Hyperliquid Vaults & HLP: Passive Market Making

Vaults are Hyperliquid's mechanism for pooled, strategy-driven trading. A vault is a smart contract that holds deposited capital and executes trades according to a strategy defined by its leader (creator). Anyone can deposit into or withdraw from a vault at any time. The vault leader takes a 10% performance fee on profits — depositors keep 90% of any gains.

Vaults operate directly on HyperCore, meaning they interact with the same order books and liquidity as all other Hyperliquid traders. There is no separate "vault mode" or reduced functionality. When a vault places an order, it competes with every other order on the book.

Anyone can create a vault with a minimum deposit. This permissionless model has led to a diverse ecosystem of vault strategies — from conservative market making to aggressive directional trading. Each vault's complete trading history, P&L, and current positions are transparent and viewable on-chain.

The Hyperliquid Liquidity Provider (HLP) vault is the protocol's largest and most important vault. It serves two critical functions: market making (providing liquidity across all trading pairs) and acting as the backstop for liquidations (absorbing positions that are liquidated when traders' margin falls below maintenance requirements).

As of early 2026, HLP has generated approximately $122 million in lifetime profits, representing a total return of roughly 450% since inception. These returns come from the bid-ask spread earned through market making, favorable liquidation acquisition prices, and the natural edge that comes from being the liquidity backstop on one of the highest-volume decentralized exchanges.

HLP deposits earn a share of these returns proportional to your deposit size. Because HLP is market making, returns are not guaranteed — there are periods of drawdown, especially during volatile markets or adverse selection events. However, the long-term track record has been strongly positive.

HLP's market-making strategy earns the spread between its bid and ask quotes. On a typical day, HLP places thousands of orders across dozens of trading pairs, earning small profits on each round-trip. Volume is the key driver — Hyperliquid consistently processes billions of dollars in daily volume, and HLP captures a fraction of that flow.

The liquidation backstop role adds another profit source. When a trader's position is liquidated, HLP takes over the position at the liquidation price, which is typically favorable (below market for longs, above market for shorts). HLP then unwinds these positions into the market, often at a profit. This function is essential for protocol health and gives HLP a structural edge.

However, liquidation backstop also creates risk. During extreme market moves, HLP can absorb large positions at prices that continue to move against it. The most notable example was the JELLY incident in March 2025, where a market manipulation attempt on the JELLY meme token forced HLP to absorb a large short position that briefly showed an $11 million unrealized loss before the situation was resolved through validator governance action.

In March 2025, a trader exploited thin liquidity in the JELLY meme token market by building a large short position and then aggressively buying to push the price up, forcing a self-liquidation that HLP had to absorb. The result was a brief period where HLP was carrying a significant underwater position, causing concern among depositors.

The situation was resolved when Hyperliquid's validator set voted to delist JELLY and settle positions at a fair price. This incident led to several important protocol improvements: stricter open interest caps on low-liquidity assets, improved auto-deleveraging (ADL) parameters, and better monitoring of position concentration.

For HLP depositors, the JELLY incident was a reminder that market-making returns come with real tail risks. While HLP has been consistently profitable over its lifetime, individual days or weeks can produce significant drawdowns. Depositors should think of HLP as a long-term strategy, not a risk-free yield source.

Any Hyperliquid user can create a vault with a minimum initial deposit. As the vault leader, you define the trading strategy — this can be manual trading, algorithmic strategies via the API, or any combination. You earn a 10% performance fee on profits generated for depositors.

The vault creation process is straightforward: navigate to the Vaults section of the Hyperliquid interface, click "Create Vault," set your initial deposit, and start trading. Your vault will appear in the public vault directory where potential depositors can evaluate your track record.

Successful vault leaders build depositor trust through consistent performance, transparent strategy descriptions, and active communication. The most popular community vaults have attracted millions in deposits by demonstrating edge in specific market niches.

To deposit into any vault (including HLP), navigate to the Vaults page on Hyperliquid, select the vault, and enter your deposit amount. Deposits and withdrawals are processed instantly — there are no lock-up periods or withdrawal queues.

When evaluating a vault, consider: historical P&L and drawdown history, the strategy description, how long the vault has been operating, the size of the leader's own deposit (skin in the game), and recent performance trends. All of this information is available on the vault's page.

HLP is generally the safest vault choice because of its size, diversification, and protocol-critical role, but it is not risk-free. Community-created vaults can offer higher returns but carry additional strategy risk and potential for larger drawdowns.