Abstract
· HIP-3 can transform prediction markets from static betting to high-leverage perpetual contracts, enabling permissionless trading of events like elections and macroeconomic data.
· Binary markets have extreme gap risks at expiration, making structural safeguards crucial. Examples include: liquidation intervals, margin adjustments based on open interest, and leverage decay.
· Scalar markets (settled by range) are a safer near-term target, as they have smoother price paths, proportional loss calculations, and lower liquidation synchronicity, thus supporting higher leverage.
· Through careful design, HIP-3 can complement and serve as an alternative to Kalshi and Polymarket, offering leverage, shared liquidity, permissionless market creation, and potential in-platform hedging capabilities, creating the fastest and most flexible prediction market trading platform.
Introduction and Opportunities
Prediction markets have long been slow, fixed-payout, and non-leveraged trading venues. HIP-3, by running on Hyperliquid's perpetual contracts, enables permissionless deployment, shared liquidity, and customizable parameters. This allows users to trade binary or continuous results for events like elections, macro data, and sports at the same speed and capital efficiency as cryptocurrency perpetual contracts.
Combining the global liquidity of perpetual contracts with the information-rich nature of prediction markets will open up a new trading category of high-frequency, multi-event markets. However, without structural safeguards, leveraged event markets will be extremely dangerous, especially for binary outcomes.
Challenges of Binary Leverage
Binary markets can jump from 0 to 100 at expiration, instantly destroying one side of bettors and triggering market-wide cascading liquidations. Without natural hedging, market makers directly bear event risk, and liquidations cannot be phased. Without protective measures, safe leverage is limited to only 1-1.5x.
Example: dYdX's TRUMPWIN
Before the 2024 US presidential election, dYdX provided 20x leverage for the Trump victory market by allowing market makers to hedge liquidity on Polymarket's YES/NO contracts, supported by mature liquidation mechanisms, a large insurance fund, and loss socialization. Even so, the market price that night surged from around $0.60 to $1.00, causing liquidity to dry up during liquidation and triggering random deleveraging in a thin order book. Hedging delays, violent price jumps, and liquidity disappearance caused losses for traders who could have otherwise been solvent.
Currently, HIP-3 lacks default in-platform spot hedging and gap risk control measures, so similar chain reactions could still occur without built-in protections.
Oracle-Based Construction
Binary perpetual contracts on HIP-3 will use BinaryHyperp contracts and rely on 0-100 probability oracles. Strict limitations will ensure trading only occurs within market boundaries. If oracles reference Kalshi or Polymarket, liquidity providers can hedge in these spot markets, reducing event risk and allowing higher leverage. However, risks remain, including hedging delays, liquidity gaps, and funding basis divergence.
Ensuring Leverage Safety
To raise binary market leverage above 1x, structural control measures are essential:
· Liquidation Intervals: Splitting positions across price ranges. Lower intervals are prioritized for liquidation to control losses.
· Open Interest-Based Margin Coefficient: Linearly increasing margin requirements based on open notional value: open_notional = OI × oracle_pricescaling_factor = (open_notional - lower_cap) / (upper_cap - lower_cap)effective_margin = min(base_margin + max(scaling_factor × (1 - base_margin), 0), 1.0)
· Leverage Decay: Gradually compressing maximum leverage rate as expiration approaches and market volatility increases (e.g., 5x at 30 days, dropping to 1x on the final day).
· Pre-Settlement Auction: Batch matching positions before result confirmation to avoid last-minute chaos.
· Price and Oracle Caps: Limiting single price jump magnitude and rate-limiting oracle updates to slow chain reactions.
By combining these measures, open interest-based margin caps can control systemic risk, liquidation intervals can stagger liquidation times, and leverage decay reduces tail-end risks near expiration.
Beyond Binary: Breakthrough in Scalar Markets
Scalar markets settle by range (like CPI percentage or BTC dominance), not 0 or 100. This significantly reduces gap risks and supports higher leverage. Key advantages include:
Smoother Price Paths: Most scalar markets settle based on gradually changing inputs (like temperature, vote share, or asset dominance).
· Proportional Losses: Even with gaps, losses are only the deviation portion, not the full notional value.
· Predictable Funding Rates and Liquidations: Continuous pricing spreads liquidation thresholds across the curve, reducing synchronized chain reactions.
Incremental pricing also naturally aligns with HIP-3's funding and margin logic, making scalar markets a safer near-term breakthrough.
Prediction Perpetual Contract User Experience
Retaining perpetual contract core elements (like order books, depth charts, and leverage sliders) while adding prediction market-specific components:
· Clear question title
· Yes/No options or scalar slider
· Payout visualization tool
· Expiration countdown
· Mark price and oracle probability display
If markets can be hedged through external platforms like Kalshi or Polymarket, this should be prominently noted.
Positioning Compared to Kalshi and Polymarket
Kalshi and Polymarket are curated, fixed-payout, non-leveraged platforms. HIP-3's differentiators are:
· Leverage: Safer scalar markets, engineered binary markets
· Permissionless Market Creation: Anyone can list new outcomes
· Shared Liquidity: Access to Hyperliquid's perpetual contract liquidity pool
· Potential In-Platform Hedging: Reduce event risk without leaving Hyperliquid
This combination can attract professional liquidity providers and active traders, enabling HIP-3 to serve niche event markets and high-traffic global outcomes.
Conclusion
Currently, no major team is publicly dedicated to developing HIP-3 prediction perpetual contracts, but this is about to change. Through thoughtful design, liquidity, and permissionless market creation, HIP-3 can both complement and serve as an alternative to Kalshi and Polymarket.
Prediction markets are about to sweep the globe, and as a blockchain accommodating all financial activities, Hyperliquid will not miss this wave.
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