Analysis of HIP-4: Hyperliquid and Kalshi Join Forces to Reshape On-Chain Prediction Markets

Recently, Hyperliquid has been quite active, first with HIP-3 allowing anyone to create perpetual contract markets, then with the controversial stablecoin bidding, and now they have thrown out a heavyweight proposal—HIP-4, preparing to officially enter the prediction market.

This is not just about adding a new feature; behind it is Hyperliquid's grand ambition to evolve from a purely perpetual contract exchange to a more foundational and modular financial infrastructure. Let’s take a closer look at what HIP-4 is, what it aims to do, and how it will shake up the landscape of prediction markets.

Hyperliquid Allies with Kalshi

Hyperliquid is already the absolute leader in the on-chain perpetual contract space, holding nearly 80% of the market share. However, every successful project must seek new growth points. HIP-4 is a key step they are taking.

One of the most interesting aspects of the HIP-4 proposal is that one of its authors, John Wang, comes from Kalshi—a centralized prediction market that is strictly regulated by the CFTC in the United States. In August 2025, Kalshi made headlines by hiring Crypto KOL John Wang as its Head of Crypto. The author lineup of HIP-4, spanning decentralized investment institutions and centralized prediction market practitioners, is quite intriguing, as it is rare for traditional competitors to collaborate on drafting proposals. As an important player in the compliant prediction market in the U.S., Kalshi's involvement in drafting HIP-4 suggests that the proposal is not aimed at "disrupting" existing players in the prediction market but rather reflects a mindset of cooperation or differentiated coexistence:

• Hyperliquid's advantage lies in its world-class on-chain trading technology and a large user base. Its high-performance on-chain order book, processing capacity of up to 100,000 TPS, and sub-second trade finality are also the technical foundations required for a qualified on-chain prediction market. Hyperliquid already has a large and active user base, most of whom are experienced traders and speculators, who are also the target users of prediction markets. If Hyperliquid enters the "prediction market" space, it can expand boundaries, enrich narratives, and provide new imaginative space for capital markets. The crypto space has never lacked funding; what it lacks is a good story. The story of perpetual DEX has been told quite a bit; if it can successfully enter the prediction market space, it will add a new variable to support HYPE valuations.

• Kalshi's core advantage is quite the opposite of Hyperliquid: it has rich experience in creating compliant and attractive markets, successfully navigating regulatory challenges in the U.S. (even winning a lawsuit against the CFTC) and establishing strong institutional credibility. Its shortcoming lies in the lack of a decentralized, crypto-native technical foundation and effective channels to reach global permissionless DeFi users.

The two are a perfect match. Kalshi can leverage Hyperliquid's technical infrastructure to efficiently enter the decentralized world and reach global users; while Hyperliquid, through its collaboration with Kalshi, gains valuable compliance, credibility endorsement, and professional market operators, avoiding the early emergence of numerous low-quality markets.

Structural Innovation: Why Do We Need Dedicated "Event Perpetual Contracts"?

You might wonder, since HIP-3 already allows users to create perpetual contracts "permissionlessly," why not use it directly for prediction markets? The answer is: it technically doesn't work.

The "Incompatibility" of Standard Perpetual Contracts

Standard perpetual contracts have two core mechanisms that make them unsuitable for prediction markets:

1. Reliance on Continuous Price Feeds: Perpetual contracts require an oracle to continuously provide external spot prices to calculate funding rates, ensuring that contract prices do not deviate. However, the topics of prediction markets, such as "Will Team A win the match?", have results that occur instantaneously, with probabilities jumping directly from one value to 0 or 1, meaning there is no continuously changing price to track, thus no need for a continuous oracle feed.

2. Price Movement Has an Upper Limit: To prevent severe market fluctuations, Hyperliquid has set a 1% cap on single price movements. This safety design becomes a fatal flaw in prediction markets. The HIP-4 proposal gives a vivid example: at the start of a game, a team's winning probability is 50%, with a price of 0.5. The moment the game ends, the price should immediately change to 1 or 0. But under the 1% single movement limit, adjusting the price from 0.5 to 1.0 would require about 50 adjustments, taking nearly an hour. During this time, anyone who knows the result in advance can engage in risk-free arbitrage, completely undermining market fairness.

"Event Perpetual Contracts" Tailored to the Need

To address these issues, HIP-4 introduces a brand new product: "event perpetual contracts," which incorporates several key innovations:

• Elimination of Continuous Oracles and Funding Rates: This is the most fundamental change. "Event perpetual contracts" completely remove the reliance on continuous oracle feeds and funding rate mechanisms, as these are entirely unnecessary for prediction markets. Before the event result is revealed, the price of the contract is determined solely by the trading actions of market buyers and sellers, freely fluctuating within a preset range (e.g., 0.001 to 0.999). Only when the event concludes does a single, authoritative "result adjudication oracle" (Resolution Oracle) publish the final result (0 or 1) for market settlement.

• 1x Independent Margin: Unlike high-leverage perpetual contracts, "event perpetual contracts" disable leverage (only supporting 1x), and the margin for each market is independent. This is clearly for risk control purposes, significantly reducing users' liquidation risks and strictly limiting the risk of this new experimental product within a single market, preventing risk spillover to users' other asset portfolios. However, Isolated Margin also limits the combinability and synergistic advantages of prediction markets with other Hyperliquid markets.

• Support for Slot Reuse: HIP-4 inherits from HIP-3, requiring a stake of 1 million HYPE to create a market. However, prediction markets differ from perpetual markets in that perpetual markets can exist long-term, while prediction markets lose their meaning once the event result is announced. Staking such a large number of tokens can only establish a one-time market, which is clearly not a cost-effective deal. To improve the efficiency of capital and platform resource utilization, HIP-4's infrastructure supports market "recycling." Once an event market settles, its occupied on-chain resources (trading slots) can be immediately released and used to deploy a new event market without re-entering the deployment auction.

Comparative Analysis: HIP-4 vs. Polymarket

As Hyperliquid enters the prediction market, it inevitably has to compete with the current leader, Polymarket. However, Hyperliquid has chosen not to imitate but to carve out a distinctly different path.

Elite Curation vs. Free Rein

This is the core difference between the two.

• Hyperliquid's "Builder" Model: Want to create a market? You can, but the threshold is extremely high—you must stake 1 million HYPE tokens (currently worth over $57 million). This high economic barrier acts as a filter, ensuring that only well-funded, serious professional teams are qualified to create markets. They have a strong incentive to launch high-quality markets with potential to attract liquidity to earn trading fee returns. Due to the high entry and trading costs, prediction markets on Hyperliquid are expected to focus more on "financial nature" topics, such as macroeconomic events (interest rate decisions, inflation data), crypto industry events (major upgrades, project launches, regulatory dynamics), and major sporting events that have strong hedging demand and high correlation with asset prices. Only these markets can attract institutions and high-net-worth speculators.

• Polymarket's UGC Model: Anyone can create a market on Polymarket. This makes the topics on the platform diverse, always keeping up with current events and full of vitality. Polymarket, with its zero-fee and UGC content, is a paradise for retail investors and enthusiasts. Various quirky bets, news hot topics, and life anecdotes appear on Polymarket, attracting users who may not understand finance but are keen on entertainment and social discussions. They often bet small amounts, focusing more on participation and topicality, and are sensitive to fees, which Polymarket perfectly meets. However, the downside is that it also generates many vague, redundant low-quality markets, diluting liquidity.

Protocol Captures Value vs. User Experience First

• Polymarket: Implements a zero trading fee policy. Its strategy is a typical Web2 growth model: using VC funds to subsidize zero-fee products, rapidly capturing user mindshare and building an impeccable network effect, while leaving future profit models to be solved later. This is a capital-intensive, lightning-fast expansion.

• HIP-4: In contrast, Hyperliquid has been committed to building a crypto-native, sustainable on-chain economic cycle from day one. Builders stake HYPE, create markets, and share up to 50% of trading fees. The HYPE token here is not just a governance tool but more like a "business operating license," with its value directly supported.

In simple terms, Polymarket follows a typical Web2 growth route—burning money for market share, while Hyperliquid has been dedicated to creating a crypto-native, sustainable economy from day one.

Unlocking Potential: 1+1+1 > 3 Advanced Play

Placing multiple financial instruments under the same account and margin system significantly reduces the operational complexity and capital friction for traders. Traders can seamlessly move funds and risk exposure between different products, allowing for the construction of more refined and efficient portfolios. This combinability is Hyperliquid's core advantage over specialized prediction market platforms.

Strategy One: Hedging Event-Driven Volatility Risk

This is one of the most intuitive application scenarios, using prediction markets as a precise tool to hedge specific event risks.

• Scenario: A trader holds a long position in XYZ token perpetual contracts worth $100,000. He expects that at an upcoming industry conference, the XYZ project will announce significant positive news. However, if the news falls short of expectations, the token price may face a sharp decline, constituting significant "event risk."

• Strategy on Hyperliquid: The trader can simultaneously buy shares of the "NO" contract in the "event perpetual contract" market, with the market's theme being: "Will XYZ announce a partnership with MegaCorp before today's close?" This "NO" contract functions like insurance against that specific positive event.

• Outcome One (Positive News Materializes): XYZ announces the partnership, and its perpetual contract price surges. The trader's profits on the perpetual contract far exceed his losses on the "NO" contract in the prediction market (the entire principal invested).

• Outcome Two (Positive News Fails): XYZ does not announce the partnership, and the perpetual contract price plummets due to disappointment. At this point, the "NO" contract in the prediction market will settle at $1 per share, effectively compensating for part of the losses on the perpetual contract position.

• Advantage: Compared to traditional hedging methods like shorting correlated assets, this approach is more direct, precise, and capital-efficient, as it directly hedges the core event driving price volatility.

Strategy Two: Basis Trading Between Perpetual Contracts and Prediction Markets

For more mature quantitative traders, a unified platform provides opportunities for cross-market arbitrage and relative value trading.

• Scenario: An event perpetual contract market's theme is: "Will the ETH/BTC exchange rate be above 0.06 by the end of the month?" The current price of its "YES" contract is $0.70, implying a 70% probability of occurrence in the market. Meanwhile, ETH/USD and BTC/USD perpetual contract markets are also trading normally on the platform.

• Strategy on Hyperliquid: A quantitative analyst uses his model to assess that the true probability of the ETH/BTC exchange rate being above 0.06 by the end of the month is only 60%, believing that the market pricing (70%) for this event is too high. He can construct a relative value trade to capture this 10% "probability spread":

1. Short the Implied Probability: Sell the "YES" contract in the prediction market (priced at $0.70).

2. Hedge Market Risk: To strip away the impact of ETH/BTC exchange rate fluctuations, he needs to construct a delta-neutral position. He can simultaneously go long an equivalent nominal value of ETH in the perpetual contract market and short an equivalent nominal value of BTC, thereby synthesizing a long exposure to ETH/BTC to hedge the short exposure created by selling the "YES" contract in the prediction market.

• Profit Source: Through the above operations, the trader maintains neutrality regarding the actual ETH/BTC exchange rate movements, but he has shorted the market's "event premium" or "implied probability." As long as the prediction market price eventually converges to what he considers a more reasonable 60% probability, or the event does not occur (price goes to zero), he can profit. The essence of this strategy is trading the difference between "opinions" and "market consensus."

Critique of HIP-4

The prospects for HIP-4 are bright, but it is not without challenges, as it still faces several key hurdles.

Fee Paradox

As mentioned earlier, Polymarket currently charges no fees. This was previously explained as Polymarket attracting users through a "free" strategy, but there are deeper considerations behind this. This is because, in prediction markets, the price of an option theoretically represents the market's belief in the probability of that option coming true. Introducing trading fees means introducing trading friction, causing option prices to deviate from market predicted probabilities. One of the major functions of prediction markets is to reflect market predictions about the future through intuitive prices, and introducing trading fees significantly weakens this function.

For example, ideally, the sum of the Yes and No probabilities should equal 100%. Polymarket has no fees and introduces constraints on the prices of YES and NO tokens through arbitrage mechanisms, making the above conclusion hold. In most cases, the sum of YES and NO token prices on Polymarket can be very close to 1.

However, the prediction markets in HIP-4 are constructed by market builders who stake 1 million HYPE (currently worth about $58 million) to gain "privileged operating rights," with the aim of earning 50% of the trading fee revenue. This will inevitably affect user trading behavior, causing prices in HIP-4 to deviate from market predicted probabilities.

For instance, considering trading costs, the sum of Yes and No in the Hyperliquid market may be less than $1 (buying one Yes and one No incurs double fees). Although the fees are small, significant trading dead zones may occur in times of low liquidity. For example, if the true probability of a market is 50%, the prices of YES and NO options on Polymarket align closely at 0.50, but on Hyperliquid, it could be Yes=0.48, No=0.49, summing to only 0.97, which implies a 3% house cut. This is detrimental to the accuracy of price discovery and harms user experience.

Adding Constraints to Prices

As mentioned earlier, for prediction markets, the core mechanism is how to ensure that the probabilities of the YES and NO outcomes always sum to 100%, which is equivalent to ensuring that the sum of the prices of Yes tokens and No tokens equals 1.

Polymarket achieves this mechanism through a set of arbitrage mechanisms:

• First, it stipulates that any participant can deposit 1 USDC into the contract to mint 1 YES token and 1 NO token. Similarly, users can return 1 YES token and 1 NO token to the contract for destruction, redeeming 1 USDC.

• For example, when the market price of YES token is 0.70 and NO token is 0.40, an arbitrageur deposits 1 USDC into the contract, mints 1 YES and 1 NO share, and then immediately sells them on the order book at prices of 0.7 and 0.4, earning 0.1 USDC in risk-free profit. A large number of such actions will increase selling pressure, driving the prices of YES and NO down until their sum returns to 1 USDC.

• When the market price of YES token is 0.60 and NO token is 0.30, the arbitrageur will first buy 1 YES and 1 NO share at prices of 0.6 and 0.3 on the order book, then redeem them with the contract for 1 USDC, earning 0.1 USDC in risk-free profit. A large number of such actions will drive the prices of both shares up until their sum returns to 1 USDC.

However, in the HIP-4 proposal, there is no similar content, and we cannot know how HIP-4 will constrain the prices of YES tokens and NO tokens. Coupled with the likelihood that prediction markets in HIP-4 will charge fees, this adds many uncertainties regarding how much the option prices in HIP-4 will reflect market expectations.

Current Mechanism Limits Synergistic Potential

Some readers may feel excited about the beautiful vision of Hyperliquid's "Spot, Futures, Prediction: 1+1+1 > 3" described in the previous chapter, but unfortunately, I must pour a bucket of cold water on this: under the current Hyperliquid "margin" system, although Hyperliquid supports Cross-Margin within perpetual markets, the three major product lines of spot, futures, and future predictions remain isolated from each other, and the aforementioned "1+1+1 > 3" synergistic advantages cannot be realized.

This means that although the three types of products are superficially on the same platform, users still need to manage positions and funds separately.

1. For example, if you profit $1,000 USDC in the prediction market, this money will not automatically increase the margin of the contract account unless you actively transfer it.

2. Similarly, if the margin in the contract account is insufficient and it gets liquidated, while the prediction market account has a balance, it cannot be automatically used to supplement it.

3. Currently, Hyperliquid does not support using non-USDC assets as margin (i.e., the so-called "coin-based" model has not yet been launched), meaning that the spot tokens held by users cannot be directly used to open contract or prediction positions and must first be converted to USDC.

Such an isolation design is understandable in the early stages for stability reasons, but it also limits the power of cross-market synergistic strategies. If users want to use prediction markets to hedge contract positions, they must constantly manually adjust funds between the two accounts, which is cumbersome and has delays. Thus, it is evident that Hyperliquid still has many foundational functions that need improvement, and before fully integrating the three major product lines, the synergistic effects brought by the prediction market business will be discounted.

Thin Margins, Few People, Many Tasks

• Thin Margins: Assuming HIP-4 goes live, Hyperliquid can initially capture only about 10% of Polymarket's trading volume (considering Polymarket's current large size and first-mover advantage). Polymarket's trading volume in August 2025 was $664 million, so 10% is about $66 million per month in trading volume. Based on a common DEX fee of 0.1%, the monthly revenue would be $66,000, of which Hyperliquid might take half (the other half goes to builders), about $33,000. Compared to Hyperliquid's overall profitability, this is just a drop in the bucket. It is worth noting that Hyperliquid's profits in 2025 were once claimed to exceed Nasdaq, with monthly revenues conservatively estimated in the millions or even tens of millions of dollars. If the prediction market can only add a few tens of thousands of dollars in monthly revenue, it will have almost no direct boost to the value of the HYPE token or the project's finances.

• Few People, Many Tasks: Hyperliquid's push to implement HIP-4 is also limited by its own resources and technical difficulties. Currently, according to community news, the core team of Hyperliquid has fewer than 20 people (with about ten developers). Recently, they have also been advancing the specific implementation of HIP-3, supporting the integration of the native stablecoin USDH, and upgrading platform performance, among other tasks. It can be said that the development schedule is already quite tight. When it comes to actually coding HIP-4, many underlying issues need to be resolved, and this work is not something that can be accomplished overnight.

In summary, even if HIP-4 passes, its actual launch time is likely to be after 2026, belonging to a medium to long-term plan. For Kalshi, which is eager to expand onto the chain, this is a "distant water that cannot quench immediate thirst," and in the short term, they still cannot meet the demand for decentralized markets through HIP-4. Accordingly, Polymarket's position remains solid in the foreseeable future, and at least for next year, it will not feel direct threats from Hyperliquid. By the time the prediction market product of HIP-4 matures, Polymarket may have further expanded its leading advantage or launched its own token to form a new moat.

Conclusion: A Carefully Planned Game

In conclusion, HIP-4 is a "strong alliance" between centralized prediction market giant Kalshi and DEX giant Hyperliquid.

• Kalshi hopes to leverage Hyperliquid's already mature on-chain architecture to quickly expand its business onto the chain, reaching global users permissionlessly. In August 2025, Kalshi made headlines by hiring Crypto KOL "John Wang" as its Head of Crypto, marking the completion of the first step in its "theoretical" phase. This time, with John Wang's involvement in HIP-4, it represents the first step Kalshi is taking toward the "practical" phase of entering the chain.

• Hyperliquid aims to utilize its technological advantages in high-performance trading infrastructure, combined with its large user base, to penetrate the new vertical of prediction markets, giving HYPE a new narrative. By collaborating with regulated entities like Kalshi, which provides compliance and credibility endorsement, HIP-4 focuses its market positioning on institutions and high-net-worth investors, with market themes primarily centered around "finance" and "policy", distinguishing itself from its main competitor Polymarket, which pursues a permissionless, bottom-up, entertainment-focused market positioning.

The success or failure of this game will depend on whether Hyperliquid can use its technological advantages and quality experience to overcome the inherent challenges of liquidity fragmentation and high costs. If successful, it will not only open up a huge new market for itself but also set an example for the entire industry: how DeFi protocols can evolve from single applications to platformization, and how traditional financial institutions can integrate with the decentralized world. The market will ultimately be the judge of this experiment.