Hyperliquidity Provider (HLP) is Hyperliquid's protocol-native vault that acts as a system-level economic actor within HyperCore. Unlike typical DeFi vaults that are smart contracts deployed by third parties, HLP is embedded directly into the L1's financial engine. It provides liquidity through protocol-defined market-making strategies, participates in liquidation processes, supplies USDC to Earn mechanisms, and accrues a portion of trading fees.

HLP represents a novel approach to exchange liquidity—rather than relying entirely on external market makers or liquidity mining incentives, Hyperliquid has a native liquidity layer that operates as part of the protocol itself.

HLP's Role in the Hyperliquid Ecosystem

Market Making

HLP provides continuous liquidity on Hyperliquid's order books through automated market-making strategies. These strategies are defined by the protocol and executed deterministically by all validator nodes. When you trade on Hyperliquid, you may be trading against HLP's orders.

Liquidation Participation

When positions become undercollateralized and the clearinghouse triggers liquidations, HLP can participate in absorbing liquidated positions. This helps maintain market stability during high-volatility periods when normal liquidity might be insufficient.

Earn Mechanisms

HLP supplies USDC to Hyperliquid's Earn features, allowing users to earn yield on their deposits. The yield comes from HLP's market-making activities and fee accrual.

Fee Accrual

A portion of trading fees generated on the exchange flows to HLP, which is then distributed to vault depositors. This creates a direct relationship between exchange volume and HLP returns.

Protocol Vault vs. User Vaults

Hyperliquid has two distinct types of vaults within HyperCore:

Protocol Vaults (HLP):

• Native to the L1 financial engine
• Strategies defined by protocol governance
• Participates in system-level functions (liquidations, Earn)
• Deterministic execution across all nodes

User Vaults:

• Created by individual traders
• Allow others to deposit and gain exposure to strategies
• Not smart contracts—native exchange features
• Strategy execution is user-defined

Both vault types are managed directly by HyperCore, not by HyperEVM smart contracts.

How HLP Works

Deposit Flow

Users deposit USDC into HLP through Hyperliquid's interface. These deposits become part of HLP's capital base, used for market making and other protocol functions.

Return Generation

HLP generates returns through:

• Spread capture: Buying at bid, selling at ask
• Fee income: Portion of exchange trading fees
• Liquidation profits: Taking over underwater positions at discount
• Funding payments: Net funding received/paid on positions

Risk Profile

HLP takes on market risk as part of its operations:

• Inventory risk: Holding positions that may move against the vault
• Liquidation risk: Absorbed positions may continue losing value
• Market conditions: Extended trends can create sustained losses

Depositors should understand that HLP returns are not guaranteed and depend on market conditions and strategy performance.

Why a Native Liquidity Provider?

Traditional DEX designs often struggle with liquidity:

External Market Makers: Professional MMs provide liquidity but may withdraw during volatility, exactly when liquidity is most needed.

Liquidity Mining: Incentivizing LPs with token emissions is expensive and often creates mercenary liquidity that leaves when incentives decrease.

AMM Pools: Constant product AMMs provide liquidity but suffer from impermanent loss and can't offer the tight spreads of order book trading.

HLP addresses these challenges by:

• Providing always-on liquidity backed by the protocol
• Aligning incentives (depositors share in exchange success)
• Operating deterministically without withdrawal risk during volatility
• Complementing rather than replacing external market makers

HLP and Exchange Stability

HLP serves as a stability mechanism for the exchange:

Liquidity Floor: Even if external MMs withdraw, HLP continues providing liquidity.

Liquidation Backstop: When large liquidations occur, HLP can absorb positions that might otherwise create cascading effects.

Spread Maintenance: HLP's market-making helps maintain reasonable spreads during low-activity periods.

Volume Generation: HLP's activity contributes to exchange volume and fee generation.

Security Considerations

Protocol Risk: HLP is as secure as HyperCore itself. If the financial engine has bugs, HLP could be affected.

Strategy Risk: Market-making strategies can lose money in certain market conditions. Prolonged directional moves or extreme volatility can create losses.

Concentration Risk: If HLP grows too large relative to the market, its trades could have outsized market impact.

Governance Risk: Changes to HLP strategies or parameters are controlled by protocol governance. Poor governance decisions could affect HLP performance.

For Depositors

If you're considering depositing to HLP:

1. Understand the risk profile: HLP is not a stablecoin vault—returns vary with market conditions
2. Check historical performance: Review past returns and drawdowns
3. Consider correlation: HLP returns may correlate with crypto market direction
4. Monitor positions: HLP's positions are visible on-chain
5. Withdrawal terms: Understand any withdrawal delays or restrictions

For Developers

If you're building on HyperEVM:

1. HLP is not callable: You cannot interact with HLP from smart contracts
2. Observe HLP state: You can read HLP's positions and statistics
3. Don't compete blindly: Understand that you're trading in a market where HLP participates
4. Complementary strategies: Design strategies that work alongside rather than against protocol liquidity

Comparison with Other Models

HLP represents Hyperliquid's answer to the liquidity challenge—a protocol-native solution that provides reliable, efficient liquidity while aligning depositor incentives with exchange success.