Original Title: Prediction Market Perps on Hyperliquid

Original Author: John Wang, former Founder of Immutable
Translation: AididiaoJP, Foresight News

Abstract

· HIP-3 enables the transformation of prediction markets from static bets to high-leverage perpetual contracts, allowing permissionless trading of events such as elections and macroeconomic data.

· Binary markets face extreme gap risks at settlement, making structural safeguards crucial. Examples include liquidation ranges, margin adjustments based on open interest, and leverage decay.

· Scalar markets (settled by range) are a safer near-term goal, as their price paths are smoother, losses are proportional, and liquidation asynchrony is lower, supporting higher leverage.

· Through thoughtful design, HIP-3 can serve as a complement and alternative to Kalshi and Polymarket, offering leverage, shared liquidity, permissionless market creation, and potential on-chain hedging, creating the fastest, most flexible prediction market trading platform.

Introduction and Opportunity

Prediction markets have long been slow, fixed-odds, and non-leveraged trading venues. HIP-3, by running on Hyperliquid's perpetual contracts, achieves permissionless deployment, shared liquidity, and customizable parameters. This allows users to trade binary or scalar outcomes of events such as elections, macro data, sports, at the speed and capital efficiency similar to cryptocurrency perpetual contracts.

Combining the global liquidity of perpetual contracts with the information richness of prediction markets will open up a new category of high-frequency, multi-event trading. However, without structural safeguards, leveraged trading in event markets can be very risky, especially for binary outcomes.

The Challenges of Binary Leverage

Binary markets can gap from 0 to 100 at settlement, instantly wiping out one side of the bet and triggering a cascading liquidation across the market. Without natural hedges, market makers would bear the event risk directly, and liquidation cannot occur gradually. In the absence of protection measures, the safe leverage ratio is only 1-1.5x.

Example: dYdX's TRUMPWIN

On the eve of the 2024 U.S. presidential election, dYdX enabled market makers to hedge on Polymarket's YES/NO liquidity contract, providing 20x leverage to the Trump victory market, complemented by a robust liquidation mechanism, a sizable insurance fund, and loss socialization. Nonetheless, on election night, the market price surged from around $0.60 to $1, depleting liquidity during the liquidation process and triggering random deleveraging in an illiquid order book. Hedge delays, violent slippage, and liquidity evaporation caused originally executable traders to incur losses.

Currently, HIP-3 inherently lacks on-exchange hedging of spot and slippage risk control measures, so without built-in protection, similar cascading events could still occur.

Oracle-Based Construction

The binary prediction perpetual contract on HIP-3 will use the BinaryHyperp contract and rely on a 0 to 100 probability oracle. Through strict constraints, trading can be ensured only within market boundaries. If the oracle references Kalshi or Polymarket, liquidity providers can hedge in these spot markets to reduce event risk and allow higher leverage. However, risks still exist, including hedge delays, liquidity gaps, and funding basis divergence.

Ensuring Leverage Safety

To increase the leverage ratio of the binary market above 1x, structural control measures are essential:

· Liquidation Bands: Segregate positions by price bands. Lower bands are liquidated first to control losses.

· Unrealized Contract Value Margin Factor: Increase margin requirements linearly based on unrealized contract 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 reduce the maximum leverage as the expiry date approaches and market volatility increases (e.g., 5x at 30 days, down to 1x on the last day).

· Pre-Settlement Auction: Batch match positions before the outcome is determined to avoid last-minute chaos.

· Price and Oracle Cap: Limit the single price tick size and impose a rate limit on oracle updates to slow down cascading reactions.

By combining these measures, the margin cap based on open interest controls systemic risk, the liquidation range staggers liquidation times, and leverage decay reduces tail risk at expiration.

Beyond Binary: A Breakthrough for Scalar Markets

A scalar market settles based on a range (such as CPI percentage or BTC dominance) rather than 0 or 100. This significantly reduces the risk of price gaps and supports higher leverage. Its key 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 case of a gap, losses are only for the deviated part, not the full nominal value.

· Predictable funding rates and liquidations: Continuous pricing disperses liquidation thresholds on a curve, reducing synchronous cascading reactions.

Incremental pricing also naturally aligns with HIP-3's funding and margin logic, making scalar markets a recent safer breakthrough.

User Experience for Prediction Perpetual Contracts

Retain core elements of perpetual contracts (such as order book, depth chart, and leverage slider) while adding components specific to prediction markets in the UI:

· Clear question title

· Yes/No option or scalar slider

· Payout visualization tool

· Expiry countdown

· Mark price and oracle probability display

If the market is hedged through external platforms like Kalshi or Polymarket, it should be prominently noted.

Comparison with Kalshi and Polymarket Positioning

Kalshi and Polymarket are curated, fixed-odds, and unleveraged platforms. The differentiation in HIP-3 lies in:

· Leverage: Scalar markets are safer; binary markets are engineered for optimization

· Permissionless market creation: Anyone can list new outcomes

· Shared liquidity: Access the perpetual contract liquidity pool on Hyperliquid

· On-chain hedging potential: Mitigate event risk without leaving Hyperliquid

This combination can attract professional liquidity providers and active traders, enabling HIP-3 to serve both niche event markets and high-traffic global outcomes.

Conclusion

Currently, no major teams are publicly dedicated to developing the HIP-3 prediction perpetual contract, but this situation is about to change. Through thoughtful design, liquidity, and permissionless market creation, HIP-3 can both complement Kalshi and Polymarket and serve as an alternative to them.

Prediction markets are about to sweep the globe, and as a blockchain that accommodates all financial activities, Hyperliquid will certainly not miss this wave.

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