to be under 1% making your loop position extremely profitable. And then as well, if you're looking to get cash, the USD rate is very [music] extremely good. Nothing said on Zero X 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. Pokachu, Ryan, and our guests may hold positions in the companies, funds, or projects discussed.

What's up, guys? Welcome back to another episode of Zero X Research. Today I'm joined by Ness from Hyperlane. Ness, thank you so much for joining us. Thank you for having me, man. Hope all is well. All is well. I hope all's well with you, too. I have um we Blockworks has worked with you guys before, but I don't think you guys have come on the pod on any of the Blockworks funds, right? Definitely not on Zero X Research, but you also haven't done the other ones, right? Yeah, like this is my first time being here and yes, we've done a lot of with Blockworks. I think that Blockworks has like a whole analytics page laid out as well for our markets and then we joined the Blockworks advisory, I think, like 4 months ago

and it's been amazing. Well, very good. Well, I don't want to give too much publicity to David and Blockworks advisory, but I'm I'm happy that you're on. Um I guess for our listeners who are new to Hyperlane, uh do you want to give a short background on what you guys are building and maybe why you guys decided to build on Hyperliquid? Yeah, for sure. Uh I'll run down some kind of like data on me. Uh I'm Ness. I've been in crypto since like March 2020 and have been online since I started. Was heavily involved in DeFi somewhere. Had my own NFT group chat. Had like a lot of like uh technical scripts for NFTs and ran like highly sophisticated airdrop farming systems. I was managing around like 500 wallets.

Um so that was pretty interesting. But then what Hyperlane is is that like we very early on, once we joined Hyperliquid and just kind of like did a few trades there, realized that like that the team is like very high in precision and like execution. So that was like very interesting and like I guess new. Uh and when there was like big volatility, the application still worked. All the orders went through. So it kind of like caught us um into like attention. And then like once they announced the EVM, we were like, "Okay, like this is probably time for us to help them out in any way if there is a possibility." So we spoke to Julian. Of course, like as the Hyperliquid team is, they didn't generally say anything specific, but we were just kind of like discussing of

like how DeFi helped Ethereum um in the beginning and like how it's been helping it grow right now. Uh so the kind of like pinpoint of the conversation was just like DeFi orientated. Um and of course like if you go and check what's the biggest uh thing in DeFi right now, of course it's Aave. Like um we can leave all the like governance stuff that they've been having here behind, but the kind of like infrastructure itself is highly scalable uh and it has processed like what, a trillion in volume in deposits and stuff like that. Um so we realized this kind of that this kind of like pool market structure is the best way how we can help Hyperliquid and like the Hyperliquid community.

Uh and I think that we've proven ourselves very well uh over the past 2 years of just going like public and now being live for a year on mainnet. We've processed around like 19 billion in volume. Uh have a total market size of half a billion now. Um So I think that generally we have helped the Hyperliquid team um not the team, but the ecosystem very well. Yeah, you guys have done well. I um one question that typically comes up with uh teams building on Hyperliquid is um that you guys don't get much help from the Hyperliquid ecosystem. I mean, they're not not helpful, but they're not like begging people to come to their chain right?

Yeah, like there isn't any grants programs or anything like that that the Hyperliquid team would be like, "Hey, we want you to build this." It's just like um we built a highly scalable infrastructure ourselves. We can give you the EVM builder codes, precompiles. You have the freedom to do anything here. Uh and I think that that removes the people that are just here for the money and kind of like has like high uh high quality and genuine teams putting in the effort themselves into the Hyperliquid ecosystem, which I think works very well on the long term.

Uh and we have seen a lot of teams go by, um kind of like start something on Hyperliquid and then as they did not get traction or any money, they just disappeared. Um but there's like a high difference of the people that are like here every day um for a longer period of time and I think that those people are going to get extraordinarily rewarded in the long run. And like we realized that like Jeff is not going anywhere, so we're not looking to leave uh the Hyperliquid side at all as well. I think that makes sense. Um it also like removes all of the a lot of the politics from their end. Yeah.

That's true. So I think it was a good decision on Never have. Um and then you guys you touched on this a little bit, but you're built on um Aave, specifically Aave V3. Um why did you guys decide to go with Aave as opposed to Morpho and how did you guys change the protocol's design to fit um Hyperliquid's needs if you did any? Oh yeah, for sure. Um we generally believe that the Aave infrastructure is a lot more scalable. Uh and like Morpho, I would say that the kind of like idea is good, but the curators that they have on board are highly, I guess like extreme when it comes to like waving off the risk in order to get more yield, which then at the end just kind of like hurts the users itself. Like

we've seen multiple scenarios this year of like stablecoin depegs, which kind of like hurt a lot of people uh and especially the curators that took on a lot of risk um to kind of like I guess like generate more yield for the users. Um so that's the main reasoning behind that. What was the second question? Uh how have you guys changed Aave's design to fit Hyperliquid a little better? Oh yeah. Um we did not change the design at all. Uh the EV the HyperEVM is the same as any other EVM. So basically we just kind of like did a one-to-one copy on the EVM side in order to have the kind of like safety and security of

the of the protocol as a top priority. Okay, that makes sense. And then for Aave V4, is that something that you guys are going to adopt? I'm not sure how the Aave uh licensing licensing side works because I know you guys are a licensed um Aave partner, fork, I don't know what the official terminology is. Yeah, um the official terminology is that we were like a official friendly fork representing Aave on the Hyperliquid side. Um we are currently discussing internally how to position ourselves for V4, but generally don't have anything concrete. I think that V4, uh as we've seen the traction of it is still in the like kind of slowly scaling it out, making sure that

the security and safety is a top priority um and making sure that like all generally works before it scales into like nine figures plus. Okay, that makes sense. I have um I have two questions on the core protocol design and then we'll get into some of the more interesting stuff, but um how does the rate curve work on Hyperlane and what happens when utilization crosses the target threshold? Um how does the I guess the basic rate system work is a better way to phrase this. Yeah, um to give like a big shout-out to our risk management team, Block Analytica, uh they manage the risk over at um Affinage Sky, so they've done a wonderful job here. Um and they've been a our kind of like risk

management team since the beginning. And how our interest rates work is that we kind of like evaluate it in order to have competitive rates on the Hyperliquid like Ethereum and stuff like that as we can see right now at Aave uh and Morpho, the supply rates are hitting all I guess like an all-time low and and comparing it to Hyperlane, we have like two times the supply rates than anyone over all in I guess like a DeFi space. And like once it reaches the threshold level, um we have it like cuz yeah, like as I said, we have it consistently the most optimal in order to have it competitive with for example Morpho on HyperEVM. Um

but if it does decide to jump in, uh we have a pretty unique kind of like staking mechanism put in place where if you are a staker that kind of like over threshold limit um kind of protects your borrow rate, I would say. Yeah, that makes sense. And we're going to talk a bit more about the staking as well because I think it's quite interesting how you guys um fit that into the puzzle, but one thing I wanted to touch on before that is this idea of being able to borrow on your L1 positions from Hypercore. Um how does that bridging work and how surprised were you guys at when precompiles launched? Uh did you guys have any heads-up from the team or from anybody

or did you just kind of it just popped up and you said, "Oh, we get to use this now." Uh like um I think the people that are building in Hyperliquid ecosystem know how things go here and like nobody gets any like 1-week notice or anything like that that precompiles are going to go live, right? Um so we generally had no idea. Like once they went live, we were just like, "Okay, this is a top priority and we should focus on this." And the kind of like borrowing against like L1 spot positions is just kind of like a user experience add-on to our application. Which means that like we will be like we we have a pretty cool kind of like notification which is like okay, lazy funds detected. And this is basically we read all the um inventory you have on Hyperliquid and

say like hey, you could be earning this much by depositing at our markets. And basically behind the scenes it all just works that like we the you just like up side accept like four different transactions. Like you bridge from L1 to EVM, you deposit the collateral, you borrow, and then you can send all within one kind of like UI display. Um So like uh we didn't do any kind of like uh special contract. Just kind of like have a simple user experience add-on to our application.

Okay, I think that makes sense. And are you planning on doing any additional contracts or do you think what you have right now works so you don't want to need to mess around with it too much? Uh we are planning to have like different unique stuff position for L1 specifically. Um but it's going to be more on the kind of like private line that we're following along right now with Hyperion as well. Okay, very cool. Um and then you guys have a liquid HLP product. Um these were very popular in the early days. I remember a lot of people talking about how liquid HLP is going to be the next big thing. How has it turned out for you guys? What do you think? Do you think it was worth the effort that you spent on it or do you think it's um it was or do you think it's just been

fine? And then a follow-on is how do you price um liquid HLP given that it is uh a market making position that you're collateralizing? I would say the kind of like expectation was not that high. It was just that saying like okay, yeah, we can offer this. Uh and like the thing is with the HLP is that like the yield is very unexpected, right? Like you as we saw on the 10th of October event, um the vault gain I I'm I'm not really sure but I think like what 50 million in total profit. But yeah, the yield is not that consistent. So people have not been that much interested in it, I would say.

Uh but we just wanted to kind of like say that hey, yeah, we can offer this. Um but I think that the issue with this is that like it's added in the isolated pools which particularly don't have that much liquidity in order that you can borrow against and then loop. Um but we are adding uh kind of like uh function to it that you will be able to deposit USDC and then potentially will open a isolated pool with USDC being borrowable as well. So I think that once those Oh yeah, I I I think that once those two things are added, um the traction should be higher. But yeah, I I very much agree with you. Like there was insane amount of talking about like uh collateralizing HLP at the beginning but now people are not that interested anymore. And and I think that

all comes down to the fact that like the yield is not that um I I guess like linear or like consistent, you know? Yeah. Yeah, and also you can very much I think the interest for and this is kind of on the Hyperliquid side as well, right? Because they've actively tried to move away from the HLP going forward. Yeah. Yeah, that is true. And like the the HLP does not have that big of a role anymore when it comes to like saying um um liquidity on perp markets and then kind of like being a backstop liquidator.

Yeah, only backstops like huge huge positions that really do need help with. Yeah, exactly. Um and then those positions are typically negative sometimes and then people end up losing a bit of money so they don't really want to put money in HLP. Um you guys just had your token generation event. Um I guess not just, it's been a few weeks now, maybe a few months. But um so congrats on that firstly. But um how are you guys thinking about incentives going forward given that you've already launched the token? Do you have a bit set aside to incentivize borrows? Um Uh yeah, how are you guys thinking about incentivization going forward? Yeah. I think that the kind of like the biggest

thing we wanted to do with the token and like where we were as a protocol is launch the like uh I guess like unique staking utility we have planned out when it comes to saying that like it it is basically like stake and save. So like you would stake your token and then basically save a lot of money uh on the borrow positions that you have at Hyperland. And the people that are borrowing are in generally our users and those are the ones we should be kind of like paying attention towards, right? Um but I think that like when it comes to saying that we're going to be throwing incentives um left and right, we're probably not going to be. We're we're be we're being very conservative when it comes to like how and where we're sending out our tokens in order to gain more traction. I think

that either way our rates are perfect right now and extremely competitive. And then like if you are staking our token, um the rates get even better compared to anyone in the ecosystem. So I think that the kind of like alignment is good here. It's just about like putting more words and kind of like more noise about it. Okay, I think that makes sense. Um I guess let's talk a bit more in depth about that staking thing. So what First of all, how did you guys come up with the staking idea? Is it purely on Is it Is this something that you guys have been thinking about for some time?

Yeah, honestly, yeah. Like uh I I don't I don't know exactly when the idea came but like we were just like looking over all the kind of like staking mechanisms there are in DeFi and stuff like that and like kind of we were like how uh Hyperliquid themselves have it set up, right? They're like okay, you stake you stake hype and then you're going to get trading discounts. Which is very good, you know, for like market makers and the big people that have like majority of the volume on Hyperliquid. This makes a lot of sense when they're actually like doing all the calculations, right? Uh so we were thinking like okay, how can we genuinely do this on Hyperland, right? Um and like how it works is that like we look at like how much you are borrowing on Hyperland and then like how much you have staked and kind of like

putting putting both of those factors together in order to kind of like calculate the rebate for you. And like how the rebate actually work is that like we overall at Hyperland earn a 20% reserve factor from all loans. And this is how we make money, right? Um and we were like okay, like Hyperliquid is giving revenue back to its um token and kind of like doing buybacks and stuff like that. Like why wouldn't we do kind of like like do something similar? Like where we would just kind of like reward the users that are active on the protocol. Uh so basically what it does is that like the percentage that we earn and like how much you're staking per user, uh we just give you the money back. Like and then and we're being extremely aggressive

with this right now. For example, like our top user which is looping I think like nine figures of KHYPER and HYPER, um they staked around like um I think it was like $2,000 worth of our token and they're genuinely saving 40K a year. You know? So kind of like the incentive structure here uh like here I would say is like perfect um when it comes to saying like yeah, like if you want to do size, Hyperland is the place to be at. Especially if you kind of like do the math on the staking utility. Yeah, that's quite a bit. Um I have two questions as a follow-up.

First of all, why did you guys decide to reduce rates on borrowing activity as opposed to supply activity? And then the second thing is are you guys going to taper off the aggressive um uh fee reduction at some point? Like I assume that right now it's just to get people uh going, right? Yeah, um I would say that like there isn't any plans right now. Like once this scales into the billions, uh we'll start considering like how we can be more conservative for it. Um but I think that overall as a team we're very lean. There's like six of us uh and we have the kind of like investment money and we we earned some revenue uh throughout the whole year of being deployed. So we're not really that

dependent on cash, I would say. And we would very rather focus on the actual product and making sure that the kind of like liquidity scales in here rather than taking money for ourselves. Um And why we chose borrow instead of supply uh is that like if you look at all the Merkel uh kind of like incentive campaigns, the supply side is not sticky at all. Um the people that genuinely stay in the protocol after an incentive program ends is the borrowers, not the suppliers. Uh so the decision here I would say was pretty straightforward when we did the data analysis on everything.

Yeah, I think that makes sense. Um and then you guys have six tiers. How did you come up with the tier thresholds? And I guess what does the ideal user for for Hyperland look like that you guys decided on these figures? Yeah, like the thing is that um the tiers were just put in place so it's kind of like easier to put it on the website. But like any amount that you borrow and like any amount that you stake, it's all being calculated already. So there's like the rebates go from I think that like 20% to 80% and like every H like every HPL staked is put into effect. You know? So there isn't like um

tier-based type of structure. Um but just kind of like a concave linear type of uh formula for it. So yeah, like to just be direct, the amount of tiers were kind of like made up. Like what made them all sense um if you put it as kind of like a from a user's perspective. Okay, so it's just to make it simple for the user. I think that makes sense. Yeah, and then of course like if you reach a certain tier, um the psychology behind that is that you have like I guess like a dopamine receptor effect here, right?

Yeah. >> You know. That makes sense. Um okay, the last thing and this one kind of surprised me about um staking HPL is that you guys don't have um lockups, right? Yeah. That is true. What's the Do you guys um internally your six-person team, was there anybody who was like we should definitely add on lockups and if they did, why did they end up losing out? Like we have an option like how the like actual contract is is like there's no lockups right now, but like we have an option to add like time-based locks. Um and we were kind of like discussing if we should add that or not, but we felt like we all felt like that that was very like previous bull run uh

and like DeFi summer where a lot of people um I guess like got burned a lot by like staking for 1 year and stuff like that. Um and we didn't want our people to be locked out of that freedom, right? You like for example, if you have a user that's going to come in, borrow 50 million, stake 7 million of hype, uh stake 7 million of our token, uh and try to get the most out of the rate at a specific moment, we're just going to give it to him, you know? Like we don't people uh we don't want people to be kind of like locked out of that freedom.

Okay, I think that makes sense. And then I guess looking I have a few questions about looking forward of Hyperlane and then we can wrap things up, but um the first one is that you have um a few competitors uh that are on the Hyper EVM live um and doing decently well. And then you also have maybe a relatively very large competitor, which is the BLP. Um how are you guys thinking about your positioning relatively relative to these other solutions and do you see yourself as complementary or competitive um to I guess BLP as well as the other protocols?

Yeah, I would for sure say complementary towards Hyperliquid and BLP. Um but regarding the ecosystem and like where the people in lend and borrow space are here in Hyperliquid is it like we're generally the only ones focusing on one specific thing and that is like lend and borrow. Um I think that a lot of teams in the ecosystem are just trying to do everything all at once and it's like I like as our moral stance and like philosophy of the company is that like if you if if you're chasing two rabbits, you're going to catch neither, right? As GCR said at some point.

Uh and we firmly be- believe that uh also in the business module. Um and yeah, like we're not worried about competition at all and the kind of like if you look at it on the product side, we have very very good traction. The users are still here and like after our points ended, after the TGE, um the user count still kind of like keeps on growing. Uh and then if we look at the rates, they're extremely competitive. Uh and if you include the staking utility with like staking save, um the rates are like abnormal abnormally lower than anyone in the ecosystem. Um so I think that we're extremely well positioned here um when it comes to the ecosystem, but uh regarding to Hyperliquid, as Jeff

said on the latest podcast is that like Excuse me. That like how Hyperlane is going to position themselves is like we just tokenize the positions that would for example be on BLP and allow markets to be on Hyperlane for that. Uh which will both kind of like grow our markets and Hyperliquid's. Uh so I think that we're going to be working very closely on this together. Uh especially from our side, we'll make sure that we can kind of like push as much as we can towards Hyperliquid. Yeah, I think that makes sense. And then in terms of I guess like all of the the rage nowadays on Hyperliquid is um equities. Um and I imagine eventually or

I guess this has kind of been talked about for some time now, but like we're going to get tokenized equities, right? Um like on the spot side. Is that something that you guys are thinking about deeply? Yeah, for sure. We're most definitely looking to have that on Hyperlane and allow allow kind of like a private um pool market structure just for equities. Uh and I think that there's a team already working on that and they're dominating right now on HTP free, so I'm pretty confident saying that um they'll do well on the spot equity side as well. Yeah.

Um and then in terms of the spot equities, those would be isolated, right? Um depends on like how we structure it, but I think that when it comes to scalability, it would be better to have it in a pool market structure. Um but I I I I don't want to commit to anything here. Like I'll just leave it up to our risk management team to kind of like decide on this. But that's just kind of like what we what I'm thinking on like um what would grow better and like what would interest people more, you know? In terms of what's most important for Hyperlane uh over the next 6 to 12 months um apart from tokenized equities, what what are what are you guys aiming for? What's the what's the goal?

Yeah, for sure. Like my main goal right now is just kind of like putting the most noise out there regarding our staking utility and like how actually useful it it it is when you consider like scaling in big positions. Um so there's a kind of like a lot of like high high-tier clients and like high-net-worth clients I'm currently chasing down in order to kind of like put things in the perspective here. And then I would say that kind of like uh our recent partnership with Hyperion as well on like focusing private credit markets and like being regulatory compliant here is going to work extremely well like extremely well for all people looking to scale into Hyperliquid that are I guess like more institutionalized

and then looking places to be capital efficient on that. Um so I'm very very bullish on that. And then there's like I I guess like a lot more things that we plan on doing, but I'll just um hop on the podcast once we have those in place and uh I'll be able to talk about them in depth. Yeah, I think that sounds good. Um and then I guess last thing so we can wrap up is we can find out about um well, we have some Hyperlane stuff. So we have as Ness mentioned at the very beginning of the pod, we have a massive dashboard on Hyperlane, which I think shows um everything about Hyperlane Mhm.

It is beautiful. um to the utilization, financials, markets, rates, everything. Um and we're working with you guys on the advisory side, so people can find out on the advisory side things about Hyperlane. Um but what would you like people to go and do on Hyperlane? Like what's an action item for the listeners? Yeah, like I think that if you have like any K hype or staked hype, like feel free to loop that at Hyperlane. Um you can do a lot of size here and like uh and and I genuinely mean that. Like you can borrow like 10 million of hype now and the rate is still going to be under 1% making your loop position extremely profitable.

Uh and then as well, if you're looking to get cash to use this here, it's very extremely good. Um so that. And like if anyone has any questions, my DMs are open on Twitter and like I try to respond to everybody and like openly as I can. So please do not hesitate. Very good, very good. Well, Ness, this was a pleasure. Thank you so much for coming on and um yeah, to our listeners, make sure to check out Hyperlane on Twitter, on their borrows, on their protocol, and on Blockworks Research. Beautiful. Thank you for having me on.