Analyzing Hyperliquid's HYPE Value: Beyond the Ecosystem

Key Takeaways

• Analyzing the value proposition of Hyperliquid's HYPE token.
• The role of fees in supporting HYPE's value.
• HyperEVM ecosystem and its impact on HYPE.
• Evaluating Hyperliquid as infrastructure vs. application.

Amidst heavy FUD surrounding Hyperliquid, prominent figures like @smartestmoney and @CL207 were entering long positions, while those publicly shorting the asset were getting liquidated. While selling or shorting $HYPE in response to team unstaking or unlocking may be understandable, it's crucial to recognize that short-term declines in HYPE's price don't necessarily indicate a deterioration in Hyperliquid's fundamentals.

In fact, with the introduction and expansion of Hyperliquid Hip-3, the fundamentals appear to be improving. This is evident to any objective observer. After reading a recent article (I'll refrain from providing a direct link), I want to share my perspective. The article centers around the idea that the "misalignment of the HyperEVM ecosystem with $HYPE results in Hyperliquid being valued at the level of applications like Aave and Uniswap, rather than the infrastructure level like Layer1/Layer2."

While the notion of the HyperEVM ecosystem being misaligned with $HYPE has merit, the HYPE LSD protocol is the only entity with real value in the HyperEVM ecosystem at the moment. However, it's crucial to overcome the misconception that launching HyperEVM is aimed at elevating HYPE's valuation level. Instead, the team hopes that HyperEVM ecosystem projects will create synergistic effects with Hyperliquid's core PerpDEX product.

We cannot apply the traditional “fat protocols, thin applications” theory to Hyperliquid. Many projects launch Layer1 with the intention of better selling their coins, a trend we haven't seen in the Hyperliquid team's behavior. Furthermore, most Layer1 teams strive to develop ecosystems to ensure there's a receptacle for their native token, facilitating sufficient exit liquidity. However, experience has shown that judging infrastructure by higher valuations is a fundamental error in the crypto world.

Worth noting is an article on substack.com titled "Fees Don't Lie." Layer1s account for 90% of total market cap, but only 12% of total fees. Cryptocurrency pricing still relies on the “fat protocols, thin applications” theory, even though the data indicates quite the opposite. Hyperliquid may be positioned to change this scenario. Applications are the most direct value capture layer, and investing long-term, substantial fee revenue into its own token buybacks is what underpins HYPE's value. In the long run, HYPE's value isn't determined by narratives driven by the HyperEVM ecosystem or Hip-3, but by its fees.

Hyperliquid doesn't need the HyperEVM ecosystem as an exit liquidity pool for HYPE. In reality, its product fees represent HYPE's exit liquidity. The same holds true for Ethereum. While it has a burning mechanism, it can't capture sufficient fees, while Layer2s leverage Ethereum's security but fail to channel the value they create back to ETH. This is why many see Lighter as Ethereum's opportunity for a breakthrough, hoping that Lighter, as a Layer2, will create incremental value for Ethereum.

Returning to HyperEVM, developers on HyperEVM initially follow the same development logic as on other chains, establishing a complete DeFi ecosystem and pumping memes, such as creating LSD, lending, and DEX products. However, with the exception of LSD, these products don't provide added value to Hyperliquid's core PerpDEX product. This has led to HyperEVM's inability to align with HYPE.

However, as I mentioned earlier, even though Hyperliquid hasn't yet seen a phenomenal DeFi product that can resonate with the Hyperliquid core product, Hyperliquid doesn't currently need an ecosystem as a HYPE water reservoir. Consequently, ecosystem projects and developers have ample time to develop. We're already witnessing the emergence and development of such products (e.g., @harmonixfi and @hyperbeat which will be launching soon), but gaining users and trust will take time. Therefore, I believe this is not a cause for concern.

Finally, returning to first principles, all of the Hyperliquid team's work and product updates serve their core product. It would be somewhat biased to view Hyperliquid's valuation ceiling through a traditional crypto-sphere mentality.