Hyperliquid's HIP-3 Proposal: Reshaping On-Chain Derivatives Trading

The recent HIP-3 improvement proposal launched by Hyperliquid has attracted widespread attention in the DeFi space, with its minimum viable version already live on the testnet. This is not just an ordinary protocol upgrade; it represents a key step in Hyperliquid's development roadmap and could have a profound impact on the future of on-chain derivatives trading.

To fully understand the importance of HIP-3, we need to first grasp the overall design philosophy of Hyperliquid, which begins with its three core proposals.

Hyperliquid's Three-Step Development Strategy

Hyperliquid has established a clear and coherent development path, building a multi-layered and fully functional financial ecosystem through three key improvement proposals.

HIP-1: Lowering the threshold for coin listing

For a long time, new projects have faced the dilemma of opacity and high costs when listing tokens on mainstream trading platforms, often needing to go through lengthy negotiations and pay high fees. HIP-1 offers an alternative for crypto projects. It allows anyone to create new tokens on Hyperliquid without permission, similar to the ERC-20 standard. The project team only needs to pay a certain fee to create their own token and automatically open a spot order book market, significantly lowering the threshold for assets to enter the public market.

HIP-2: Automated Market Making

Even if a new token is successfully launched, its value is difficult to manifest if it lacks trading depth. This is known as the "liquidity cold start" problem. HIP-2, also known as "Hyperliquidity," is the native automated liquidity strategy of the Hyperliquid protocol. After a new token is created through HIP-1, HIP-2 acts as a market-making robot, automatically placing buy and sell orders on the order book, providing foundational liquidity for the new market, effectively solving the cold start problem of new assets in the early stages of their launch.

HIP-3: Open Perpetual Market Creation Rights

Perpetual contracts are the largest area of trading volume in the crypto market, but before HIP-3, only the core team of Hyperliquid had the authority to decide which assets' perpetual contracts would be launched. HIP-3, also known as "Builder-Deployed Perpetuals," fully opens the creation rights of the perpetual contract market. Any "builder" can deploy a custom perpetual contract on Hyperliquid by staking 1 million HYPE.

Builders have full control over the markets they deploy, allowing them to autonomously define various key parameters, including selecting collateral, price oracles, leverage limits, and margin parameters. At the same time, builders can also enjoy 50% of the trading fees from the market, which is a quite considerable profit.

Through these three steps, Hyperliquid has transformed from a decentralized exchange aimed at end users into a "financial infrastructure layer", surpassing other competitors in narrative and deriving new business ecosystems and gameplay.

The Four Major Impacts of HIP-3

1. Aligning with the real-world asset boom

HIP-3 has set a high staking threshold of 1 million HYPE, which is essentially a screening mechanism to ensure that only well-capitalized and serious participants can create perpetual markets. This presents a highly attractive opportunity for institutional capital, which is likely to target those markets in traditional finance that have large and stable trading volumes, such as major stock indices, commodities, and foreign exchange currency pairs.

Taking the S&P 500 index futures as an example, even if one only obtains 0.1% of the trading volume in the traditional market, under reasonable assumptions, the builder can earn considerable fee income daily. This stable return is extremely attractive to institutions pursuing long-term gains.

Moreover, the modular design of HIP-3 allows Hyperliquid to better adapt to the characteristics of different types of assets, laying the foundation for securely and efficiently bringing various real-world assets on-chain.

2. Foster a new token ecosystem

Although HIP-3 has brought new opportunities to the market, its high staking requirements pose obstacles for ordinary investors to participate. However, leveraging the composability of DeFi, the community is likely to develop third-party solutions to overcome this challenge.

For example, a protocol similar to "HLAggregator" may emerge, allowing retail investors to raise funds through crowdfunding to deploy perpetual contracts. This not only gives ordinary users the opportunity to share in the fee income but may also give rise to new token economic models, such as issuing governance tokens to determine the direction of contract deployment.

This model not only solves the capital threshold issue but also provides an initial source of liquidity for the newly deployed contract market. With the rise of similar protocols, it may trigger a "Hyperliquid war" around HYPE deposits, project cooperation, and yield distribution rights, akin to the early "Curve wars."

3. Meet the trading needs of unlisted company stocks

Recently, investors have shown increasing interest in privately placed stocks of unlisted companies. Hyperliquid's Hyperps feature combined with HIP-3 provides an ideal solution to meet this demand. Hyperps innovatively addresses the problem of futures trading lacking reliable price source assets, while HIP-3 allows anyone to deploy perpetual contracts for these popular private placements.

Although these contracts are not real stocks and are not suitable for traditional value investors, they offer retail investors the opportunity to participate in the price fluctuations of these companies, while also providing valuable reference for the pricing of these companies during their future IPOs.

4. Responding to the competition of centralized exchanges with flexibility

As compliant exchanges begin to offer futures trading services for U.S. users, Hyperliquid faces new competitive pressure. However, traditional exchanges have limitations in the speed and diversity of product launches, which is where Hyperliquid's advantages lie.

HIP-3 turns contract market creation into a "permissionless" operation, greatly enhancing Hyperliquid's speed in responding to market demands. This agility allows Hyperliquid to quickly launch innovative products, such as NFT index contracts and social account indices, thereby maintaining a differentiated advantage in fierce market competition.

Conclusion

HIP-3 marks an important milestone in the development of Hyperliquid. It is not only a technical upgrade but also a strategic transformation aimed at establishing Hyperliquid as a core financial infrastructure that connects real-world assets, innovative ecosystems, and rapidly responds to market demands, promoting the deep integration of decentralized finance and traditional finance.

Despite the many challenges ahead, such as effectively guiding new market liquidity and coping with a complex regulatory environment, HIP-3 has already outlined a more open, flexible, and full of possibilities on-chain financial future blueprint for us.