Introducing the Hyperdrive Protocol: Fixed and Variable Rates, Reimagined.

Introducing the Hyperdrive Protocol: Fixed and Variable Rates, Reimagined.
By DELV

Reliable sources of fixed and variable yields are necessary for emerging on-chain financial markets to thrive. Over the past year, our research-driven team at DELV has been quietly obsessing over core problems of rate models in DeFi and building a novel solution.

Today, we are excited to introduce Hyperdrive, a new automated market maker (AMM) protocol for fixed and variable rates.

Hyperdrive AMMs bring material improvements over former fixed and variable rate DeFi models in several ways:

  • On-demand terms. Positions are minted on demand and last for the full term duration. No more need to purchase partially matured terms!
  • Simpler positions. Choose a fixed rate, variable rate, or Liquidity Provider (LP) position.
  • Continuous liquidity. LPs can earn considerable passive returns in perpetuity, without a need to roll over capital upon term expiry.
  • Reputable yield sources. Hyperdrive AMMs focus on integrating with reputable yield sources that follow sustainable growth models.

Over the next few weeks, Hyperdrive’s audit reports and whitepaper will be released. Collectively, they will reveal how these advancements were made possible.

For now, we’ll cover what Hyperdrive is and its most important concepts.

What is Hyperdrive?

Hyperdrive is a new AMM protocol featuring a novel pricing mechanism for fixed and variable yield positions. In addition to terms on demand, its mechanism design enables a more efficient and symmetrical yield market.

Hyperdrive is the result of our team’s principled approach to DeFi research and many months of focused heads-down building.

What can you do with Hyperdrive?

There are three positions (non-custodial) a user can take on a Hyperdrive AMM:

Long (Fixed Rates)

Long positions earn a fixed rate. When a user deposits an asset (e.g., sDAI, DAI, stETH, ETH), they receive an agreed-upon future value that is redeemable 1:1 at maturity. When a user opens a Long position, it impacts the market by lowering the fixed rate. Longs held to maturity take a fixed return but can also be closed before maturity for their current market price.

Example | A user deposits 1.00 stETH today, in a market offering a 5% fixed APR. They can redeem exactly 1.05 stETH one year from now.

Short (Variable Rates)

Shorts earn a multiplied variable rate that may result in a much higher implied yield. This can be easily calculated as (1 / fixed rate) * variable rate. Shorts pay the market fixed rate upfront as margin and earn variable yield on the full capital this margin is backing. When a user opens a Short, it impacts the market by increasing the fixed rate. Shorts can earn outsized returns but can incur losses if the variable rate underperforms the fixed rate.

Example | A user could pay 0.05 stETH today to earn the yield generated by a total of 1.05 stETH for a year (assuming a 5% fixed APR).

Example | Another way to look at it would be if the average variable rate for a year is 8%, the proceeds will be 0.08 stETH, meaning a 60% return!

Provide Liquidity (LP'ing)

LPs deposit single-sided liquidity into a Hyperdrive AMM and collectively take the other side of traders’ respective Longs and Shorts in the market. This means that Long positions generate more variable yield for LPs, and conversely, Short positions take variable yield from LPs. Unutilized LP capital in Hyperdrive markets earns the underlying yield source's variable rate. LPs also earn fees from all trading activity in the market.

Key Features

Several unique features differentiate Hyperdrive from existing fixed and variable rate protocols:

Single-Sided Liquidity

Hyperdrive’s liquidity provision mechanism improves the UX of LPing and is far more capital efficient. Rather than providing both a Principal Token (PT) and base asset (e.g., ETH being the base asset for Lido's staked ETH yield), Hyperdrive LPs only need to provide liquidity in a base asset. Since positions are minted on-demand, LPs are never required to mint positions just to provide liquidity.

Terms on Demand

Unlike prior fixed-rate AMMs, users that open positions always receive the full position duration of exposure. This simplifies the UX of trading fixed-rate assets since traders always get the exposure that they want instead of racing to open a position when a term begins or only getting access to terms that are partially matured.

Continuous Liquidity Provision

LPs provide liquidity to a single pool that never expires, which underwrites a variety of fixed and variable rate terms with differing maturity dates. Instead of LPs manually migrating over their positions at the expiration of each pool, they are continuously LP’ing in the pool.

Next Steps: Audit Results and Public Testnet Launch

Hyperdrive's audit results are in! The full reports will be shared in an upcoming security update. Security is our top priority. Hyperdrive has gone through several rounds of audits and formal verification and we have scheduled one final audit to run during public testnet. This is a significant milestone towards safely launching Hyperdrive.

In parallel, our team is diligently preparing a governance proposal for a public testnet launch of Hyperdrive with the Element DAO, and we look forward to opportunities to work on Hyperdrive with other Protocols and DAOs in the future.

This testnet will be your chance to experience Hyperdrive firsthand, contribute to its research and development, and provide valuable feedback – all without putting real assets on the line. If you are reading this, you are invited to participate. We read all feedback we receive and take it seriously so we can get things right for you.

Here’s what you can expect over the next few weeks from us:

  • Hyperdrive Website Launch – it's live!
  • Hyperdrive Security Roadmap Update – read it here!
  • Open Sourcing Our Hyperdrive Codebase(s) – it's public!
  • Public Testnet Proposal to the Element DAO – read it here!
  • Hyperdrive Docs Portal Showcase – it's live!
  • Hyperdrive Whitepaper – read it here!
  • Bug Bounty Program

Join They Journey to Launch Hyperdrive

The upcoming weeks will be full of important announcements! Join the conversation in Discord and Farcaster to learn more, provide feedback, review our code, or just hang out. We want to hear from you!

Stay tuned for more updates and join us as a user, integrator, builder, partner, or supporter as we gear up for launch!

Sincerely,

The DELV Team