Hyperliquid's HIP-3: Opening a New Era of On-Chain Derivation

The HIP-3 improvement proposal recently launched by Hyperliquid has garnered widespread attention in the DeFi space, with its minimum viable version now live on the testnet. This is not just a simple protocol upgrade, but a key step in Hyperliquid's development roadmap that could have a profound impact on the future of on-chain derivation trading.

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

Three Core Proposals of Hyperliquid

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

HIP-1: Simplified Token Launch Process

For a long time, new projects have faced difficulties and high costs in listing tokens on mainstream trading platforms. HIP-1 provides an alternative for cryptocurrency project teams. It allows anyone to create new tokens on Hyperliquid without permission, similar to the ERC-20 standard. Project teams only need to pay a certain fee to create their own tokens and automatically activate a spot order book market, significantly lowering the barrier for assets to enter the public market.

HIP-2: Providing automated market making for the new token market

New tokens often face the problem of insufficient liquidity after being launched. 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 automatically posts buy and sell orders on the order book, providing basic tradable liquidity for the new market and effectively addressing the cold start challenge in the early stages of new asset launch.

HIP-3: Open Perpetual Contract Market Creation Permission

Perpetual contracts are the largest trading volume area in the crypto market, but previously only the Hyperliquid core team had the authority to decide which assets' perpetual contracts would go live. 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 million HYPE.

Builders can autonomously define various key parameters, including selecting collateral, price oracle, leverage limits, and margin parameters. Additionally, builders can enjoy a certain percentage of the market trading fees, which is quite a considerable revenue.

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

Potential Impact of HIP-3

1. Align with the trend of physical asset tokenization

HIP-3 sets a high entry threshold, requiring builders to stake 1 million HYPE tokens. This design ensures that only players with substantial capital can participate. Institutional investors may target those markets in traditional finance that have huge and stable trading volumes, such as major global stock indices, commodities, and major foreign exchange currency pairs.

Taking the world's leading S&P 500 index futures contracts as an example, even capturing a small portion of the traditional market trading volume can bring substantial profits to the builders. This is undoubtedly very attractive for institutions seeking stable returns.

In addition, the modular design of HIP-3 enables Hyperliquid to better adapt to the characteristics of different types of assets, laying the foundation for safely and efficiently bringing various physical assets on-chain.

2. Give birth to a new token ecosystem

Although the high threshold of HIP-3 excludes most retail investors, the community may leverage the composability advantages of DeFi to develop third-party solutions. For example, aggregator protocols may emerge that allow retail investors to pool funds to deploy perpetual contracts, enabling regular users to participate in the profits of HIP-3.

This type of aggregator protocol may issue its own governance tokens, playing a role in deciding which asset's perpetual contract to deploy. This, in turn, may lead project parties to incentivize aggregator users with tokens to compete for the opportunity to be listed, thus forming a brand new ecosystem.

3. Meet the trading needs of unlisted company stocks

Recently, investors have shown increasing interest in private equity stocks of unlisted companies. Hyperliquid's Hyperps feature provides futures trading for assets that are not yet officially listed or lack reliable price sources. The combination of HIP-3 and Hyperps allows anyone to deploy perpetual contracts for popular private equity stocks, providing retail investors with the opportunity to participate in the price fluctuation gains of these companies, while also offering price discovery functions for the companies' future IPOs.

4. Responding to the competition of centralized trading platforms with flexibility

In the face of some compliant trading platforms starting to provide users with futures trading services, Hyperliquid's advantage lies in its ability to quickly respond to market demands. HIP-3 transforms the contract market into a "permissionless" operation, further enhancing the platform's flexibility, which is difficult for centralized trading platforms to match.

Conclusion

HIP-3 represents an important leap in Hyperliquid's development path. It is not only a technological upgrade but also a strategic choice aimed at establishing itself as a core financial infrastructure that connects real-world assets, fosters innovative ecosystems, and quickly responds to market demands, promoting the deep integration of decentralized finance and traditional finance.

Despite the many challenges ahead, such as how to effectively guide liquidity in new markets and respond to the complex global regulatory environment, HIP-3 undoubtedly paints a picture of a more open, composable, and imaginative on-chain financial future.