The latest horrid DEX simulacrum is Hyperlink, a perp CLOB emphasizing shit coins. It runs on its own dapp-specific L1 using a version of Tendermint, the favorite consensus mechanism for those prioritizing speed.
I listened to a Flirting with Models podcast with founder
Jeff Yan, where he spoke with Corey Hoffstein, a quantitative long-term equity
portfolio manager. Hoffstein's background and demeanor prevented him from calling out Yan's
BS, which is fine because most good podcast hosts are credulous and agreeable; otherwise,
no one would go on their shows. Yan spouts many typical crypto/market maker
cliches among those trying to impress people who are vaguely familiar with the
issues. For example, when talking about his earlier trading experience, he said
he 'was surprised how inefficient markets were.' This is a great phrase because
it implies one was outsmarting people, an alpha generator, and it does exist,
so it is possible.
Yet, one should provide several good examples to demonstrate
you are more than just bloviating. In crypto, there was the famous Kimchi premium,
where coins traded at 10% in Asian countries. This inefficiency persisted
because it required trusted partners in the US and Japan or Korea to make the
trade, which is non-trivial. In any case, it was over by early 2018 and required
connections instead of savvy. Nonetheless, many Sam Bankman-Fried interviewers
were blown away by SBF's singular arbitrage example, presumably one of his many
clever trades. Looking back at Alameda's tax returns and the fact that most FTX
traders left FTX throughout 2018 (no bonus pool), this was likely his only
profitable trade outside of buying coins in the 2021 bubble with customer funds (see here for more).
Thus, we have FTX exec Sam Trabucco bragging about their other genius trade idea,
buying Doge when Elon Musk tweeted about it. The Kimchi premium was the only
inefficiency Yan mentioned on the podcast.
When Yan was asked about the difference between maker and
taker high-frequency strategies, Yan stated that a taker strategy might make
only one trade a day. An HFT taker strategy involves sniping the top of the
book before an LP can cancel. By definition, it can't do this to a large volume,
as the top of the book is not big. The edge is the spread at best. That's a
large amount of risk and capital, adding up to a couple of bucks per day. He
described a strategy that has never existed because it makes no sense: a
once-a-day HFT taker strategy.
Yan highlighted that Hyperlink's L1 can do things that
would otherwise be impossible and emphasized updating a perp account for hourly funding payments. This
is pointless. Given the horizon of perp traders—days, weeks—crediting their
accounts hourly instead of waiting until the position is closed is pointless. A
50% funding rate is a 1% potential boost for a week-long position, which would
be long for perps. No rational trader will be excited by having that trivial
amount accelerated into hourly payments. Again, this highlights Yan's cluelessness.
Yan says he then decided to build an exchange on his own L1 because of the Impermanent Loss problem in AMMs. I agree that
Uniswap's AMMs are unsustainable because they lose more money to this expense,
but CLOBs on blockchains are not the solution. A fast L1 will still be slow because
the CEXs are centralized, and co-located servers can respond to exchange messages
within 5 microseconds. A centralized L1 is pointless, like a private permissioned
blockchain. With decentralization, you have geographic diversity among
validators, which takes you to 100 milliseconds if you restrict yourself to one
hemisphere. It will always be a price follower for coins listed on CEXs, so its market makers will be scalped just like they are on AMMs. However, their select market makers will make money, but not for the reasons they state. [As for the unlisted coins, there is no need for speed, as they
are less correlated with the big two that move secondary crypto coins around (ETH
and BTC). The only people who should be market making shit coins are their insiders]
The main problem with a dapp-specific L1 is that the chain validators
and the protocol are equal partners, as the gas and trade fees all support that
one dapp. The incentives of the DEX and L1 insiders are perfectly
aligned, so insider collusion is the default assumption. They probably give
insiders a latency advantage by giving them effective co-location, and prioritization in sequencing transactions within a block. However, as
officially a decentralized L1, this would be unacknowledged. As
LP cancellations are explicitly prioritized over trades, the Hyperlink insiders
can make consistent money-making markets, unlike in Uniswap.
Hyperlink conspicuously claims to be decentralized. Yet they
currently have centralized control over their L1 validators, bridge, their oracle, and whoever is running their primary
market-making strategy (currently working pro bono because that's what trustless anonymous
crypto insiders do!). They restrict IP access to avoid US regulators, which would not be possible on a genuinely decentralized dapp. While Binance and Bitmex almost
surely have insiders making their markets with privileged access, they at least
have the decency not to pretend these are decentralized exchanges.
Its disingenuous design encourages the worst in crypto,
which is saying something. For example, it wasn't until SBF created his
unregulated offshore exchange FTX that things took off for SBF. He claimed to
be trading $300MM/day when he approached VCs for funding in July 2019, though
you won't find more than a handful of mentions about their exchange on Reddit or
other forums where people talk about their crypto activities. FTX released a
White Paper on how many crypto exchanges were faking volume to boost interest,
which is a great way to learn about these tactics—and what not to do—and disarm
people who might accuse you of faking your trading metrics. As we now know, SBF
and his team were like Alex Mashinsky, liars who emphasized their unique
integrity and decentralization, making them safer and morally superior to his
competitors. We should not be surprised that SBF and Mashinsky moved on to
stealing customer funds to gamble on shit coins because that's what liars do,
like the scorpion on the frog; it's in their nature.
Their L1 does not have a native token, so it just takes USDC
collateral from Arbitrum to bridge to their chain. Users thus have the hacking risk
of the Arbitrum and Hyperlink bridge and worry about USDC censorship (if you
get flagged, your USDC is effectively zeroed out). With just their trusted version of USDC, the famously fraudulent perp finance rate is the only mechanism
that ties their perp prices to spot prices on off-chain assets. Yan mentioned this was discovered
in trad-fi, indicating he probably heard stories about how Nobel Laureate
Robert Shiller introduced a different version in 1991. He probably does not
realize that the Bitmex perp/spot funding rate mechanism is nothing like Shiller's
perpetual real-estate futures contract, which, in any case, never caught on in
trad-fi because it was fatally flawed. Many perps work fine without the
perp/spot funding rate ruse, highlighting its irrelevance. The perp funding
rate mechanism is just an excuse to comfort traders to believe these perp
prices are not mere Shelling points but are tied down by arbitrage (see here for more on that).
If you go to Hyperliquid's Discord or search them on YouTube, most of the content is focused on schemes to get free money via rewards, giving them tokens from their airdrop. Everyone is wash trading to collect points, as there are no fees or gas costs. There's also a referral program, and I'm sure many have gamed that, as it's easy to create seemingly unrelated accounts on the blockchain. Their fake trading is already twice that of Bitmex and ten times that of GMX ($1B/day—heh).
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