The Hyperdrive Protocol brings fixed-income market dynamics to DeFi, enabling participants to lock in returns, take strategic positions on future interest rates, and, as Liquidity Providers (LPs), earn trading fees from protocol activity, profits from counter-trading, and yields on idle liquidity.

Each player within this ecosystem plays a crucial role. LPs create and sustain fixed-income markets, while Long and Short traders take advantage of these markets and either secure predictable returns or speculate on variable rate fluctuations.

At the heart of this ecosystem is the hy[Token], a single price mechanism that reflects interest rate dynamics. hy[Tokens] trade at a discount (%) and mature at their full face value. Longs and Shorts directly influence this price, creating diverse opportunities.

This guide dives into the three core participants in Hyperdrive —Longs, Shorts, and Liquidity Providers— and explains the opportunities available to each.

Longs: Locking in Predictable Returns

Who they are: A “Long” participant in Hyperdrive is a user who buys fixed-rate positions (hy[Tokens]) at a discount with the expectation of earning a fixed return by maturity. They secure a predictable payoff in the future, shielding themselves from variable rate volatility.

What they do: Longs purchase the “principal” portion of a yield-bearing asset at a set rate. hy[Tokens] mature at full face value, so the difference between the price Longs paid upfront at a discount and the price at maturity is the yield.

For example, imagine a Long purchases a certain amount of hy[USDe] for 0.95 units of USDe (the base asset), knowing that at maturity (182 days) each hy[USDe] can be redeemed for 1 full unit of that base asset (USDe). The 0.05 difference locks in a fixed gain if held to maturity.

Why go Long?

• Predictable income: Longs know exactly what they will receive at maturity, removing the need to constantly monitor interest rate fluctuations.

• Hedging against volatility: Those who worry that variable yields may drop over time can “lock in” a favorable fixed rate now.

Suppose an investor believes that current variable yields (e.g., interest rates from other DeFi protocols) are likely to decrease in the coming months. They decide to go Long by purchasing hy[Tokens] at a discount. When the term ends, regardless of how the variable yield might have fluctuated, they still receive the fixed rate initially locked in.

Shorts: Leveraging Variable Rate Exposure

Who they are: “Short” participants are traders who want to gain leveraged exposure to the variable rate. Instead of buying the fixed-rate asset, Shorts effectively "sell" the fixed rate to the Longs. Shorts pay a fixed amount upfront—matching the discount on the hy[Tokens]—in exchange for earning the variable yield on the entire principal amount of the position.

What they do: Opening a Short position involves short-selling hy[Tokens]. The Short trader deposits a smaller amount of capital initially (equal to the hy[Token] discount) and gains exposure to variable yield generated on a larger amount of principal over the position’s duration.

At maturity, when the Short position is closed, the yield of the Shorts is the difference between the accumulated variable interest accrued and the fixed portion they paid upfront as a cost.

Why go Short?

• Variable rate upside: Shorts profit if the variable yield outperforms the fixed rate they paid.

• Capital efficiency: By only depositing the hy[Token] discount amount upfront, Shorts “multiply” their variable-rate exposure.

Suppose traders expect the variable yield in the market to rise significantly. They may open a Short by depositing a small amount of the base asset (the hy[Token] discount that is paid to Long traders). Over time, as the variable yield outpaces the fixed rate, they earn more interest than the amount they initially paid upfront. By maturity, the position is closed and the difference is their net profit.

Liquidity Providers (LPs): Earn Fees, Yield, and More

Who they are: Liquidity Providers are the engine of the Hyperdrive market. By providing the base asset as liquidity, LPs facilitate trades for both Longs and Shorts. They are, in essence, the “house” that stands ready to take the opposite side of trades when no direct counterparty is available.

What they do: LPs supply their base assets to one of Hyperdrive’s pools. This capital is then used in two main ways:

• Backing trades: When a Long enters the market, LPs supply hy[Tokens]. When a Short opens a position, LPs receive the Short’s initial deposit and effectively finance the Short’s variable exposure.

• Earning yield: Any unused (idle) liquidity is deployed into the underlying yield sources, earning variable returns for LPs. They also earn trading fees from participants entering and exiting positions.

LP Revenue Streams

• Trading fees: Every time a Long or Short opens a position, the LPs collect fees.

• Profit from counter-trading: LPs might find themselves effectively going Long or Short when the market is imbalanced. Depending on how interest rates move, this can result in profits.

• Variable yield on idle capital: Liquidity not actively backing trades earns the underlying yield sources (e.g., wstETH or sUSDe), providing LPs a baseline of variable interest.

• “Zombie Capital” Yield: When Long traders’ positions mature but remain unredeemed, this idle capital continues to generate yield for LPs until it’s withdrawn.

Why Provide Liquidity?

• Diversified income streams: LPs earn from trading fees, variable yield, and potentially profit by counter-trading.

• Continuous exposure: LP positions never expire, allowing them to “set and forget” their capital while still earning revenues over time.

Suppose an LP deposits a large amount of the base asset into Hyperdrive. Over time, various Longs and Shorts enter and exit positions, generating fees. If the market leans heavily towards Longs, the LP may end up effectively “shorting” the rate, earning variable interest at the expense of paying out a known fixed return. If variable rates outperform the fixed rate, the LP benefits.

At the same time, any liquidity not needed to back these positions generates additional yield. At the end of the day, LPs earn fees, have exposure to both fixed and variable opportunities through their net position, and collect yield on unused liquidity.

Hyperdrive Miles: Additional Rewards for Liquidity Providers

Liquidity Providers play a key role in building Hyperdrive’s fixed-income markets, and with the first phase of Hyperdrive Miles, LPs can access additional rewards on top of their regular APY.

Starting in January, Hyperdrive Miles will be distributed weekly based on liquidity provision to specific pools, with certain pools carrying more weight in Miles allocation than others. These rewards are forever associated with the corresponding address.

As key stakeholders, LPs who earn Miles gain access to potential future benefits, highlighting their crucial role in shaping the protocol's future.

Hyperdrive Protocol bridges the gap between traditional financial markets and DeFi. As the global fixed-income market gradually moves on-chain, Hyperdrive simplifies the execution of popular fixed-income trading strategies while leveraging DeFi’s efficiency and transparency.

As the owner of the Hyperdrive Protocol instance, ElementDAO’s Discord server is where you can stay updated and connect with other contributors exploring and building on Hyperdrive.

If you're building a front-end and considering becoming an affiliate, join the server or email info@hypervue.xyz to connect directly with the HyperVue Foundation and apply for an affiliate reward of up to 10% on Miles.