How Hyperliquid Reshapes Token Value Capture

Author: Ponyo Source: X, @13300RPM Translation: Good Oppa, Golden Finance

The traditional concept of "real returns"—such as dividends or fee-sharing—may seem appealing, but often it is merely a channel for foundations or large holders to withdraw funds. They do not need to sell off their core holdings (which could trigger market panic with such on-chain operations), but can continuously convert ETH or USDC dividends into cash. Meanwhile, the protocol hardly engages in any reinvestment actions, and small holders are powerless to emulate this, ultimately becoming mere spectators. On the surface, this appears to be a "harmless" profit model, but in reality, it may be a secret siphoning mechanism that allows large holders to discreetly and efficiently extract value from the protocol, lacking any substantial accountability or public oversight.

1. Buyback and Burn = Democratic Dividend for Small Holders

Hyperliquid reversed this logic by adopting a "buyback and burn" model. Instead of distributing the transaction fees as "pseudo-dividends," it is better to directly use the protocol revenue to buy back $HYPE from the open market and then permanently burn it.

This mechanism provides a more democratic way of value growth for small token holders: each time the protocol repurchases and burns $HYPE, the token price tends to rise, thereby giving any holder, especially small users, the opportunity to freely profit and exit at high price points.

In contrast, the foundation faces numerous obstacles when it comes to cashing out. Once a large-scale sell-off occurs, it will immediately expose itself on-chain, triggering market panic, damaging investor confidence and consequently harming the project's reputation. Although some question whether certain protocols might 'market make' by buying back and then selling at high prices, such behavior is illogical for teams that are serious about their work—buying back only to sell again would completely destroy market trust while also hurting their own holding value. Even in the relatively relaxed crypto sphere, when the Ethereum Foundation sold ETH in small amounts, it has triggered public backlash.

More importantly, the act of selling is equivalent to cutting off the buyback mechanism that supports the value of the token. The buyback itself is a declaration of confidence in the project, telling the market: "The protocol itself is a steadfast buyer." This not only boosts investor confidence but also easily stimulates the market's "follow-buy" sentiment. At the same time, the rise in token prices will, in turn, enhance the long-term interests binding between the protocol and the token holders.

Ultimately, although the buyback mechanism is beneficial for the foundation, relatively speaking, small holders often benefit more. They do not have to worry about liquidity restrictions and do not have to bear the reputational costs brought by large-scale selling pressure. This value growth model is fairer and more widely benefits the community compared to proportional dividends.

2. Value Capture 101: Recovery, Not Loss

The essence of the value of tokens comes from the relationship between supply and demand and the expectations of future returns. While transaction fee dividends can attract "interest-seekers," they are also like a leaky bucket. The value created by the protocol continuously flows out of the ecosystem rather than being retained within the tokens to form a compound interest effect. Dividends paid in ETH or USDC will be periodically withdrawn, gradually weakening the growth momentum, while large holders can easily cash out for arbitrage.

Hyperliquid currently has a total of 422.6 million $HYPE staked, of which the foundation holds approximately 272.7 million (about 64% of the total). If the protocol adopts a dividend model instead of buyback and burn, the foundation could theoretically receive about 14 million $HYPE annually, amounting to approximately 352 million USD (based on 64% of the total buyback amount as of May 9, 2025). Even if the foundation claims some reinvestment, there is a lack of any structural guarantees— a significant portion of the value may be directly siphoned off, leaving retail users and the broader community with no control over this and no visibility on where these funds ultimately go.

In contrast, the buyback and burn mechanism is a direct "recycling" of income, gradually increasing the proportion of each holder by continuously reducing the total supply of tokens. This mechanism can also stimulate a "reflexive" feedback loop—investors who anticipate a continued contraction in supply are more inclined to hold long-term, thus driving prices further upward.

At Hyperliquid, spot trading and listing fees ultimately flow into the $HYPE burn pool, meaning that the larger the trading volume, the scarcer the token becomes. In comparison, the reflexive nature of the dividend mechanism is far from sufficient—because it requires each token holder to manually reinvest the dividends to buy tokens again. In contrast, Hyperliquid's automatic burn mechanism takes effect immediately and is stable and sustainable, establishing a direct and powerful positive connection between network activity and token scarcity.

3. Hyperliquid's Community First Principle

Hyperliquid's choice of "buyback and burn" instead of transaction fee dividends reflects its unwavering commitment to the community-first philosophy. From the very beginning, the project rejected VC allocations and instead conducted a large-scale airdrop of 310 million $HYPE to over 90,000 users (valued at about $1.6 billion at launch). This widespread distribution effectively mitigated the risk of internal sell-offs, built a highly engaged user base, and injected ample liquidity into the ecosystem from day one.

More than 70% of $HYPE is reserved for the community, used for ongoing airdrops and incentive programs, while the foundation stakes a large amount of its tokens to ensure network security. By clearly avoiding the "pump and dump" dividend model, Hyperliquid has realized a design that feeds back protocol revenue to token value, allowing all participants to benefit. Especially for retail investors, they have greater flexibility in choosing when to take profits as they buy back to drive prices up.

4. Looking to the Future

Following the "real yield" craze of 2022, the years 2024-2025 are showcasing another more sustainable model - "the protocol becomes its own best buyer." We see projects like dYdX starting to adopt buyback mechanisms to retain more income in their own tokens. The market signals are becoming increasingly clear: capturing protocol revenue through buyback mechanisms can enhance investor confidence and assure them that this token is not just an unsupported "air coin."

Hyperliquid has adhered to this logic since the project's inception. By using fees for token burns, the project not only prevents core token holders from extracting excessive profits but also circumvents the potential legal gray areas associated with traditional dividends. Whenever the protocol earns fees, all token holders can see the tangible financial effects.

Of course, not all projects that adopt a buyback mechanism have been successful. Those that initiated buybacks but failed to support token prices often lack genuine user demand, sufficient fee income, or a solid community foundation. Buyback and burn is not a panacea; it cannot save a fundamentally unstable project. For this mechanism to truly work, a protocol must also have a clear market fit, stable cash flow, reliable use cases, and an active community that trusts its long-term value.

From this perspective, "buyback and burn" is becoming a core mechanism for value capture of high-quality tokens. It creates an incentive structure: if the foundation and other large holders want to profit, they must do so by increasing the overall value of the tokens. This provides traders with a centralized exchange-level user experience, and also lets them know that their transaction fees are genuinely entering the "value burn" loop, rather than going into a large holder's wallet. The end result is that users are more enthusiastic, the ecosystem becomes self-reinforcing, and a clear incentive framework is formed, rewarding genuine usage behavior.