Kinetiq announces Elysium Layer-2 for Hyperliquid to address bottlenecks

Kinetiq – a liquid staking protocol – has announced the development of Elysium L2, a specialized Layer-2 solution built on Hyperliquid's infrastructure, aimed at overcoming the performance limitations of the HyperEVM architecture.

8/25/20264 min read

Limitations of HyperEVM

HyperEVM is an Ethereum-compatible execution layer operating within the Hyperliquid blockchain in parallel with the HyperCore perpetual contract order book – which launched its mainnet in February 2025. By early 2026, the platform supported lending markets, liquidity-staking tokens, CDP stablecoins, and the official deployment of USDT0 on Hyperliquid. Its dual-block architecture separates EVM execution from HyperCore's L1 block generation, allowing Solidity smart contracts to interact with the order book via precompile interfaces while maintaining HyperCore's strength in high performance (high transaction frequency) for core transaction functions.

The limitations mentioned in Kinetiq's Elysium announcement are the technical hurdles arising from the dual-block architecture under conditions of high market demand. Kinetiq's technical data indicates that the current HyperEVM environment faces throughput limitations, soaring transaction costs during surges in demand, and a block structure that is not optimal for spot market operations – the area Elysium specifically targets. Unlike other versatile Layer-2 DeFi solutions that fiercely compete for users, Elysium positions itself as an extension of the Hyperliquid ecosystem rather than an independent chain; This platform uses HYPE as a gas fee payment token, builds on Hyperliquid's infrastructure, and focuses on spot market use cases – factors that HyperEVM's dual-block design proactively prioritizes composability with the perpetual contract order book at the L1 layer.

The Tokenomics Mechanism of the National Network

The 50/25/25 sequencer fee allocation mechanism is Elysium's most commercially significant design choice for token holders. Sequencer fees on Layer-2 networks are generated each time a user makes a transaction, creating a continuous stream of fee revenue proportional to the network's transaction volume. Allocating 50% of this revenue stream to repurchase tokens from the open market and burn them creates a systematic buying pressure mechanism that grows in tandem with Elysium's popularity: higher transaction volume leads to higher fee revenue, resulting in more token repurchases and burning, thereby reducing the circulating supply if the burning rate exceeds the rate of new token issuance.

For KNTQ holders, the burning mechanism creates a direct economic link between Elysium's trading volume and the token's supply fluctuations, without requiring them to actively receive or stake rewards to benefit from the increase in value. The 25% allocation to developers incentivizes the building of third-party applications on Elysium by sharing a portion of the network fee revenue generated by their applications with the protocol development teams; this is a standard ecosystem development method that Layer-2 networks often use to attract developers. The 25% allocation to the treasury provides operational capital for Kinetiq, with its scale growing with network activity rather than relying solely on declining liquid staking revenue.

Elysium as a solution for diversifying revenue streams.

Bankless analysts, quoted in Spanish-language news reports on the announcement, believe that Kinetiq's sole reliance on staking revenue is limiting its expansion options, given the continuous decline in deposits to its core liquid staking product. This is evidenced by on-chain data: the liquid staking participation rate for HYPE has decreased from 10.42% of the total network stake (before August 2025) to 4.42% in May 2026; simultaneously, the circulating supply of kHYPE has decreased by 62% from its peak in August 2025, and the total value locked (TVL) has decreased by 18% in the month before the Elysium announcement.

This decline reflects two factors: first, the general downward trend of HYPE during the 2026 bear market — which reduced the USD value of kHYPE holdings, even for those who maintained their positions; second, a shift in Hyperliquid user behavior, as they preferred staking HYPE directly with validators rather than through liquid staking solutions (which charge protocol fees in exchange for liquidity and cohesion benefits). As Hyperliquid's native staking delegation mechanism became more accessible and the premium of liquid staking tokens in DeFi applications narrowed, the economic advantages of kHYPE over direct staking became less attractive.

Elysium is Kinetiq's strategic move to address this downturn: instead of just competing in the liquid staking market where direct staking is becoming an increasingly popular alternative, the protocol is expanding into infrastructure. Here, they can generate revenue from sequencer fees (transaction processing fees) from any DeFi application using Elysium, rather than relying solely on HYPE stakers who choose liquid staking over direct staking.

Assessment and Conclusion

Elsium's announcement reflects a general trend in the development of the DeFi ecosystem: liquid staking protocols, which had already established themselves during the boom phase when the main network (host chain) was just beginning to gain acceptance, will expand into adjacent infrastructures as their core products mature and face increasing competition from direct staking. Lido's expansion from liquid staking on Ethereum to a broader governance model for token holders, or Rocket Pool's integration into the validator infrastructure instead of focusing solely on liquid staking products, are prime examples to compare with Kinetiq's vertical expansion strategy.

Specifically for Hyperliquid's DeFi ecosystem, a high-performance Layer-2 solution designed specifically for spot market trading, which maintains HYPE as the gas fee payment token and shifts sequencer fees to a KNTQ token burning mechanism, could significantly scale DeFi operations on the Hyperliquid infrastructure, far exceeding HyperEVM's current throughput limits. Will Elysium's performance advantages over HyperEVM be significant enough to entice developers to migrate from existing spot DEX and DeFi applications on HyperEVM, where they already possess liquidity, a robust user base, and strong composability relationships, to this new platform? This is a question of market adoption, and only when this Layer-2 solution officially launches and attracts initial interest from developers will we know the answer.

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