The Chopping Block: Hyperliquid vs. Tarun, ADL Transparency & The Coming Perps Arms Race - Ep. 981
Episode
66 min
Read time
2 min
Topics
Investing, Fundraising & VC, Design & UX
AI-Generated Summary
Key Takeaways
- ✓ADL Algorithm Transparency: Centralized exchanges historically experienced repeated auto-deleveraging events invisibly, but decentralized exchanges enable public verification. Hyperliquid's on-chain data allowed first-ever analysis showing approximately $100 million in over-aggressive position closures, revealing need for open-source implementations and clearer documentation of liquidation parameters.
- ✓Zero-Fee Trading Model: Lighter implements two-tier pricing where retail traders access zero fees with added latency while professional traders pay for premium API access and lower latency. This structure expands trading universe by removing barriers for smaller participants while maintaining profitability from institutional flow, mirroring Robinhood's disruption of traditional brokerages.
- ✓Insurance Fund Design: Lighter's LLP absorbed $20 million losses on October 10 instead of aggressively auto-deleveraging traders, meaning all other traders collectively gained $20 million. This demonstrates parameter choices where liquidity pools buffer extreme events occurring every five to ten years, prioritizing trader experience over immediate risk transfer through forced position closures.
- ✓Cross-Margin Architecture: Building on Ethereum enables any asset to serve as collateral and allows lighter positions to be tokenized on-chain through zkVM sidecar technology. This permits established lending protocols like Morpho and Aave to integrate directly, enabling basis trading strategies without building redundant infrastructure, expanding composability beyond isolated exchange ecosystems.
- ✓DevCo Acquisition Dynamics: When Circle acquired Axelar's development company but not the token, retail investors criticized the structure despite the token being down 85 percent from venture investment. Venture capital accepts failed experiments and talent reallocation, while retail expects perpetual commitment regardless of market validation, creating misaligned expectations around protocol versus company ownership.
What It Covers
Tarun's ADL research paper sparked controversy with Hyperliquid over auto-deleveraging algorithms during October 10 liquidations. Discussion covers perpetual exchange competition, fee models, token versus equity dynamics, and the technical challenges of building decentralized derivatives platforms.
Key Questions Answered
- •ADL Algorithm Transparency: Centralized exchanges historically experienced repeated auto-deleveraging events invisibly, but decentralized exchanges enable public verification. Hyperliquid's on-chain data allowed first-ever analysis showing approximately $100 million in over-aggressive position closures, revealing need for open-source implementations and clearer documentation of liquidation parameters.
- •Zero-Fee Trading Model: Lighter implements two-tier pricing where retail traders access zero fees with added latency while professional traders pay for premium API access and lower latency. This structure expands trading universe by removing barriers for smaller participants while maintaining profitability from institutional flow, mirroring Robinhood's disruption of traditional brokerages.
- •Insurance Fund Design: Lighter's LLP absorbed $20 million losses on October 10 instead of aggressively auto-deleveraging traders, meaning all other traders collectively gained $20 million. This demonstrates parameter choices where liquidity pools buffer extreme events occurring every five to ten years, prioritizing trader experience over immediate risk transfer through forced position closures.
- •Cross-Margin Architecture: Building on Ethereum enables any asset to serve as collateral and allows lighter positions to be tokenized on-chain through zkVM sidecar technology. This permits established lending protocols like Morpho and Aave to integrate directly, enabling basis trading strategies without building redundant infrastructure, expanding composability beyond isolated exchange ecosystems.
- •DevCo Acquisition Dynamics: When Circle acquired Axelar's development company but not the token, retail investors criticized the structure despite the token being down 85 percent from venture investment. Venture capital accepts failed experiments and talent reallocation, while retail expects perpetual commitment regardless of market validation, creating misaligned expectations around protocol versus company ownership.
Notable Moment
Don Wilson from DRW warned that if crypto cannot fix auto-deleveraging mechanisms to accommodate traditional finance players, the industry will revert to FCM clearing systems requiring third-party custody, essentially recreating centralized exchange structures and defeating the purpose of decentralized bearer asset trading.
Episode Transcript
The goal of decentralized exchanges is to, like, improve upon centralized exchanges. And one thing is a lot of people who work at centralized exchanges DM me and said, like, hey, these ADL, like, repeated events have happened before at centralized exchanges, but no one knew because you can't really see it. Right? There's no public data. You only see yourself getting ADL'd. You don't see other people, so you can't measure, like, how big of an event it is. Not a dividend. It's a tale of coupon. Now your losses are on someone else's balance sheet. Generally speaking, aircrafts are kind of pointless anyways. I mean, the trading firms were very involved. I like that ETH as the ultimate possible. DeFi protocols are the antidote to this problem. Hello, everybody. Welcome to the chopping block. Every couple weeks, the four of us get together and give the industry insider's perspective on the crypto topics of the day. So So quick intros. First, you got Tom, the DeFi Maven and master of memes. Hello, everybody. Tom is Tom is at a party. Apparently, he was too cool to show up on time. Next, we got Tarun, the giga brain, and Grand Poobah at Gauntlet. Yeah. And joining us today, we've got special guest, Vlad, leverage legend and leader of lighter. Welcome back to the show, Vlad. Wow. You guys, you're good to join for the late night session. That's right. That's right. Actually, it is very late at night right now. And I'm a Steve, the head of man at Dragonfly. We are early stage investors in crypto, but I want to caveat that nothing we say here is investment advice, legal advice, or even life advice. Please see chopping block then x y z for more disclosures. So welcome to the late night version of chopping block brought to you by the chopping block crew. So we brought Vlad on the show today because there's been a lot of drama going on in Purps Land specifically. So right at the end of the last show, we were actually running up on time and we got we got some some angry letters from our from our viewers that, we gave very short shrift to Tarun's ADL paper. So Tarun had just recently released a paper on ADL. ADL stands for auto deleveraging. This is a process that happens when basically a market is moving really crazy fast in a perps market and it must forcibly close out positions in order to deleverage the market. It's called auto deleveraging. And it's a very edge casey kind of thing. But, of course, it happened repeatedly across many, many different venues on October 10, which was the big day where we saw the largest number of liquidations in crypto history. So Tarun, being the kind of dutiful researcher that he is, wrote a paper trying to analyze what's going on in the world of ADLs and and this is a space that has …
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company
“When Circle acquired Axelar's development company but not the token, retail investors criticized the structure despite the token being down 85 percent from venture investment.”
“This permits established lending protocols like Morpho and Aave to integrate directly, enabling basis trading strategies without building redundant infrastructure.”
“This permits established lending protocols like Morpho and Aave to integrate directly, enabling basis trading strategies without building redundant infrastructure.”
“Lighter implements two-tier pricing where retail traders access zero fees with added latency while professional traders pay for premium API access and lower latency.”
“Tarun's ADL research paper sparked controversy with Hyperliquid over auto-deleveraging algorithms during October 10 liquidations.”
“When Circle acquired Axelar's development company but not the token, retail investors criticized the structure despite the token being down 85 percent from venture investment.”
“Don Wilson from DRW warned that if crypto cannot fix auto-deleveraging mechanisms to accommodate traditional finance players, the industry will revert to FCM clearing systems.”
“Building on Ethereum enables any asset to serve as collateral and allows lighter positions to be tokenized on-chain through zkVM sidecar technology.”
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