# Markets

Hyperdrive offers two distinct market types, each designed to serve different lending use cases with different risk profiles. Understanding the distinction between them is key to understanding how Hyperdrive works.

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### Core Markets

Core Markets are general-purpose lending markets that will be familiar to anyone who has used protocols like Aave or Morpho. They support a wide range of collateral types and are designed for standard borrow/lend activity where collateral and loan assets have no inherent redemption relationship.

#### How It Works

A Core Market is an isolated lending pool with a single borrow asset and one or more accepted collateral types. Lenders deposit the borrow asset into an ERC-4626 vault and receive shares representing their proportional claim on deposits plus accrued interest. Borrowers supply collateral and borrow against it up to their maximum loan-to-value (LTV) ratio.

#### Collateral and Pricing

Collateral in a Core Market is priced using external price oracles. The oracle provides a USD-denominated price feed for each collateral asset, and the protocol uses this to determine the value of a borrower's collateral relative to their debt.

Each collateral type has two LTV parameters:

* **Max LTV** — the maximum ratio of debt to collateral value at which a user can borrow. This is the threshold used when opening or increasing a position.
* **Liquidation LTV** — the threshold at which a position becomes eligible for liquidation. This is always higher than the Max LTV, creating a buffer zone between the point at which a user can no longer increase their debt and the point at which they can be liquidated.

#### Interest Rates

Interest accrues on a per-second compound basis. The interest rate is determined by the market's utilization — the ratio of total borrowed assets to total supplied assets. As utilization increases, the interest rate rises to incentivize new deposits and discourage additional borrowing. As utilization decreases, the rate falls.

Interest paid by borrowers is distributed to lenders proportionally through the appreciation of vault share value, minus a protocol reserve fee.

#### Liquidations

Core Markets use a traditional liquidation model. When a borrower's health score falls below the liquidation threshold, their position becomes eligible for liquidation by any external party.

A liquidator repays some or all of the borrower's debt and receives the equivalent value of the borrower's collateral plus a liquidation discount. The liquidator is responsible for disposing of the seized collateral, typically by selling it on a DEX.

This model requires sufficient on-chain liquidity for the collateral asset to function correctly. The depth of available liquidity is a key input in risk modelling and directly influences the LTV ratios and supply caps that can be offered for each collateral type.

#### Use Cases

Core Markets are suitable for:

* Borrowing stablecoins against volatile collateral (e.g., borrow USDH against HYPE)
* General-purpose leverage on assets without a redemption relationship to the loan token
* Any lending pair where the collateral must be priced by external oracle

#### Risk Profile

The primary risks in a Core Market are oracle risk (incorrect or stale price data), liquidity risk (insufficient DEX liquidity for liquidators to execute), and smart contract risk. These are well-understood risks common to all general-purpose lending protocols.

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### Correlated Markets

Correlated Markets are a new lending primitive pioneered by Hyperdrive. They are specifically designed for asset pairs that share a deterministic redemption relationship — where the collateral can be redeemed back into the loan token through an on-chain mechanism rather than through a secondary market.

Examples include borrowing ETH against stETH, borrowing USDC against tokenized treasury shares, or borrowing HYPE against HYPED. In each case, the collateral has a known, programmatic path back to the loan asset.

#### How It Works

Like Core Markets, a Correlated Market is an isolated lending pool built on an ERC-4626 vault. Lenders deposit the borrow asset and receive vault shares. Borrowers supply correlated collateral and borrow against it.

The fundamental difference is in how collateral is priced, how liquidations are handled, and what happens to the value that is captured during the liquidation process.

#### Collateral and Pricing

Instead of relying on an external price oracle, a Correlated Market prices collateral according to its **redemption rate** — the rate at which the collateral can be redeemed back into the loan token through the underlying protocol's redemption mechanism.

For example, if 1 stETH can be redeemed for 1.01 ETH through Lido's withdrawal queue, the Correlated Market values 1 stETH at 1.01 ETH regardless of what stETH is trading at on secondary markets. This eliminates oracle risk and the NAV-to-market-price divergence that can cause cascading liquidations in traditional lending markets.

Because the collateral's value is anchored to a deterministic redemption rate rather than a volatile market price, Correlated Markets can offer significantly higher LTVs than would be possible in a Core Market for the same asset.

#### Internalized Liquidations

Correlated Markets remove the traditional third-party liquidator entirely. When a borrower's position becomes unhealthy:

1. The liquidation is triggered (permissionlessly, by any caller).
2. The market closes the borrower's debt position.
3. The collateral is seized by the market and a redemption request is initiated, converting the collateral back into the loan token through the underlying protocol's redemption mechanism.
4. When the redemption completes, the proceeds are returned to the market — covering the outstanding debt, a small liquidation fee paid to the caller, and a **liquidation bonus** that is captured as additional yield for lenders.

The liquidation bonus that would have been extracted by a third-party liquidator in a traditional market is instead retained by the protocol and distributed to lenders. This means lenders earn yield from two sources: the interest paid by borrowers, and the liquidation bonus captured during any liquidation events.

Because the market handles liquidations internally through redemption rather than through secondary market sales, there is **no dependency on on-chain AMM liquidity**. This removes the single largest constraint on scaling a lending market for illiquid or novel asset types.

#### Self-Liquidation

In a traditional lending market, users unwind leveraged (looped) positions by selling collateral on a DEX to repay debt, repeating the process until the position is closed. This requires on-chain liquidity and can be expensive.

Correlated Markets allow borrowers to **self-liquidate** — voluntarily closing their own position by triggering the same internalized redemption process used for standard liquidations. The borrower pays a small fee (analogous to slippage on a DEX) which is captured by the market rather than leaked to external liquidity providers.

This provides a predictable, liquidity-independent mechanism for users to deleverage their positions at any time.

#### Zero-Coupon Bonds

When a liquidation or self-liquidation occurs, the collateral enters a redemption queue. Depending on the underlying protocol, this redemption may take days (e.g., 7 days for HYPE unstaking) or weeks (e.g., monthly redemption cycles for some RWAs). During this period, the market's available liquidity is temporarily reduced.

To accelerate liquidity back to the market, pending redemption claims can be **purchased by any participant at a discount**. This creates a zero-coupon bond mechanism:

* The buyer purchases the pending claim at a discount to its face value, providing instant liquidity to the market.
* The discount decays linearly toward zero as the redemption nears completion.
* Any portion of the discount not captured by the buyer flows back to lenders as additional yield.

For example, if a position is liquidated with a 5% liquidation bonus and a 5-day redemption period, a buyer can purchase the claim on day one at a 5% discount. By day two, the discount has decayed to 4%, with the remaining 1% flowing to lenders. By the time the claim is nearly redeemable, the discount approaches zero.

This mechanism democratizes liquidations — instead of requiring sophisticated MEV searchers, any participant can earn yield by providing liquidity to the market.

#### Redemption Types

Correlated Markets support three redemption types, depending on the underlying collateral:

* **Instant** — the collateral can be redeemed immediately with no delay (e.g., some vault tokens with sufficient exit liquidity).
* **Asynchronous** — the collateral enters a time-based redemption queue with a fixed duration (e.g., HYPED unstaking, 7 days).
* **Batch** — the collateral is redeemed on a fixed calendar schedule (e.g., an RWA fund that processes redemptions at month-end). All claims within the period are batched together and settle simultaneously.

The zero-coupon bond mechanism adapts to each type: for asynchronous redemptions, each claim is an individual bond with its own maturity. For batch redemptions, claims within a period are grouped into a shared maturity bucket.

#### Use Cases

Correlated Markets are designed for:

* **LST leverage looping** — borrow ETH against stETH, wstETH, or other liquid staking derivatives to amplify staking yield
* **RWA borrowing** — borrow USDC against tokenized treasuries, money market fund shares, or private credit tokens
* **Yield-bearing vault tokens** — borrow against any ERC-4626 or ERC-7540 vault token that has a redemption path back to the loan asset
* **Pendle PT looping** — borrow against PT tokens with higher capital efficiency, collateral rollover, and predictable unwinding costs

#### Risk Profile

By removing oracle dependency and AMM liquidity requirements, Correlated Markets eliminate the two largest risk vectors in traditional lending. The primary risks become:

* **Redemption risk** — the possibility that the underlying protocol's redemption mechanism fails or is delayed beyond expected timelines.
* **Smart contract risk** — vulnerabilities in either the Hyperdrive contracts or the underlying collateral protocol.
* **Liquidity timing risk** — during the redemption window, the market's available liquidity is reduced. The zero-coupon bond mechanism mitigates this but does not eliminate it entirely.

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### Comparison

| Feature                   | Core Market                  | Correlated Market                   |
| ------------------------- | ---------------------------- | ----------------------------------- |
| Collateral pricing        | External price oracle        | Redemption rate (NAV)               |
| Liquidation model         | External liquidators via DEX | Internalized via redemption         |
| AMM liquidity required    | Yes                          | No                                  |
| Liquidation value capture | Extracted by liquidator      | Retained by lenders                 |
| Deleveraging mechanism    | Sell collateral on DEX       | Self-liquidation                    |
| Capital efficiency        | Standard LTVs                | Higher LTVs                         |
| Supported collateral      | Any priced asset             | Correlated/redeemable assets only   |
| Lender yield sources      | Borrow interest              | Borrow interest + liquidation bonus |
| Oracle risk               | Yes                          | No                                  |
| Redemption delay risk     | No                           | Yes                                 |
