Hyperliquid's HYPE Dilemma: Echoes of Ethereum's Scaling Challenges

Hyperliquid's HYPE Dilemma: Echoes of Ethereum's Scaling Challenges

Article Highlights:

• Analysis of the challenges Hyperliquid faces in balancing its HYPE token and the HyperEVM ecosystem.
• Drawing lessons from Ethereum's journey in scaling and decentralization.
• Examination of the relationship between main tokens and ecosystem projects, and their impact on the future of blockchain.

Hyperliquid, a rising decentralized exchange (DEX), faces growing pains as it strives to maintain a delicate balance between its native HYPE token and its HyperEVM ecosystem. While Hyperliquid boasts successes like HIP-3 growth mode, rumored BLP (borrowing protocol), and the staking of 1 million HYPE as aligned quote assets, cracks are beginning to show.

One such fissure is the temporary alignment of HyperEVM with HYPE. In a normal state, the HyperEVM ecosystem would consume HYPE and, in turn, support the HyperEVM ecosystem's development. However, in the current state, the Hyperliquid Foundation's focus remains on leveraging HYPE within the HyperCore spot, futures, and HIP-3 markets, relegating HyperEVM development to a secondary priority.

An earlier HIP-5 proposal from a third party sought to allocate a portion of HYPE's buyback fund to support ecosystem project tokens, but it was met with widespread community rejection and skepticism. This highlights a harsh reality: the current HYPE price is entirely supported by HyperCore market buybacks, leaving no surplus to bolster the HyperEVM ecosystem.

Lessons from Ethereum: Scaling Successes and Failures

Ethereum's (un)successful scaling shift to Rollups hasn't satisfied ETH. The development of a chain involves three main entities: the main token (BTC/ETH/HYPE), the foundation (DAO, spiritual leaders, company), and ecosystem projects. The interactive relationship between the main token and ecosystem projects determines the chain's future.

The healthiest scenarios involve a two-way interaction, where the ecosystem needs the main token, and the main token empowers ecosystem projects. Solana currently excels in this regard. Conversely, there are models where the main token unilaterally empowers the ecosystem, but after the main token's TGE (Token Generation Event), everyone scatters, as seen with Monad or Story. There are also models where the main token leeches off ecosystem projects, resulting in a cooperative-competitive relationship.

The evolving relationship between Ethereum and its DeFi projects and L2s is the most direct and reflects the current state of HyperEVM and its potential for future breakthroughs. According to research by 1kx, the top 20 DeFi protocols account for roughly 70% of on-chain revenue sources, yet their valuations are far lower than the underlying public chain. The fat protocol theory still holds sway, and people trust Uniswap and stablecoins on Ethereum more than Hyperliquid and USDe alone.

Adding to this, Vitalik has long "hated" DeFi but can't live without it, ultimately concocting a low-risk DeFi theory. Many DeFi protocols have tried to build their own portals, from dYdX V4 to MakerDAO's 2023 Endgame plan, using technologies ranging from Cosmos to Solana. Then came Vitalik's public sale of MKR. Beyond the interaction between the main token and the ecosystem, people often underestimate the "official" endorsement of a public chain, especially the role of spiritual leaders.

Hyperliquid: A Fork in the Road

Hyperliquid faces an Ethereum-esque dilemma: how to manage the relationship between its main token and its ecosystem. Will Hyperliquid successfully build a thriving decentralized ecosystem that supports HYPE, or will it devolve into merely a perpetual DEX? Only time will tell.