Author: Dongdong Fusi; Source: X, @dongdongRobin

1. Where did the money go?

Priority Fee is the first time that Hyperliquid systematically guides the cost of the HFT* arms race from outside the chain back into the protocol and permanently destroys it through $HYPE.

Before this, the money went to private operators;

After that, it becomes a common benefit for the entire ecosystem.

HFT (High-Frequency Trading) - refers to a trading method that uses algorithms and extremely low latency to buy and sell large amounts of money in a very short time. In traditional finance and crypto markets, HFT teams spend a lot of money optimizing infrastructure to gain speed advantages of milliseconds or even microseconds over others. This "speed arms race" extracts billions of dollars from global markets every year.

Prior to this upgrade, API traders on Hyperliquid who wanted to access competitive latency had to privately pay validators for sentry peering or other exclusive access services. This fee, which can run into tens of thousands of dollars per month, goes to private operators and is completely opaque to ordinary users. Priority Fee directly targets and replaces this mechanism, transferring this money from the pockets of validators to the protocol’s destruction mechanism.

Facing the HFT arms race, traditional exchanges and Hyperliquid have taken three completely different paths.

Easy to understand description:

The choice of IEX (Investors Exchange) is "I won't let you run". They added a 350 microsecond delay to the system, forcing all orders to wait for a short period of time before being executed. This directly wipes out the speed advantage - but the price is that serious market makers are also slowed down, and the exchange loses a lot of liquidity. It was a confrontational gesture that ended up driving the HFT away, but also drove everyone else away with it.

The choice of NYSE and CME is "Since you can't run away, it's better to collect rent." They built the server rooms bigger and bigger, and made the HFT team pay to put their own servers closest to the exchange. This colocation fee flows into the pockets of the exchange, but the entire arms race is still going on, but the exchange has changed from a spectator to a landlord.

Hyperliquid is taking the third path: "turning the competition itself into protocol revenue". It does not block or collect rent, but directs the money that the HFT team is willing to spend on speed through the Priority Fee mechanism - and then destroys it all. The arms race is still there, but every competitive cost has turned into pressure to destroy HYPE, which is returned to the entire ecosystem.

BIS research estimates that the HFT arms race extracts approximately $5 billion per year from global stock markets, and the Priority Fee is a mechanism for protocols to proactively take a piece of this competition.

Figure 1: Facing the same problem, three completely different paths

2. The complete path of the order

To truly understand where Priority Fee is inserted, you need to first know what an order goes through from "click to buy" to "position opening".

From signature to position opening, an order goes through six stages within 70ms. Priority Fee does not intervene out of thin air - Gossip Priority allows you to see the data earlier before Mempool, and Order Priority directly affects the execution order within the matching engine.

Only by understanding this path can you understand why this mechanism works.

Figure 2: The 70ms journey of a transaction in Hyperliquid

1. Signature — Users sign orders through API, using EIP-712 signature, including asset, direction, price, quantity, order type, nonce.

2. Broadcast Node — Signed transactions enter a single whitelist broadcast node, and all user transactions are pushed to the verification node through the same entrance.

3. Mempool —Complete the seven checks of format, signature, authorization, nonce, duplication, and submission status in order before joining the team.

4. Proposal Node — Every approximately 70ms, one of the 24 validating nodes is designated as a proposal node to package pending transactions into blocks.

5. Consensus — Other validating nodes vote on the block hash signature and commit when it reaches 2/3+ pledge weight, instant finality, no reorganization.

6. Block Execution — This is the most critical stage, and the order is fixed: BeginBlock first, before your order is processed, oracle updates, funding rate distribution, liquidation and other things will happen first. If the funding rate consumes your margin at this step, your order will be rejected in the next step even if there is sufficient balance before 70ms. After that comes the matching engine DeliverSignedActions, where price-time-first CLOBs run. Finally, there is ProcessFills, which completes fee calculation and position update.

Priority Fee intervenes at two different points in the process.

Gossip Priority Steps into the information layer, bids through 5 simultaneous Dutch auction slots, and pays to see mempool data earlier - officials describe it as

"these are the fastest transaction inputs to execution, broadcast even before they are executed by the L1."

"This is the fastest data flow from transaction input to execution - these transactions are broadcast before they are executed by L1."

But it should be noted that this is just for faster viewing, not faster trading. The fee is denominated in HYPE and deducted from the spot balance and permanently destroyed.

Order Priority Intervenes in the matching engine stage. The rule is that all canceled orders will always take priority over all IOC orders. The higher the fee between IOC orders, the earlier they will be executed. The fee will be deducted from the undelegated pledge balance and permanently destroyed. Currently only applicable to HIP-3 assets.

Figure 3: Two Priority Fees, two competition dimensions

Gossip Priority buys information advantage, while Order Priority buys execution advantage. The two have different sources of fees, different levels of intervention, and different functions - but one thing is the same: all fees are permanently destroyed and directly converted into protocol value.

3. Powell: "Good Afternoon."

The official document is very straightforward about the positioning of Order Priority:

"Order priority reduces the need for market makers to hyper-optimize their order entry and connectivity, and instead focus on the strategy itself. It further protects makers and allows responsiveness to price moves driven by traditional venues."

“The order prioritization mechanism reduces the need for market makers to extremely optimize order reporting and network connections, allowing them to focus on the strategy itself. This mechanism further protects market makers and enables them to respond promptly to price changes driven by traditional trading venues.”

This sentence reveals an important design intention: this mechanism is not to help HFT be faster, but to reduce market makers' dependence on the infrastructure arms race, allowing them to focus their energy back on the strategy itself, while being able to respond quickly to price fluctuations in traditional markets.

There is a core game point here that deserves to be explained separately: the market maker's order cancellation will always take precedence over the taker's IOC, which means that the market maker can always cancel orders first when an outdated quote is reported, and the taker's only means of competition is to pay the Order Priority Fee. This design converts the costs of the HFT arms race directly into protocol revenue and destroys it.

Figure 4: Racing within the same block

The most direct usage scenario of this mechanism is in highly volatile event moments.

Take the as an example. When the interest rate decision is announced, the prices of BTC and mainstream assets may fluctuate violently within seconds. Price signals from traditional trading venues will be transmitted first, and market makers' quotations on Hyperliquid will then deviate, and a race for outdated quotations will begin.

"Good Afternoon." ——Jerome Powell

For market makers, whether they can remove outdated orders before the taker takes the order determines the profit and loss at this moment. For aggressive takers, whoever makes the deal first means who has captured the price difference. In this scenario, Order Priority Fee is the only way for takers to accelerate themselves, and it is also the structural guarantee for market makers to protect themselves.

Similar scenarios also include: major macro data releases (non-agricultural, CPI), sudden geopolitical events, on-chain liquidation chain reactions of large projects, and moments of abnormal fluctuations in exchanges. The common characteristics of these moments are:The information gap is extremely narrow, the time window is extremely short, and whoever acts first wins.

The existence of Priority Fee allows this competition to continue in a way that is beneficial to the protocol.

This is the most fundamental logic of this upgrade: ordinary transaction fees may tend to decline in the long term due to market competition, but Priority Fee will not be compressed because its driving force is the arms race itself, and the arms race will reinforce itself as transaction volume increases.

If HL continues to attract additional funding flows from TradFi, Priority Fee revenue may become one of the protocol's most important revenue streams in the coming years.