Hyperliquid's HIP-3 Proposal: Pioneering a New Era of On-Chain Derivatives Trading

The HIP-3 improvement proposal recently launched by Hyperliquid has attracted widespread attention in the DeFi space. Currently, its minimum viable version has gone live on the testnet. This is not just an ordinary protocol upgrade, but a key step in Hyperliquid's development roadmap that could have far-reaching implications for the future of on-chain derivatives trading.

To fully understand the importance of HIP-3, we need to first understand the overall design concept of Hyperliquid, which starts from its three core proposals (HIPs).

Hyperliquid's Three-Step Development Strategy

Hyperliquid has built a layered and fully functional financial ecosystem through three key improvement proposals.

HIP-1: Breakthrough of the Coin Listing Barrier

Industry Pain Points: New projects face the dilemma of listing tokens on mainstream trading platforms for a long time: the process is opaque, costs are high, and it is often accompanied by harsh terms. Project parties often have to go through lengthy negotiations and may pay high fees or give up a large number of tokens.

Solution: HIP-1 provides crypto project teams with another option. It allows anyone to freely create new tokens on Hyperliquid, similar to the ERC-20 standard. Project teams only need to pay a certain fee (in the form of HYPE tokens) to create their own tokens and automatically open a spot order book market. This greatly lowers the barriers for assets to enter the public market, providing a fairer and more transparent issuance platform for project parties.

HIP-2: Automated Market Making

Industry Pain Point: Even if a new token successfully launches, its value is difficult to reflect if there is a lack of trading depth. This is known as the "liquidity cold start" problem.

Solution: HIP-2, also known as "Hyperliquidity", is the native automated liquidity strategy of the Hyperliquid protocol. After new tokens are created through HIP-1, HIP-2 acts as a market-making bot, automatically placing buy and sell orders on the order book to provide basic tradable liquidity for the new market. This effectively addresses the cold start problem during the initial launch of new assets.

HIP-3: Permissionless perpetual market creation

Industry Pain Points: Perpetual contracts are the largest area of trading volume in the crypto market, but before HIP-3, only the Hyperliquid core team had the authority to decide which assets would have perpetual contracts launched, which limited the platform's development potential and asset diversity.

Solution: HIP-3, also known as "Builder-Deployed Perpetuals", completely opens up the creation rights of the perpetual contract market. Any "builder" can deploy custom perpetual contracts on Hyperliquid by staking 1,000,000 HYPE.

The Builder has full control over the market it deploys, allowing it to autonomously define various key parameters, including selecting collateral assets, using price oracles, setting leverage limits, and margin parameters. At the same time, the Builder can enjoy 50% of the trading fees from the market (this percentage may be adjusted after the official launch), which is a considerable revenue.

Through these three steps, Hyperliquid has transformed from a decentralized trading platform purely aimed at end users to a "financial infrastructure layer," far surpassing other competitors in narrative and deriving new business ecosystems and play styles.

The Four Major Impacts of HIP-3

1. Aligning with the trend of tokenizing real-world assets

HIP-3 has set a high staking threshold of 1 million HYPE tokens, equivalent to over 42 million USD. This design is essentially a filtering mechanism to ensure that only financially strong and serious participants can get involved.

Institutional investors undoubtedly belong to this category of qualified participants. Given their massive investments, they are more likely to target traditional financial markets that have huge and stable trading volumes, as well as deep value, which is exactly where the tokenization of physical assets comes into play. Major global stock indices (such as the S&P 500), commodities (such as gold), and major foreign exchange currency pairs (such as EUR/USD) are all potential targets.

Taking the world's leading S&P 500 index futures as an example, suppose relevant perpetual contracts are deployed on Hyperliquid. Even if only achieving 0.1% of the traditional market trading volume, with a 0.1% fee rate, Builders can still earn considerable returns daily. This is undoubtedly highly attractive to institutions seeking stable returns.

In addition, the introduction of HIP-3 allows Hyperliquid to better adapt to the characteristics of different types of assets. Its modular design enables the customization of risk parameters, collateral assets, and liquidation logic for specific assets (such as U.S. Treasuries and real estate), which is essential for securely and efficiently bringing diversified physical assets on-chain.

2. Foster a new token ecosystem

Although HIP-3 has brought new opportunities to the market, there are still two issues to be resolved:

1. High staking costs will exclude most retail investors.
2. The initial liquidity source for the new market is still unclear.

Although HIP-3 is still in the testing phase, there may be better solutions in the future. Even if the official does not provide a solution, the community may leverage the composability advantages of DeFi protocols to offer third-party solutions.

For example, the community might develop a new protocol similar to HLAggregator, allowing retail investors to deposit HYPE tokens into a public pool and raise 1 million HYPE through crowdfunding to qualify for deploying perpetual contracts. In return, users will receive staking certificates representing their shares, granting them the right to share in the future fee income of the contract market.

In addition, HLAggregator may also issue its own governance token (such as HLA), which will be used to determine which token's perpetual contract market will be established for the crowdfunding of HYPE. This may lead project parties to compete to "please" HLA holders, such as through targeted airdrops, thereby driving up the demand and price of HLA.

This mechanism also helps to address the liquidity issues in the new contract market. HLAggregator can attract users to provide initial liquidity for the new market through "token incentives" by distributing its own tokens or collaborating with project parties to distribute their tokens.

With the success of platforms like HLAggregator, more "liquidity aggregators" may emerge, sparking a "Hyperliquid War" over user HYPE deposits, project collaborations, and the rights to real yield distribution.

In summary, the deflationary effect caused by staking 1 million HYPE is just the first step; the second step is to create new ecosystems and business models around HYPE. This will greatly expand the application scenarios and market demand for HYPE, establishing a solid support for its price.

3. Meet the trading needs of unlisted company stocks

Recently, retail investors' interest in private placement stocks of unlisted companies (Pre-IPO) has been growing increasingly. Many hope to participate in investments in star companies like OpenAI and SpaceX in advance. Some trading platforms have issued tokenized stocks of these companies in small quantities, which, although controversial, has also demonstrated the strong demand in the market for Pre-IPO stocks.

Hyperliquid has a unique advantage in meeting this market demand. Its Hyperps function addresses the challenge of providing futures trading for assets that are not yet officially listed or lack reliable price sources. The funding rate calculation for Hyperps is based on the difference between the current price of the futures and its own exponential moving average over a past period, rather than the traditional deviation between futures and spot prices.

The combination of HIP-3 and Hyperps allows anyone (as long as they can afford the staking cost of 1 million HYPE) to "self-service" deploy perpetual contracts for popular private placement stocks. HIP-3 addresses the question of "can it be deployed", while Hyperps solves the issue of "price being unanchored and highly volatile".

Although this mechanism provides futures contracts rather than actual stocks, which may not be suitable for value investors, it offers retail investors the opportunity to gain from the price fluctuations of these companies. More importantly, this mechanism provides a price discovery function, offering a reference for the pricing when these companies officially IPO, helping to avoid excessively outrageous pricing.

4. Flexibly respond to competition from centralized trading platforms

Recently, some compliant trading platforms have begun to offer futures trading services for US users. Their main advantage lies in compliance, which is attractive to certain institutional funds with high security compliance requirements. However, these platforms tend to be cautious when launching new products, currently limited to a few mainstream cryptocurrencies with lower leverage limits. Additionally, the launch of new products requires a complex approval process, which may take months, making it difficult to respond quickly to market demands.

The disadvantages of these centralized platforms are precisely the advantages of Hyperliquid. Even before HIP-3, Hyperliquid excelled in responding to market demands. For example, it launched NFT index contracts when the NFT market was booming and introduced social account indices during the social finance craze. Now, HIP-3 has made the creation of contract markets "permissionless," further enhancing the speed of responding to market demands, a flexibility that centralized platforms find hard to match.

Therefore, Hyperliquid is continuously innovating by launching new features such as HIP-3 and Hyperps, leveraging its flexibility to address the compliance advantages of centralized platforms and strengthening its unique characteristics in the intense market competition.

Conclusion: The Future of Open and Win-Win On-Chain Finance

HIP-3 marks an important milestone in the development of Hyperliquid. It is not only a technological upgrade but also a strategic choice aimed at transforming Hyperliquid into a core financial infrastructure that connects real-world assets, revolves around the HYPE innovation ecosystem, and flexibly responds to market demands, promoting the deep integration of decentralized finance and traditional finance.

The future path is filled with challenges, and issues such as how to effectively guide liquidity in new markets and respond to the complex global regulatory environment remain to be solved. Nevertheless, HIP-3 has painted a more open, composable, and imaginative on-chain financial future blueprint for us.