Hyperliquid HIP-2 Sets New Standard for Embedded Liquidity and Token Issuance

Naul.T

Hyperliquid HIP-2 is an innovative extension of the HIP-1 token standard, targeted at solving the core liquidity challenges for new tokens. Embedding liquidity natively directly into the very process of creating the token, HIP-2 provides assurance that at any moment in time, a given token will have sufficient market depth to be instantly tradable the very moment that token is created. The standard combines robust liquidity pools with the precision of on-chain order books precisely at the level of the token.

Hyperliquid Hip-2
Hyperliquid Hip-2 token standard

Key Features of Hyperliquid HIP-2

  • Embedded Liquidity: HIP-2 tokens feature built-in liquidity from the start, fostering active trading immediately.
  • Instant Market Depth: Predefined liquidity levels ensure tighter spreads and a better trading experience than traditional Ethereum liquidity pools.
  • Democratized Liquidity: Hyperliquid HIP-2 allows anyone to participate in liquidity provisioning, promoting fairness and accessibility in token markets.

Motivation Behind HIP-2

Motivation Behind Hyperliquid Hip-2
Hyperliquid Hip-2 motivation

While HIP-1 is a good permissionless token standard, it doesn’t provide much-needed liquidity in the early stages of any token. Liquidity lies at the very heart of creating trading activity, price discovery, and market stability.

Hyperliquid HIP-2 solves this by natively baking liquidity into the token distribution process. Drawing inspiration from the likes of Uniswap, for example, HIP-2 employs Hyperliquid’s natively on-chain order book for a deep, sophisticated liquidity provision. This design opens up the supply of liquidity to all while removing the operational complexity associated with traditional liquidity pools in the process.

Hyperliquidity Mechanism

At the core of HIP-2 lies the Hyperliquidity strategy—an automated liquidity provisioning mechanism that forms the core consensus logic of the Hyperliquid blockchain. It is decentralized, self-sustaining, and guarantees unflagging liquidity, in contrast to most other traditional liquidity strategies run by third-party operators, native in their implementation on the blockchain.

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Key Parameters of Hyperliquidity:

  • Spot Asset: The initial price at which to set the liquidity range.
  • startPx (Initial Price): It gives the total order quantity for the price range.
  • nOrders (Number of Orders): Defines the total number of orders across the price range.
  • orderSz (Order Size): Specifies the size of each individual order in the range.
  • nSeededLevels (Seeded Levels): This sets the amount of seeded, or initially placed, levels in the bid that requires deployers to fund USDC proportionally in price and size.

Price Calculation:
The price range is determined recursively:
px_0 = startPx, px_i = round(px_{i-1} * 1.003)

How Hyperliquidity Updates Work

How Hyperliquid Hip-2 Updates Work
Hyperliquid Hip-2 updates

The Hyperliquidity strategy updates automatically every block, provided at least three seconds have passed since the last update. Each update involves the following steps:

  1. Order Placement: The strategy targets nFull = floor(balance / orderSz) full orders, with an additional partial ask order for any remaining balance.
  2. Spread Maintenance: Maintains a 0.3% spread between orders, ensuring dynamic and fair pricing.
  3. Seamless Execution: Fully filled tranches are automatically adjusted based on the available balance, ensuring liquidity remains active without manual intervention.

This automated mechanism guarantees continuous and adaptive liquidity provisioning, eliminating the need for deployer or user involvement in maintaining the liquidity pool.

Advantages of Hyperliquid HIP-2 Over Conventional Systems

  • No Manual Maintenance: Unlike smart contract-based liquidity pools, HIP-2 does not need any user transactions to keep its operation running.
  • Integrated Order Book Participation: Liquidity providers can contribute seamlessly alongside Hyperliquidity in scaling markets as demand grows.
  • Dynamic Market Adaptability: The system will adapt instantly to any change in the market, ensuring consistent market depth and active trading opportunities.
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The Future of Liquidity with Hyperliquid HIP-2

HIP-2 rethinks the landscape in which tokens are issued by incorporating liquidity right at their very core. By offering this innovative standard, Hyperliquid addresses the challenge of early-stage liquidity that has always confronted token adoption and trading activity.

The HIP-2 integrates itself with the on-chain order book of Hyperliquid to present a fair, efficient, and highly scalable environment to token issuers, traders, and liquidity providers alike. HIP-2 therefore avoids the unnecessary burdens related to traditional methods of providing liquidity and redefines the standard for decentralized financial innovation to continue opening up ways to even stronger and more wholesome markets.

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