When prediction markets meet perpetual contracts, another trillion-dollar market awaits discovery
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When prediction markets meet perpetual contracts, another trillion-dollar market awaits discovery
With proper design, HIP-3 can serve as a complement and alternative to Kalshi and Polymarket.
Navigating Web3 tides with focused insightsAuthor: John Wang
Translation: AididiaoJP, Foresight News
Summary
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HIP-3 transforms prediction markets from static bets into high-leverage perpetual contracts, enabling permissionless trading on elections, macroeconomic data, and other events.
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Binary markets carry extreme gap risk at expiration, making structural safeguards critical—such as liquidation bands, open-interest-adjusted margining, and leverage decay.
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Scalar markets (range-settled) are a safer near-term target due to smoother price paths, proportional losses, and lower liquidation synchronicity, enabling higher leverage.
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With proper design, HIP-3 can complement and replace platforms like Kalshi and Polymarket by combining leverage, shared liquidity, permissionless market creation, and potential on-chain hedging—creating the fastest, most flexible prediction market platform.
Introduction and Opportunity
Prediction markets have long been slow, fixed-payout, and unleveraged. HIP-3 changes this by running them as perpetuals on Hyperliquid, enabling permissionless deployment, shared liquidity, and customizable parameters. This allows users to trade binary or continuous outcomes on elections, macro data, sports, and more with the same speed and capital efficiency as crypto perpetuals.
Combining the global liquidity of perpetuals with the information richness of prediction markets opens a new category of high-frequency, multi-event trading. However, leveraged event trading is highly dangerous without structural safeguards—especially for binary outcomes.
The Challenge of Binary Leverage
Binary markets can gap from 0 to 100 at expiry, instantly wiping out one side and triggering cascading liquidations across the market. Without natural hedging, market makers take direct event risk, and liquidations cannot be staged. Without protective measures, safe leverage is limited to 1–1.5x.
Example: dYdX’s TRUMPWIN
Before the 2024 U.S. presidential election, dYdX offered 20x leverage on a Trump win market by allowing market makers to hedge in Polymarket’s YES/NO liquidity. It also employed mature liquidation mechanisms, a large insurance fund, and loss socialization. Still, on election night, the price surged from ~$0.60 to $1.00, draining liquidity during liquidations and triggering random deleveraging amid a thin order book. Hedging delays, violent gaps, and vanishing liquidity caused losses even for solvent traders.
Currently, HIP-3 lacks built-in spot hedging and gap-risk controls. Without embedded protections, similar chain reactions remain likely.
Building on External Oracles
Binary prediction perps on HIP-3 will use the BinaryHyperp contract and rely on 0–100 probability oracles. Strict constraints can ensure trading only occurs within market bounds. If oracles reference Kalshi or Polymarket, liquidity providers can hedge in those spot markets, reducing event risk and enabling higher leverage. However, risks remain—including hedging latency, liquidity gaps, and basis divergence.
Ensuring Leverage Safety
To raise binary market leverage above 1x, structural controls are essential:
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Liquidation bands: Split positions into price ranges. Lower bands liquidate first to cap losses.
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Open-interest-adjusted margin: Increase margin requirements linearly with open notional value: open_notional = OI × oracle_price scaling_factor = (open_notional - lower_cap) / (upper_cap - lower_cap) effective_margin = min(base_margin + max(scaling_factor × (1 - base_margin), 0), 1.0)
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Leverage decay: Gradually reduce max leverage as expiry approaches and volatility rises (e.g., 5x at 30 days, down to 1x on final day).
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Pre-settlement auction: Batch-match positions before outcome resolution to avoid last-minute chaos.
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Price and oracle capping: Limit maximum price moves and rate-limit oracle updates to slow cascades.
Together, these measures—OI-capped margining to control systemic risk, staggered liquidation bands, and leverage decay to reduce tail risk at expiry—make leveraged binary markets viable.
Beyond Binary: The Scalar Breakthrough
Scalar markets settle on ranges (e.g., CPI percentage or BTC dominance), not 0 or 100. This drastically reduces gap risk and supports higher leverage. Key advantages include:
Smoother price paths: Most scalar markets settle on gradually changing inputs (e.g., temperature, vote share, asset dominance).
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Proportional losses: Even with gaps, losses are limited to deviation, not full notional value.
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Predictable funding and liquidations: Continuous pricing spreads liquidation thresholds across the curve, reducing synchronized cascades.
Incremental pricing also aligns naturally with HIP-3’s funding and margin logic, making scalar markets a safer near-term focus.
User Experience for Prediction Perps
Maintain core perp elements (order book, depth chart, leverage slider), while adding prediction-specific UI components:
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Clear question title
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Yes/No options or scalar slider
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Payout visualization tools
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Expiry countdown
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Mark price and oracle probability display
If hedged via external platforms like Kalshi or Polymarket, this must be clearly indicated.
Positioning vs. Kalshi and Polymarket
Kalshi and Polymarket are curated, fixed-payout, unleveraged platforms. HIP-3 differentiates through:
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Leverage: Safer in scalar markets, engineered for binaries
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Permissionless market creation: Anyone can list new outcomes
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Shared liquidity: Taps into Hyperliquid’s perpetual liquidity pool
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On-chain hedging potential: Reduce event risk without leaving Hyperliquid
This combination attracts professional LPs and active traders, enabling HIP-3 to serve both niche event markets and high-volume global outcomes.
Conclusion
Currently, no major team has publicly committed to developing HIP-3 prediction perps—but that is about to change. With sound design, strong liquidity, and permissionless creation, HIP-3 can both complement and displace Kalshi and Polymarket.
Prediction markets are going global—and Hyperliquid, as the blockchain for all financial activity, will not miss this wave.
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