Where To Stake Your HYPE

Level 1 - NGMI

Welcome Avatar!

Many of you have asked for our recommendations for HYPE staking.

We have a brief post on this today, followed by our Q&A on Saturday and normal service will resume next week.

What Is Staking?

Blockchains rely on privileged participants known as validators to verify user transactions and publish them by assembling them into a “block”. With Proof of Stake, blockchain security is assured by requiring each validator to lock up (or “stake”) valuable tokens. These tokens are forfeited (“slashed”) if the validator fails to follow the rules of the chain. Proof of Stake solves the “Nothing At Stake” problem.

Nothing At Stake

In a decentralized system, there are no “official” nodes run by a provider and responsible for ensuring transactions are processed. And as block production carries costs, it isn’t reasonable to expect volunteer operators to run the system. We therefore depend on the profit motive, but must set incentives to avoid abuse.

Block producers (validators) are incentivized with newly minted cryptocurrrency for winning the race to produce a block. In a global distributed network, multiple blocks may be produced at nearly the same time. The network must come to consensus on which block at the new block height will be the official accepted block.

Under Proof of Work, producing a block is so costly that the winning strategy is to support the current consensus (the longest chain). In Proof of Stake, no computing power is wasted ‘mining’ for blocks, so it would be rational to support all competing blocks to maximize rewards when the network resolves consensus. But this would delay finding consensus, which isn’t desirable - fast finality (transaction speed) is critical to decentralized public blockchains. This conflict between validator profit incentive and the needs of the network is called the “Nothing At Stake” problem.

The solution is to impose an economic cost for ‘equivocating’, or voting for blocks on competing chains. In Hyperliquid and Ethereum this is called slashing.

The Hyperliquid L1 is secured by around 400 million staked HYPE tokens which have a mark-to-market value of roughly $8.8b. The yearly reward rate is ~2.37% per year (varies based on amount of HYPE staked). The future emissions reserve pays rewards.

Where To Stake HYPE?

At this phase of decentralization Hyperliquid supports only 16 validators.

The validator set is expected to grow larger as the project matures.

For now, just under 1/3rd of the validators (5) are controlled by the Hyper Foundation, but ~83% of all staked HYPE is delegated to these nodes. This means that the Foundation are the only actor with a quorum, which is defined as 2/3rds of the total stake in the network.

Around 72 million HYPE tokens would need to be redelegated to other teams to remove effective supermajority control from the Foundation. It’s fair to consider the network centralized until this occurs.

As the specter of DPRK-backed elite hacking teams looms large in DeFi, we think the risk/reward favors staking with the Hyperliquid Foundation *for now*. Any of the 5.

Reasoning: for practical and optics reasons we think the Foundation are in a better position to protect stakers from some or all of the financial consequences of a hack. Under this assumption, the risk/benefit doesn’t seem to favor third party staking. Any variation in commission is meaningless. 3% of 2.3% is 0.00069, or $0.15c/HYPE at current prices: less than the average 5 minute volatility in the HYPE token.

For the Hyper Foundation the staking commissions are a meaningful > $5mm/year - our immediate thought is this gives a reasonable security budget. 11 validators need to be secured with only ~$1mm revenue between them, that’s not enough for 1 FT security person/node. However also be aware that well resourced and reputable teams like Nansen may be willing to subsidize the cost of proper security as a altruistic service, at least until they grow share.

While staking *may* make you eligible for additional rewards, we can’t quantify these. Instead we can look at potential risks. Like every successful DeFi project with high TVL, Hyperliquid is a target for hackers. Hyperliquid validators are especially a target, as attackers may attempt to profit by ratifying a malicious transaction.

Slashing penalties are essential in a Proof of Stake network (solving the “nothing at stake” problem) and although the Hyperliquid team have discretion over slashing, it may create perverse incentives if malicious validator behavior is not punished. The validator operator being hacked may not be sufficient excuse.

So for now, in the early stages of the project, we think the Foundation offers the highest probability to minimize slashing risk. As the *known* rewards are essentially equivalent, we can’t make an economic case for preferring another operator. We can certainly make an altruistic case, and if you are comfortable with the risk profile then you can support the decentralization of the network by staking with a minority.

We support the reputable teams who are running Hyperliquid validators and we’d like the Hyperliquid chain to become more decentralized, with the Foundation eventually being delegated a minority stake in a truly competitive validator marketplace. We don’t intend any criticism of the excellent and reputable teams who have stepped up to run validators, and we hope they continue to grow stake.

If you have a large bag of HYPE you could delegate a riskier portion to your preferred team and the majority to Foundation validators.

How To Stake HYPE?

Staking is easy: the staking contract is built into the L1 and it’s a simple matter of transferring your HYPE to it using the interface at https://app.hyperliquid.xyz/staking

Transferring your HYPE to the staking contract is instant, as is delegating the stake to your chosen node. Unstaking has a 7 day waiting period, and waiting periods are standard in delegated Proof of Stake chains to ensure the slashing penalties can be activated if necessary.

If you are well capitalized and wish to sell your HYPE, you can hedge your exposure by shorting the HYPE perp contract during the 7 day unstaking period. This requires USDC for margin in your perps account. You may be charge (or be paid!) funding to hedge, and you will be subject to margin requirements and liquidation risk in the usual way (as if you did not own spot HYPE, as cross margin is not available between spot and futures accounts yet).

Normal service resumes on Saturday with our January Q&A!

Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions from an anonymous group of cartoon animals with Wall Street and Software backgrounds.

• We now have a full course on crypto that will get you up to speed (Click Here)

• Security: Our official views on how to store Crypto correctly (Click Here)