Felix Protocol Guide — DeFi Lending, feUSD Stablecoin & Perps on Hyperliquid

Felix

What Is Felix Protocol?

Felix Protocol is the second-largest DeFi protocol on HyperEVM, with over $1 billion in total value locked. It is not a single product — it is a full financial suite built natively on Hyperliquid that spans lending, borrowing, stablecoins, and perpetual futures trading.

At its core, Felix is a Liquity V2 fork — a collateralized debt position (CDP) protocol that lets you deposit crypto assets and mint feUSD, a dollar-pegged stablecoin. But Felix has expanded well beyond that original blueprint. The protocol now includes Vanilla Markets (Morpho-powered lending pools), FLX Dex (builder-deployed perpetual futures), and USDhl (a fiat-backed stablecoin through M0).

If you are active in the Hyperliquid ecosystem, Felix is one of the first protocols you will encounter. It provides the infrastructure for leveraging your HYPE holdings, earning yield on stablecoins, and accessing markets that do not exist anywhere else.

feUSD: The CDP Stablecoin

feUSD is the flagship product of Felix Protocol. It is an overcollateralized stablecoin that you mint by locking up crypto collateral in a CDP — sometimes called a "Trove" in Liquity terminology. The design is straightforward: deposit collateral worth more than the feUSD you want to mint, and the protocol issues new feUSD tokens to your wallet.

How Minting Works

The process follows a simple flow:

1. Deposit collateral — Choose from HYPE, UBTC, kHYPE (Kinetiq liquid staking token), or wstHYPE (wrapped staked HYPE).
2. Set your interest rate — Unlike most lending protocols where rates are algorithmically determined, Felix lets borrowers choose their own interest rate. Lower rates mean cheaper borrowing but higher liquidation priority if the system needs to redeem collateral.
3. Mint feUSD — The protocol issues feUSD against your collateral at a loan-to-value ratio of approximately 40%, meaning you need roughly $2.50 in collateral for every $1 of feUSD minted.
4. Use feUSD — Deploy it across the Hyperliquid ecosystem: trade with it, provide liquidity, deposit into Stability Pools for yield, or use it as you would any other stablecoin.

The Redemption Mechanism (Hard Peg)

What makes feUSD genuinely different from many DeFi stablecoins is its hard peg mechanism. Every feUSD token is always redeemable for exactly $1 worth of underlying collateral. This is not a soft peg maintained by market incentives alone — it is an arbitrage-enforced guarantee built into the smart contracts.

If feUSD ever trades below $1, arbitrageurs can buy it at the discounted price and redeem it for $1 of collateral, pocketing the difference. This buying pressure pushes feUSD back to peg. Conversely, if feUSD trades above $1, borrowers are incentivized to mint more (since each $1 of feUSD costs less than $1 to mint), increasing supply and bringing the price back down.

This dual-sided arbitrage mechanism is what Liquity V2 was designed around, and it has proven effective across multiple market conditions.

Collateral Types

Felix supports four collateral assets, each serving different user profiles:

Collateral	Description	Use Case
HYPE	Hyperliquid's native token	Core collateral for HYPE holders who want liquidity without selling
UBTC	Wrapped Bitcoin on HyperEVM	Bitcoin exposure with feUSD borrowing
kHYPE	Kinetiq liquid staking token	Earn staking yield while using HYPE as collateral
wstHYPE	Wrapped staked HYPE	Another liquid staking derivative for capital-efficient collateral

Felix has crossed $100 million in outstanding loans, demonstrating significant real-world adoption of the CDP system. The protocol was audited by Three Sigma in July 2025, covering the core CDP contracts and redemption logic.

Vanilla Markets: Lending and Borrowing

While CDPs are the original Felix product, Vanilla Markets has become the protocol's largest component by TVL — exceeding $750 million in deposits. Vanilla Markets is a set of variable-rate lending pools powered by Morpho, one of the most respected lending protocol designs in DeFi.

How Vanilla Markets Works

Vanilla Markets operates on a straightforward lending pool model:

• Suppliers deposit assets into pools and earn interest from borrowers. Rates are variable and determined by utilization — the more of a pool that is borrowed, the higher the interest rate.
• Borrowers deposit collateral and borrow against it. Unlike the CDP system where you mint feUSD, Vanilla Markets lets you borrow existing assets from pools.
• P2P Matching — Morpho's architecture includes peer-to-peer rate matching. When a supplier's rate and borrower's rate can be matched directly, both sides get a better deal than the pool rate — suppliers earn more, borrowers pay less.

This is a fundamentally different product from the CDP side of Felix. CDPs let you create new stablecoins. Vanilla Markets lets you borrow and lend existing assets in a traditional money-market structure.

Why Vanilla Markets Matters

The $750M+ in TVL tells the story. Variable-rate lending pools are the bread and butter of DeFi — they are how most users earn yield on idle assets and how most borrowers access leverage. Having this infrastructure natively on HyperEVM, without needing to bridge funds to Ethereum or Arbitrum, is a significant piece of the Hyperliquid ecosystem puzzle.

For users coming from Aave or Compound on other chains, Vanilla Markets will feel immediately familiar. The key difference is that everything operates on HyperEVM with sub-second finality and low gas costs.

Stability Pools

Stability Pools are Felix's mechanism for handling liquidations and distributing yield to feUSD holders. If you hold feUSD and want to earn passive income, Stability Pools are the primary way to do it.

How Stability Pools Work

The concept is simple:

1. Deposit feUSD into a Stability Pool (each collateral type has its own pool).
2. Earn yield from two sources: borrower interest payments and liquidation gains.
3. Withdraw your feUSD plus accumulated earnings at any time.

When a borrower's collateral ratio falls below the liquidation threshold, the Stability Pool's feUSD is used to repay the debt, and the pool receives the borrower's collateral at a discount. This discount is the liquidation gain — it is essentially buying collateral below market price.

The dual yield source means Stability Pool returns tend to spike during market volatility — exactly when liquidations are most frequent. This creates a natural hedge: if you hold HYPE and are worried about a price drop, depositing feUSD into the Stability Pool means you earn more precisely when HYPE prices are falling and liquidations are triggering.

FLX Dex: HIP-3 Perpetual Futures

FLX Dex is Felix's expansion into perpetual futures trading, built using Hyperliquid's HIP-3 builder code system. HIP-3 allows third-party builders to deploy their own perpetual futures markets on Hyperliquid's infrastructure, and Felix has used this to launch 14 markets spanning asset classes you will not find on most crypto exchanges.

What Markets Are Available

FLX Dex markets include:

• Equities — Perpetual contracts tracking major stock prices. For a deep dive on equity perps, see our equity perps guide.
• Commodities — Exposure to physical commodity prices through perpetual contracts. Our commodity perps guide covers this category in detail.
• Crypto — Additional cryptocurrency markets beyond what Hyperliquid's core order book offers.

All 14 markets are builder-deployed, meaning they run on Hyperliquid's native order book infrastructure with the same sub-second finality and deep liquidity as the core platform. The key difference is that FLX (as the builder) sets the fee structure and market parameters.

FLX Dex is still the newest piece of the Felix suite, but it represents an interesting strategic direction — a DeFi protocol that started with lending and stablecoins expanding into derivatives trading using Hyperliquid's native infrastructure.

USDhl: Fiat-Backed Stablecoin

USDhl is Felix's fiat-backed stablecoin, created in partnership with M0 — a protocol that issues wholesale dollars backed by U.S. Treasury bills. This is a fundamentally different product from feUSD.

Where feUSD is a crypto-collateralized stablecoin (minted against HYPE, UBTC, etc.), USDhl is backed by real-world assets — specifically T-bill-backed wholesale dollars issued by M0. This means USDhl's backing does not fluctuate with crypto market prices.

On-Chain Reserve Attestations

One of USDhl's distinguishing features is on-chain reserve attestations. Rather than relying on periodic audit reports (which is how most fiat-backed stablecoins handle transparency), USDhl provides cryptographic proof of its reserves directly on-chain. This allows anyone to verify, at any time, that USDhl is fully backed.

This is worth comparing to the broader stablecoin landscape on Hyperliquid. The ecosystem now has USDH (Hyperliquid's native aligned stablecoin backed by Treasuries via BlackRock and Superstate), feUSD (Felix's crypto-collateralized stablecoin), and USDhl (Felix's fiat-backed stablecoin via M0). Each serves a different purpose and carries different risk profiles.

How to Use Felix Protocol

Getting started with Felix requires a funded wallet on HyperEVM. If you have not set up your Hyperliquid account yet, follow our deposit guide and beginner guide first.

1Connect Your Wallet

Navigate to Felix Protocol and connect your wallet. Felix supports standard EVM wallets ( MetaMask, Rabby, etc.) connected to HyperEVM. Make sure your wallet is set to the Hyperliquid EVM network.

2Transfer Funds to HyperEVM

If your funds are on HyperCore (the trading side), you need to transfer them to HyperEVM. In Hyperliquid's interface, use the transfer function to move HYPE or other assets from your trading account to your HyperEVM wallet address.

3Choose Your Product

Felix offers multiple paths depending on your goal:

• Want to borrow stablecoins against HYPE? Open a CDP and mint feUSD. Navigate to the "Borrow" section, select your collateral type, deposit your assets, set your interest rate, and mint feUSD.
• Want to earn yield on idle assets? Go to Vanilla Markets and supply assets to lending pools. You will earn variable interest from borrowers.
• Want yield on feUSD specifically? Deposit feUSD into a Stability Pool to earn from borrower interest and liquidation gains.
• Want to trade perps? Head to FLX Dex to access the 14 builder-deployed markets.

4Monitor Your Positions

If you have open CDPs, monitor your collateral ratio regularly. Market volatility can push your LTV toward liquidation thresholds. Felix provides a dashboard showing all your positions, current collateral ratios, and proximity to liquidation.

Risks and Considerations

Felix Protocol has strong fundamentals — $1B+ TVL, a battle-tested Liquity V2 design, and a Three Sigma audit. But no DeFi protocol is risk-free. Here is what you should understand before committing capital.

Smart Contract Risk

Felix is a Liquity V2 fork, which means it inherits a well-audited codebase, but the fork itself introduces changes that may contain undiscovered vulnerabilities. The Three Sigma audit (July 2025) covers the core contracts, but audits are not guarantees — they reduce risk, they do not eliminate it. Vanilla Markets adds Morpho's smart contract surface area as an additional dependency.

Collateral Volatility

HYPE, UBTC, kHYPE, and wstHYPE are all volatile crypto assets. A sharp drawdown in collateral prices can push CDPs toward liquidation faster than users can react, especially during flash crashes or periods of extreme volatility. The ~40% LTV provides a significant buffer, but crypto markets have historically produced drawdowns that can blow through even conservative ratios in hours.

Liquidation Risk

If your CDP's collateral value drops below the liquidation threshold, you lose your collateral. Unlike some protocols that offer partial liquidations, the Liquity V2 design can liquidate entire positions. The Stability Pool mechanism is efficient but unforgiving.

Redemption Risk

The feUSD redemption mechanism means that borrowers with the lowest interest rates get redeemed first. If you set a very low interest rate to minimize costs, your collateral may be partially redeemed (returned to you minus the debt portion) even if your LTV is healthy. This is a feature of the system, not a bug — it maintains the peg — but it can be surprising to new users.

Oracle and Price Feed Risk

CDP protocols depend on accurate price feeds for collateral valuation. If the oracle feeding HYPE or UBTC prices to Felix delivers incorrect data — due to manipulation, network issues, or oracle downtime — liquidations could trigger incorrectly or fail to trigger when they should. This is an inherent risk in all CDP and lending protocols.

Felix in the Hyperliquid Ecosystem

Felix occupies a central position in the HyperEVM DeFi stack. As the #2 protocol by TVL, it provides critical infrastructure that other protocols and users depend on:

• feUSD acts as a native stablecoin within the HyperEVM DeFi ecosystem, serving as a trading pair, liquidity pool asset, and yield-bearing deposit.
• Vanilla Markets provides the lending and borrowing infrastructure that enables leverage across the ecosystem.
• FLX Dex expands the range of tradeable markets beyond what Hyperliquid's core order book offers, using the HIP-3 builder code framework.
• USDhl adds a fiat-backed stablecoin option alongside USDH and feUSD, giving users multiple stablecoin choices with different risk profiles.

The protocol's breadth is unusual for DeFi on any chain — most protocols focus on one vertical. Felix's strategy of combining CDPs, lending pools, perps, and fiat-backed stablecoins under one roof mirrors the "super app" approach that Hyperliquid itself takes to exchange design.

For traders who are active on Hyperliquid's core platform, Felix provides the tools to put idle HYPE to work without leaving the ecosystem. Deposit HYPE, mint feUSD, earn yield in Stability Pools, or supply to Vanilla Markets — all without bridging to another chain.