Felix Protocol: An Overview

Felix Protocol functions as a decentralized borrowing and lending platform deployed on the Hyperliquid Layer 1 blockchain. Derived from the Liquity V2 protocol, it provides users with the ability to mint feUSD, a native stablecoin, by using crypto assets as collateral, and to engage in variable-rate borrowing and lending across different market segments.

Overview

Felix Protocol serves as a critical financial infrastructure component within Hyperliquid, offering participants mechanisms to access liquidity, generate returns, and implement complex trading approaches. The platform comprises two main offerings: Felix CDP (Collateralized Debt Position) and Felix Vanilla. The CDP market caters to traders pursuing high-leverage strategies through feUSD minting, whereas the Vanilla market provides conventional variable-rate borrowing and lending options across multiple asset types.

The protocol was developed with a priority on security and risk controls, incorporating multiple refinements beyond Liquity V2's design. These enhancements feature mint caps, administrative tools for modifying protocol parameters, and a mechanism to pause operations during emergencies. The development team's experience from Anthias.xyz, a DeFi risk assessment organization, shaped the protocol's risk-conscious approach. Felix Protocol partners with Anthias Labs for continuous risk evaluation and has received smart contract security assessments from independent firms.

The protocol's expansion has been driven by several concurrent factors: growth of the HyperEVM ecosystem, a rewards system awarding "Felix points" for user engagement, and market anticipation surrounding a possible future token distribution from the Hyperliquid network. According to contributor Charlie.hl, "The protocol offers flexibility for users on both lending and borrowing sides, which represents a notable characteristic for such a nascent ecosystem."

History

Felix Protocol's creation was first announced in March 2025 as a borrowing platform launching on testnet with security reviews by Dedaub and Coinspect. Following a phased mainnet introduction with restricted access, the protocol became publicly available between April 8 and April 9, 2025. The original Liquity Protocol developers acknowledged Felix as a "variant of Liquity V2" deployed on Hyperliquid.

Following its public launch, the protocol demonstrated substantial growth metrics. Within one week on April 15, 2025, it incorporated Bitcoin as collateral, expanded minting limits for HYPE-collateralized positions, and attained $100 million in Total Value Locked. On April 18, 2025, the protocol initiated a "Felix points" distribution program to incentivize participation.

The platform expanded its product range on May 14, 2025, introducing Felix Vanilla markets alongside the existing CDP offering. At that time, the CDP segment had accumulated more than $180 million in collateral. Continued expansion led to surpassing $100 million in aggregate outstanding debt and reaching $265 million in TVL by June 5, 2025. By September 9, 2025, Felix Protocol announced exceeding $1 billion in cumulative deposits.

Technology

Felix Protocol runs on the Hyperliquid Layer 1 blockchain, leveraging its HyperEVM infrastructure. The platform is built on modifications to the Liquity V2 codebase, enhanced with supplementary risk management components. Planned improvements include tighter integration with Hyperliquid's underlying systems via CoreWriter (previously called "write precompiles"), designed to expand functionality for trader optimization.

Core Products

The protocol consists of two distinct market structures designed to serve different user categories and objectives.

Felix CDP (Collateralized Debt Position)

The Felix CDP market represents the avenue for minting feUSD, the protocol's proprietary stablecoin. It primarily serves traders seeking leverage exposure.

• Functionality: Participants deposit approved collateral including HYPE, Wrapped Bitcoin, Ethereum, and staking tokens such as stETH and rETH into a vault (referred to as a "Trove"). They then mint feUSD by using these assets as collateral backing.
• Interest Rates: A distinctive aspect involves borrowers autonomously determining their interest rates, permitting them to manage costs and achieve more favorable borrowing conditions.
• Leverage: Borrowing amounts are regulated primarily by asset-specific mint limits rather than lender liquidity availability, supporting potential high-leverage scenarios.
• Risks: This product involves redemption exposure, enabling other protocol participants to repay undercollateralized positions. Borrowers must actively oversee their positions to sustain appropriate collateralization levels. Position creation incurs fees charged by the protocol.
• Functionality: Participants supply assets including USDe and USDT0 to generate returns based on borrowing demand. Alternative users can pledge collateral like HYPE or UBTC to obtain these stablecoins.
• Interest Rates: Borrowing costs emerge from market equilibrium, adjusting based on asset availability relative to demand within each liquidity pool.
• Risk Model: The principal hazard for borrowers occurs via liquidation when collateral valuation decreases below mandated levels. In distinction to the CDP market, absence of redemption exposure simplifies position tracking. Liquidity providers face exposure to price fluctuations in underlying collateral assets.
• Fees: The Vanilla market imposes no fees for position creation, potentially reducing costs for users engaging in temporary borrowing relative to CDP offerings.
• Architectural Enhancements: Building on Liquity V2, the development team integrated specific modifications for improved protocol resilience. These encompass system-wide minting limits to prevent excessive leverage, administrator capabilities for managed parameter modifications, an emergency shutdown capability, and safeguards addressing a weakness identified in the original Liquity V2 Stability Pool.
• Audits: Independent security evaluations were conducted by Dedaub and Coinspect on the protocol's code.

feUSD Stablecoin

feUSD represents the protocol's proprietary collateral-backed stablecoin, engineered to maintain equivalence with the U.S. dollar's value. It constitutes a fundamental element of the Hyperliquid DeFi ecosystem, functioning as a medium of transfer, leverage instrument, and yield-generating asset.

Overview and Utility

feUSD generation occurs exclusively through the Felix CDP market when borrowers pledge collateral and establish debt. The stablecoin maintains over-collateralization, meaning locked collateral value surpasses circulating feUSD value. As of October 2025, approximately 75 million tokens were in circulation with roughly $75 million in market valuation. Price movements have demonstrated volatility, reaching a peak of $1.07 and a minimum of $0.7059, frequently reflecting market-wide selling pressure from leverage-seeking traders.

Core applications for feUSD include:

Stability Mechanisms

• Acquiring Leverage: Traders mint feUSD and exchange it for alternative assets to establish extended or shortened positions.
• Yield Generation: feUSD owners can contribute tokens to the protocol's Stability Pool to obtain compensation derived from borrowing fees and liquidation events.
• Liquidity Provision: feUSD functions as a trading pair component or base asset within liquidity pools on Hyperliquid's decentralized exchange platforms, such as `HYPE/feUSD` and `USDe/feUSD` pairings.
• Over-collateralization: All circulating feUSD is secured by excess collateral, creating protective margin against price movements in backing assets. The protocol's test environment operated with a cautious 40% Loan-to-Value ratio emphasizing safety.
• Redemption: The protocol permits feUSD possessors to exchange tokens for underlying collateral at equivalence (1 feUSD for $1 in collateral). This functionality establishes a minimum price for feUSD because traders are incentivized to acquire discounted tokens and redeem them profitably. Though this anchors the price near parity, it creates hazard for CDP borrowers with minimal collateralization margins, as their accounts receive priority in redemptions.
• Stability Pool: This mechanism functions as the principal reserve backing liquidations. Protocol participants deposit feUSD into this pool to cover obligations from closed positions. Depositors receive liquidated collateral (such as HYPE) from repaid accounts, typically at below-market prices, and obtain a share of protocol income. This establishes mutual benefit where the protocol gains robustness and participants earn income, though collateral value decline represents a potential loss.

Use Cases

The protocol's two-market design facilitates varied financial strategies available to Hyperliquid network participants.

• Leveraged Trading: Market participants can produce feUSD from CDP operations or obtain assets from Vanilla segments to construct amplified directional positions. The system accommodates "recursive leverage," permitting repetitive collateral pledging and borrowing to magnify exposure.
• Carry Trades: The protocol enables spread capture strategies, where participants borrow at lower rates and deposit proceeds at higher rates to realize profit differentials. An example involves minting feUSD at base rates and depositing into the Stability Pool to capture the positive spread.
• Yield Generation: Non-active users can accumulate returns by depositing stablecoins like USDC or HUSD into Vanilla segments or depositing feUSD into the Stability Pool.
• DEX Liquidity Provision: feUSD constitutes a fundamental pair asset for liquidity contribution on Hyperliquid's decentralized exchange, functioning in non-stable pairs like `HYPE/feUSD` and equilibrium swap mechanisms.