Original Title: Prediction Market Perps on Hyperliquid
Original author: John Wang, former founder of Immutable Original compilation: AididiaoJP, Foresight News
Summary
· HIP-3 is able to transform prediction markets from static betting to high-leverage perpetual contracts, enabling permissionless trading on events like elections and macroeconomic data.
· Binary markets face extreme gap risks at expiration, so structural safeguards are crucial. For example: liquidation intervals, margin adjustments based on open contracts, and leverage decay.
· Scalar markets (settled by range) are a safer near-term goal because their price paths are smoother, losses are proportionately calculated, and liquidation synchronicity is lower, thus supporting higher leverage.
· With reasonable design, HIP-3 can complement and serve as an alternative to Kalshi and Polymarket, incorporating leverage, shared liquidity, permissionless market creation, and potential on-site 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 achieves permissionless deployment, shared liquidity, and customizable parameters by operating its perpetual contracts on Hyperliquid. This allows users to trade binary or continuous results on events like elections, macro data, and sports with the speed and capital efficiency of cryptocurrency perpetual contracts.
Combining the global liquidity of perpetual contracts with the information richness of prediction markets will open a new category of high-frequency, multi-event trading. However, without structural safeguards, leveraged trading in event markets will be very risky, especially for binary outcomes.
Challenges of binary leverage
Binary markets may gap from 0 to 100 at expiration, instantly destroying one side of the bettors and triggering a chain liquidation across the entire market. Without natural hedging, market makers will directly bear event risk, and liquidation cannot be phased. In the absence of protective measures, the safe leverage ratio is only 1-1.5 times.
Example: dYdX's TRUMPWIN
On the eve of the 2024 U.S. presidential election, dYdX provided 20 times leverage for the Trump victory market by allowing market makers to hedge in Polymarket's liquidity YES/NO contracts, supported by a mature liquidation mechanism, a large insurance fund, and socialized losses. Even so, on election night, the market price surged from about $0.60 to $1.00, causing liquidity to dry up during the liquidation process and triggering random deleveraging in a shallow order book. Hedging delays, extreme gaps, and liquidity disappearance resulted in losses for traders who could have fulfilled their trades.
Currently, HIP-3 defaults to a lack of on-site hedging and gap risk control measures, so without built-in protections, similar chain reactions may still occur.
Construction based on external oracles
The binary prediction perpetual contracts on HIP-3 will use BinaryHyperp contracts and rely on a probability oracle ranging from 0 to 100. Strict restrictions ensure that trading occurs only within market boundaries. If the oracle references Kalshi or Polymarket, liquidity providers can hedge in these spot markets, thereby reducing event risk and allowing for higher leverage. However, risks still exist, including hedging delays, liquidity gaps, and funding basis differentiation.
Ensure leverage safety
To raise the leverage of binary markets above 1 times, structural control measures are essential:
· Liquidation interval: Dividing positions by price range. Lower ranges are prioritized for liquidation to control losses.
· Margin coefficient based on open contracts: The margin requirement increases linearly based on open nominal 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 compress the maximum leverage ratio as the expiration date approaches and market volatility increases (e.g., 5 times at 30 days, dropping to 1 time on the last day).
· Pre-settlement auction: Batch matching positions before the results are determined to avoid last-minute chaos.
· Price and oracle limits: Restrict the size of single price swings and rate-limit oracle updates to slow down chain reactions.
By combining these measures, the margin cap based on open contracts can control systemic risk, the liquidation interval can stagger liquidation timing, and leverage decay can reduce tail risk as the expiration date approaches.
Beyond binary: Breakthroughs in scalar markets
Scalar markets settle by range (such as CPI percentage or BTC dominance) rather than 0 or 100. This significantly reduces gap risk and supports higher leverage. Its main advantages include:
Smoother price paths: Most scalar markets settle based on gradually changing inputs (such as temperature, voting shares, or asset dominance).
· Proportional losses: Even in the event of a gap, losses are only on the deviated portion, not the full nominal value.
· Predictable funding rates and liquidation: Continuous pricing spreads liquidation thresholds along the curve, reducing synchronized chain reactions.
Incremental pricing also naturally aligns with HIP-3's funding fees and margin logic, making scalar markets a safer breakthrough in the near term.
User experience of prediction perpetual contracts
Retain the core elements of perpetual contracts (such as order books, depth charts, and leverage sliders) while adding components unique to prediction markets in the UI:
· Clear problem title
· Yes / No options or scalar sliders
· Payout visualization tools
· Countdown to expiration
· Marked prices displaying oracle probabilities
If the market hedges through external platforms like Kalshi or Polymarket, it needs to be significantly marked.
Comparison with positioning of Kalshi and Polymarket
Kalshi and Polymarket are curated, fixed-payout, and non-leveraged platforms. HIP-3's differentiation lies in:
· Leverage: Scalar markets are safer, binary markets are optimized through engineering
· Permissionless market creation: Anyone can list new outcomes
· Shared liquidity: Access to the liquidity pool of perpetual contracts on Hyperliquid
· On-site hedging potential: Reduce event risk without leaving Hyperliquid
This combination can attract professional liquidity providers and active traders, allowing HIP-3 to serve both niche event markets and cover high-traffic global outcomes.
Conclusion
Currently, no major team is publicly dedicated to the development of HIP-3 prediction perpetual contracts, but this situation is about to change. With reasonable design, liquidity, and permissionless market creation, HIP-3 can complement Kalshi and Polymarket while also serving as an alternative.
Prediction markets are about to sweep the globe, and as the blockchain accommodating all financial activities, Hyperliquid will not miss this wave.
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