TechFlowPost has published a market analysis arguing that DeFi primitives on HyperEVM are running into a structural conflict with HyperCore, the market structure at the center of Hyperliquid. The article says lending markets, tokenized vaults and liquid staking tokens, or LSTs, cannot be replicated on Hyperliquid in the same way they were built elsewhere.
The core claim is straightforward: portfolio margin makes recursive borrowing against native Hyperliquid assets unworkable, while most DeFi primitives still depend on recursive lending. That leaves DeFi on Hyperliquid competing with HyperCore’s own growth. The author lays out two possible responses: build DeFi markets around token utility instead of recycled yield, and make the DeFi layer complementary to HyperCore or risk being absorbed by it.
A DeFi economy built on leveraged yield runs into a different margin engine
The article describes traditional DeFi as an economy built on looping native onchain yield: native yield sources, same-asset lending against yield-bearing receipts, and downstream flywheels that support a large share of DeFi activity.
Hyperliquid changes that setup in two fundamental ways, and the first is portfolio margin. In the article’s framing, portfolio margin is Hyperliquid’s native margin engine. Liquidity that would otherwise support leveraged yield strategies is redirected to leveraged trading.
The author argues that the mechanism was not designed for same-asset lending, so the conditions that made older DeFi flywheels work are no longer in place, and there is no direct replacement.
- First, there is no reusable rehypothecated liquidity for loops. The article says that when HYPE is posted on AAVE to borrow USDC, that HYPE collateral can be reused by loopers in products such as stHYPE and kHYPE, lowering the cost of recursive lending. On HyperCore, by contrast, HYPE pledged to borrow USDC does not remain available for further reuse.
- Second, HyperCore does not support the lower-capital liquidation paths common in EVM lending markets. Its design liquidates against an order book. If a yield-bearing derivative is used as collateral, a separate deep order book would have to be bootstrapped on HyperCore. On AAVE and Morpho, the article notes, such assets can be supported through mechanisms such as withdrawal-queue liquidations.
AAVE’s symbiotic flywheel versus Hyperliquid’s liquidity drain
The article contrasts this with AAVE’s growth model. According to the piece, AAVE subsidized ETH borrowing by attracting large whale ETH-USDC activity and used E-Mode to create a special liquidation path for yield-bearing derivatives, making stETH more usable as collateral. Of the WETH supplied on AAVE, 80.6% belongs to accounts that use it as collateral to borrow stablecoins.
That pool-based engine created a flywheel between USDC margin and ETH yield leverage. Each side supported the other.
Portfolio margin on Hyperliquid does the opposite, the article argues. It pulls USDC margin out of the pool system, does not relend collateral, and does not allow same-asset lending. Looping trades are shut down, with nothing replacing them. If USDC borrowing moves from pools into portfolio margin, then recursive exposure to native Hyperliquid yield sources, including vault tokens, LP positions and LSTs, is removed from the DeFi economy. The article says that much of DeFi still depends on that trade and on the symbiosis between margin and looping.
Why staking emissions matter less on Hyperliquid
The next part of the analysis turns to staking emissions. The author says Hyperliquid is unusual because the chain is already useful enough that it does not need network-level inflation to drive consensus participation. That leaves staking emissions with limited marginal value. On many other chains, the article says, those emissions are the native yield source that supports a large share of DeFi.
In the author’s view, staking emissions do little to align HYPE holders. Net new demand for HYPE comes from HIP-3, HIP-4, AQA and fee-discount staking tiers, not from a 2.2% yield.
The validator set, the article says, is effectively made up of custodians, DAT, data providers and organizations running validators for operational reasons and latency, rather than for staking income. The number of 0% commission validators is presented as evidence that getting into the active set is itself a privilege many participants are willing to pay for.
From that starting point, the article says staking emissions on Hyperliquid should be reevaluated if they provide no significant benefit, and that DeFi on the network should also rethink its purpose.
The Sept. 18 shift to manual borrowing and the speed of liquidity migration
The article then moves to a live example. It says HyperEVM DeFi is fundamentally driven by LST leverage, and the current picture is weak.
On Sept. 18, Hyperliquid introduced a manual borrowing feature that lets users post HYPE or BTC on HyperCore and borrow USDC.
Two days later, one account withdrew 743,058 HYPE from HyperLend, bridged it to HyperCore, borrowed $25.65 million in USDC against it, and repaid $25.6 million of debt on HyperLend. The article says the entire HyperEVM borrowing position migrated to HyperCore within 33 minutes.
A second account followed. HyperLend’s HYPE pool utilization rose from 78% to 98%, while HYPE borrowing rates jumped from 1% to 90%. At that point, recursive trades no longer made economic sense.
The article’s conclusion is that portfolio margin is structurally moving HYPE liquidity out of HyperEVM and into HyperCore. Without intervention, that process could continue until liquidity is exhausted.
Why LSTs face persistent depegs on Hyperliquid
The result, according to the article, is that LSTs on Hyperliquid have difficulty supporting their own economics and remain prone to long depeg periods. The author points to kHYPE, saying its depegs have been more frequent and more severe than those seen in comparable LSTs on Ethereum and Solana.
Liquid staking is capital intensive by design, the piece says. It needs HYPE lenders to support low-rate and stable looping, and it needs DEX liquidity plus arbitrage to maintain the peg and reduce exit costs. Once the native margin engine pulls out a core part of the system, the flywheel becomes hard to sustain.
The article reviews responses from existing projects. It says Valantis has focused on optimizing DeFi economics under capital constraints. stHYPE uses a native dynamic instant-redemption buffer, reducing the need for deep DEX liquidity and helping users exit within seven days. STEX reuses liquidity across HYPE lenders, supporting loops while also supplying conversion liquidity when needed.
stHYPE is only one-fifth the size of kHYPE, the article says, but has held its peg more steadily. Even so, market pressure remains visible. The author argues that the staking-yield trade is already too fragile to assume the flywheel can survive portfolio margin, because HyperCore’s natural tendency under the current structure is to absorb all liquidity.
The article also mentions Kinetiq, which describes itself as the fastest-growing LST in the history of the category and pitches itself as Hyperliquid’s version of Lido and Jito. The author disputes the comparison. Ethereum and Solana do not have a native margin engine competing with lending markets, and that makes Hyperliquid, structurally, one of the least suitable places in crypto to run a standard LST model.
If that trade no longer exists, ordinary LSTs lose much of their job. The author broadens the point by arguing that most of today’s DeFi consists of yield-bearing derivatives: tokenized yield vaults, LP positions and LSTs. When recursive liquidity disappears, many of the DeFi primitives validated so far stop working as expected. New primitives are needed.
HYPE staking is framed as access to network resources, not just yield
The fourth section argues that Hyperliquid locks HYPE in a very different way from Ethereum-style DeFi. Rather than paying holders to stake, Hyperliquid requires businesses that want to use exchange resources to buy and stake HYPE.
- To deploy a perpetual market under HIP-3, or an outcome market under HIP-4, participants must stake 500,000 HYPE for six months, with slashing risk.
- To make a stablecoin the aligned unit of account, the requirement is 1 million HYPE.
- For lower trading fees, staking 10 HYPE gives a 5% discount, and staking as much as 500,000 HYPE gives a 40% discount. Intermediate tiers exist at 100, 1,000, 10,000 and 100,000 HYPE. The article says top traders and market makers can save more than $40 million a year by locking HYPE for lower fee tiers.
- To peer directly with foundation nodes for lower-latency data, the threshold is 10,000 HYPE.
Each of these cases, the author says, is a user or partner consuming network resources and paying with locked HYPE. In that framing, staking HYPE is an access key. Liquid staking should build markets around that key.
The article cites Valantis’s three-act view of liquid staking’s evolution: first, yield from high economic security costs, represented by stETH; second, yield from privileged access to liquidity flow, represented by JitoSOL; third, yield from direct access to liquidity, represented by staked HYPE. The point is not to tokenize HYPE’s native yield, but to build an economy around gated access to network resources and liquidity.
What kind of DeFi primitive could survive on Hyperliquid
The fifth section argues that the primitives most likely to survive are those that extend HYPE utility to places HyperCore cannot cover on its own.
One hard limit is that native staking cannot be used as collateral in portfolio margin. The article says traders who want to use their HYPE as margin are giving up yield and lower Hyperliquid trading fees in the process. Portfolio margin cannot accept already staked HYPE as collateral because the margin engine needs liquidators, either through an order book or through a curator-led lending market willing to bear redemption risk. Native staked HYPE has neither. The author’s conclusion is that portfolio margin will not support native staking by design, which means an LST is needed to carry staking benefits into the margin system.
A fee-discount-bearing LST could solve that problem, the article says. In that setup, stHYPE tokenizes the fee discount. Without a liquid receipt token, the discount cannot be replicated, and downstream DeFi activity can form around it. The article presents that as a Hyperliquid-native DeFi flywheel.
The author then outlines a possible division of labor: HyperCore handles USDC margin, while HyperEVM handles derivative risk.
- AAVE: stHYPE → HYPE
- HyperCore: HYPE → USDC
This arrangement would compete the least with HyperCore because it fills a gap while still using HyperCore’s USDC liquidity. HyperCore would not have to carry derivative risk; the EVM side would handle that layer instead.
The problem, the article says, is how to keep HYPE borrowing rates low when most HYPE-USDC lending has already migrated to HyperCore. If that challenge can be solved, recursive activity may return through a new set of DeFi assets shaped by Hyperliquid’s own structure.
Tokenizing HYPE utility and building markets for bespoke yield
The sixth section focuses on HYPE utility itself. The article says tokenization is about creating new markets by splitting assets, and points to Valantis’s integration with Pendle as one example: tokenized Hyperliquid fee discounts.
In that structure, traders pay a premium to buy fee discounts from HYPE holders. stHYPE holders monetize their staking-tier discount by selling it to YT holders and collecting a premium, which shows up in PT yields.
The author describes this as a new yield source and market created through DeFi around HYPE’s asset utility. Similar structures, the article says, could emerge around HIP-3, HIP-4 and future HYPE utility cases.
The piece then develops the idea of DeFi-driven bespoke yield. Staking is not homogeneous, the author argues. The same 500,000 staked HYPE has different value depending on who holds it: 2.2% for a passive holder; a 40% taker-fee discount for a market-making desk; a license to run a perpetual exchange for one deployer; the right to list an outcome market for another participant; and a distribution channel into one of crypto’s fastest-growing exchanges for a stablecoin issuer.
Behind the same stake sit different businesses. The article says most of these positions are acquired privately and come with their own yield, lockup and slashing terms. That is what the author calls bespoke yield on Hyperliquid. It does not come from onchain emissions. It comes from what staking unlocks for a specific counterparty.
Once staking becomes non-fungible in that sense, primitives such as restaking and stratification may become tools for delivering value that HyperCore itself cannot reproduce. The article says Hyperliquid’s dynamic staking utility opens a new design space for DeFi.
It also points to an example already in the market. From December to August, stHYPE delegated HYPE to Ethena HyENA exchange, bringing more than $1 million in HYPE rewards to stHYPE holders. The article says this turned a private and illiquid yield source into something publicly accessible, with more than $100 million of HYPE moving in and out without delay.
That new yield changed the economics of stHYPE and spilled into lending markets, AMMs and ordinary wallets, the author argues. The next phase for stHYPE will depend on rebuilding that state through scale and network effects. If successful, DeFi liquidity could bring more markets to HyperCore than private counterparties can, helping HyperCore grow instead of competing with it.
The closing argument: the constraint is market structure, not speed
In its final section, the article warns that any Hyperliquid project built on the assumption of a general-purpose DeFi layer may be more exposed than its builders realize.
The author says HyperEVM is not being held back by speed or composability. The deeper issue is market structure, and a new sidecar or L2 will not fix that on its own. The inherited DeFi script that Hyperliquid started with has run its course, the article argues, and the next version of DeFi on the network is now being formed.
