A Detailed Explanation of Hyperliquid HIP-4: Infiltrating Traditional Finance through Prediction Markets and Options Trading

This article is from: Pavel Paramonov

Compiled by｜Odaily Planet Daily Azuma

Currently, Hyperliquid is regarded as one of the few "investable" assets in the cryptocurrency market.

The overall market is in a downtrend, while HYPE has shown remarkable stability. There are many reasons for this, but one of them is undoubtedly Hyperliquid's strong fundamentals, focus on generating revenue, and the continuous use of profits for HYPE buybacks.

The cryptocurrency industry has matured relatively, and some changes are still occurring ------ protocols are trying to avoid continuing to promote "crypto-first" products and are instead shifting towards more generalized fintech models, where cryptocurrency is just part of the infrastructure rather than a deliberately emphasized selling point.

Today, whether it is asset management institutions, native crypto users, or more broadly, ordinary users, there is an increasing tendency to adopt logic similar to traditional equity valuation when evaluating protocols ------ that is, focusing on revenue and how that revenue will create value for token holders (similar to the relationship between equity and dividends).

Ultimately, protocols like Hyperliquid are easier to evaluate through revenue and distribution mechanisms compared to those that rely solely on crypto-native metrics, and they are also easier for the market to "understand."

HIP-3 (the perpetual contract market deployed by builders) has already shown a clear pattern: when infrastructure is permissionless and has been validated by the market, liquidity tends to concentrate around stronger teams, regardless of whether they have received additional support from the ecosystem.

The same logic will apply to HIP-4. Hyperliquid has defeated Aevo in the pre-market battlefield, outperformed dYdX in the Perp DEX battle, and won against Lighter and Aster in the new round of Perp DEX competition. Hyperliquid has completed the leap from 0 to 1, so what remains next?

Google was initially just a search engine until it nearly swallowed the entire market. When a company becomes a monopolist in its field, unless the global market and demand are still growing rapidly, its growth potential becomes quite limited. To meet investor demands, Google had to explore new markets, thus entering fields such as advertising, images, news, email, maps, video, and documents. Beyond Google's own ambitions, it also had to respond to shareholder expectations.

However, at Hyperliquid, there are no investors to satisfy ------ only its own ambitions and goals, which is to "encompass the entire financial system." Hyperliquid is moving from 1 to ∞ in its own way; it owes nothing to anyone, and anyone can freely come to this platform to start trading or buy HYPE.

Hyperliquid has solved the user acquisition problem (excellent products and a proven track record), the liquidity depth problem (almost perfect order book), and the trading volume problem (the result of the first two). Now, it is time to push these metrics further up.

The next update (HIP-4) focuses on "outcome trading," which will introduce prediction markets and certain types of options to Hyperliquid ------ these products can provide non-linear return outcomes while having no liquidation risk.

I have read many articles, predictions, and various studies about HIP-4, most of which focus on prediction markets but hardly discuss the options side. In my view, options are also very interesting and have great potential, but they currently do not receive enough attention.

This article aims to clarify three questions:

• Why do many people underestimate the potential of HIP-4 even though they praise it?
• Does Hyperliquid really need prediction markets?
• Why might Hyperliquid leverage options to capture a significant portion of the traditional financial market?

The Concept Behind HIP-4

HIP-3 brought some changes: people who previously would not use cryptocurrency exchanges began to use Hyperliquid on weekends ------ traditionally, weekends are usually when traditional markets are closed. Hyperliquid has been able to bring "ordinary people" into the crypto world because it has done something that crypto protocols typically do not do for some reason ------ precisely filling a clear pain point and addressing the real issue of insufficient weekend market liquidity.

Users of Hyperliquid are no longer just "crypto traders," but traders using the best tools available.

After HIP-3, crypto traders on Hyperliquid have dropped the "crypto" prefix because the platform is no longer limited to a single asset class. As Hyperliquid founder Jeff said, "Hyperliquid is not a crypto company."

HIP-4 continues this concept and direction. As I mentioned earlier, this update includes two parts (prediction markets and options), and these two types of tools have already been widely used outside the crypto world, both for ordinary users and professional traders.

If Hyperliquid wants to continue growing, it cannot rely solely on a limited pool of crypto users; it needs to expand and bring new users into the crypto world without them even realizing it.

This has always been seen as a kind of ultimate form ------ hiding the "crypto" layer, and now it seems to be gradually becoming a reality. Those who trade precious metals and stocks on weekends will eventually come into contact with crypto tokens; those who come to trade perpetuals will discover options, and vice versa.

In addition to the mature users already on Hyperliquid, HIP-3 has also brought in two new types of users: one from centralized exchanges and the other from traditional traders.

HIP-4 has the opportunity to attract both options traders from crypto exchanges and traditional exchanges while allowing existing users to build more customized trading strategies using options and prediction markets.

Those new traders coming from HIP-3 will also gain new tools ------ namely options ------ allowing them to trade non-crypto assets on a permissionless exchange.

Deployers like trade.xyz from HIP-3 can now achieve trading volumes comparable to or even higher than Lighter, even with higher fees. Traders are willing to pay for features such as deep liquidity markets, atomic settlement mechanisms, and automatic allocation of funding rates.

That said, prediction markets may seem like a business that doesn't quite fit Hyperliquid. How can a Perp DEX platform compete with platforms like Polymarket or Kalshi that target completely different audiences?

I believe it can compete with them and also become very close allies.

Why Does Perp DEX Need Prediction Markets?

When HIP-4 was first proposed and widely regarded as a way to bring prediction markets to Hyperliquid, I pondered some questions: Is this (prediction markets) really suitable for this platform?

Hyperliquid has focused on perpetual contracts, while the operation of prediction markets is actually closer to options ------ both have the same return structure, thus fundamentally belonging to completely different tools. Hyperliquid has always been a platform leaning towards "hardcore trading"; while Polymarket and Kalshi can also be seen as trading venues, their user experience is not as technical and is more user-friendly for ordinary users.

Overall, I certainly agree that expanding to more trading tools is reasonable; however, at that time, I did not understand how Hyperliquid would compete with Polymarket or whether there was a real competitive relationship between them.

Without delving too deeply into technical details, Polymarket's DeFi composability is actually quite limited, and its user experience is also fragmented from other platforms. Kalshi is a regulated, centralized platform and lacks any on-chain integration capabilities. Each of them is certainly useful as independent prediction platforms, but integrating them into a larger strategic system is nearly impossible.

The "agentic payments" integrated with Hyperliquid, serving various trading strategies, are likely to gradually develop into an independent vertical track.

"Outcome contracts" (prediction markets) can be combined with various trading tools, such as providing liquidity, trading perpetuals, spot trading, etc. You can even open a short position on ETH perpetuals while betting on the prediction market "if ETH price rises above a certain level, you will receive a payout."

This is just a very simple example, but it is enough to help you understand the composability brought by HIP-4 within the same framework. This is nearly impossible to replicate on Kalshi or Polymarket because on Hyperliquid, these two positions can be placed in the same margin account and automatically hedge each other. Traditional prediction market platforms are isolated from each other, but Hyperliquid is not.

However, even with such a clear advantage, I still do not believe Hyperliquid can defeat Polymarket or Kalshi solely based on this point, and the reason is simple ------ user experience (UX).

Polymarket serves a large number of users outside the crypto industry, while the vast majority of Kalshi's users may have never even encountered cryptocurrency. I do not believe ordinary users will come to Hyperliquid to accept a more trading-terminal-like experience just to buy a "yes" share on "Will Trump say something outrageous?" The key is that Hyperliquid is not competing with them in that direction.

The native UX of Hyperliquid for prediction markets will likely only be used for prediction markets centered around themes such as economics, prices, equity valuation, and geopolitical events related to precious metals. Of course, there are more relevant scenarios, but these will be the core ones because they can directly influence the direction of trading strategies to some extent.

As for other types of markets, there will be different UIs to accommodate them, targeting different content and making them more suitable for ordinary users. With the help of builder codes (independent applications running natively on Hyperliquid), the imagination in this layer is almost limitless.

Yes, Hyperliquid itself may not be able to win against Polymarket in direct competition, but independent protocols built on Hyperliquid at least have the opportunity to compete with it or pose a substantial challenge. Moreover, even Kalshi's crypto head, John Wang, was one of the contributors to the initial proposal of HIP-4. Therefore, it would not be surprising if Kalshi's prediction markets settle directly on Hyperliquid, or even Polymarket does the same; they can leverage Hyperliquid's existing user base to create a smoother and more seamless overall experience.

In addition to composability, HIP-4 also brings mechanisms such as low-latency execution and cancellation priority, allowing for real-time adjustments to liquidity. In some highly asymmetric events, if prediction markets cannot quickly cancel orders and rapidly reprice, they can easily be penetrated by toxic order flow.

This is precisely why prediction markets are naturally suited to be placed on Hyperliquid ------ it inherits the unified execution standards of the entire ecosystem. Many micro-moments require the underlying technology to adapt to high-frequency trading and approach real-time settlement. Winners need to be paid quickly, and results need to be settled quickly.

However, prediction markets are only part of HIP-4. The other part of this update is options trading.

The significance of HIP-4 in terms of options has been almost completely overshadowed by the current narrative surrounding prediction markets, while options trading is likely to bring hundreds of thousands of new traders to Hyperliquid. Before explaining this, we must first answer a question ------ why would a Perp DEX need options, a completely different trading tool?

Why Does Perp DEX Need Options?

It does not need to! The answer is actually hidden in the name: perp stands for perpetual futures, which is exactly the opposite tool of options. It's like your local candy store suddenly starting to sell steaks; both are food and can be eaten, but they are completely different things.

As I mentioned at the beginning, Hyperliquid has already won the local candy store battle, so now it is time to aim for something new. To continue growing, Hyperliquid must capture new markets. This expansion will start with several types of options products ------ such as binary options and bounded options ------ but it will not cover all types of options in one go.

As some readers may know, options trading is a very popular tool in the world outside of crypto, but it is not well-received in the crypto world (at least compared to options trading in the stock market). Why? Because perpetual contracts are much simpler.

When trading perpetual contracts, you only need to judge one variable ------ direction. You know the chart will keep moving to the right, so the only thing left to determine is whether it will go up or down. Its profit and loss curve is linear, predictable, and the logic is very simple.

In addition to being easy to understand, perpetual contracts also fit very well with the natural attributes of the crypto market. The crypto market is highly volatile, so you can make a lot of money in a short time, but you can also lose a lot in a short time. The larger the leverage, the more the risks and returns are amplified. Many people say crypto is like a casino, and this "casino feel" can be partially reflected in perpetual contract trading ------ often, leverage above 5 times seems very close to gambling addiction.

Moreover, a perpetual contract corresponds to only one contract. If you trade HYPE-PERP, then both buyers and sellers are on the same order book ------ deep liquidity, low slippage, orders continuously executed, and prices move accordingly. Once again, this makes it easier to trade.

Options are not like this at all. You not only have to judge the price direction, but also the price sensitivity, time value decay, and sensitivity to changes in implied volatility. Many times, even if you are right about the direction, you can still lose money on options: it could be because the market moves too slowly, or too quickly, or simply because implied volatility (IV) has been compressed.

An asset often corresponds to hundreds or thousands of options contracts. Each combination of strike price and expiration date forms an independent order book, which leads to liquidity fragmentation ------ and this is precisely the problem the crypto industry has been trying to solve for years. A wide bid-ask spread feels like a direct tax burden for traders; often, as soon as you enter the market, you are already in a clearly losing position relative to fair value.

Crypto traders are already engaged in a continuous psychological battle in this high-volatility, emotion-driven market, watching unrealized losses, repeatedly questioning their entry points, and constantly being swept up by FOMO. If you add a countdown mechanism that continuously erodes position value, then even if you are "nominally correct" in your directional judgment, it will still become very difficult to hold that position. A leveraged long position in perpetual contracts can theoretically be held indefinitely (not considering funding fees), but this does not exist in options.

In a sense, perpetual contracts solve a problem that does not exist in traditional finance. In traditional markets, the closest thing to perpetual contracts is actually continuously rolled quarterly futures ------ you hold a futures contract and roll the position to the next expiration cycle before it expires. This mechanism works well when market volatility is relatively mild; but in our industry, volatility is never "mild."

Hyperliquid is no longer just a decentralized crypto exchange; it is more like a decentralized exchange with multiple tradable assets. Other assets are not the same as crypto assets; they have different operational logics and require different trading tools.

Options Have Always Been There

One of the key reasons Hyperliquid has been able to win the Perp DEX battle is UX ------ on this platform, you do not need to sign every order, every transaction, or every operation. Frequent signing creates a lot of friction, while most teams in the industry optimize for "blockchain consistency" rather than user experience.

If the entire industry struggles to create a truly sustainable, permissionless perpetual contract trading product, it is not surprising that it has not been able to create a sufficiently excellent permissionless options trading protocol. It is too complex, complex enough that people find it hard to truly envision it. However, I am slightly inaccurate here because over the past few years, everyone has been trading options in a sense ------ options are prediction markets (more accurately, binary options).

Because structurally, binary options and prediction markets are actually completely consistent: if an event is ultimately deemed true, the prediction market pays $1; if it does not occur, it pays $0. If at expiration the price of the underlying asset is above a certain strike price, the binary option pays $1; if it is not above, it pays $0.

The two are essentially the same: the return structure is the same, and the pricing mechanism is also the same. The only difference lies in the expression and applicable scenarios (after all, you cannot buy an option on an underlying called "Will Trump say a certain word in his next speech?").

Polymarket did something very genius; it allowed people to trade options without them even realizing they were trading options. Prediction markets thus achieved something every crypto practitioner has been talking about ------ allowing people to use cryptocurrency without realizing they are using cryptocurrency. This is actually a direct solution to this problem.

HIP-3 attracted a large number of non-crypto trading users. In fact, most of the trading volume on Hyperliquid today comes from precious metals, oil, and the S&P 500, rather than crypto assets. Since the platform has already acquired a new user base, it is obviously very reasonable to introduce more tools they are already familiar with.

Historically, one important reason stock options became popular was that it was very difficult to short stocks. You need to borrow stocks, pay borrowing fees, have a broker lend them to you, and bear the risk of being forced to cover if the demand for borrowed stocks exceeds supply. Rather than going through this entire complex process, it is much easier to just buy a put option.

Hyperliquid Has No Competitors

In the past, no protocol was excellent enough to truly bring sustainable options trading into the crypto world. Hegic, Ribbon Finance, Lyra, etc., have not succeeded; Aevo was quite successful and even considered a strong competitor to Hyperliquid in 2024, but their order books still remain off-chain. As for the reasons, I do not intend to elaborate here; you are all quite familiar with liquidity fragmentation, latency issues, LP adverse selection, etc.

HIP-4 introduces binary options and bounded options, and these two types of products are applicable to almost all mainstream asset types: forex, stocks, indices, commodities, and the crypto assets we are familiar with.

Crypto traders will continue to trade perpetual contracts while gaining a new tool with a high-risk, high-reward ratio. This can lead to more trading strategies and provide new ways to hedge positions.

Users trading commodities on Hyperliquid will receive a tool they are already familiar with from other exchanges, only now it is permissionless and open 24/7.

With the introduction of products like S&P 500 perpetuals, more markets will be deployed, more traders will be attracted, and more liquidity will flow in, leading to continued growth in trading volume.

Hyperliquid has the opportunity to continue attracting crypto traders from Binance, Bybit, OKX, as well as commodity traders from traditional exchanges, forming a complete dominance in this side of the options market.

It is already clear why crypto traders would choose Hyperliquid, and this migration will only become more frequent in the future; but the question is, why would those non-crypto options traders shift from NASDAQ or NYSE to Hyperliquid?

NASDAQ is still considering opening 24/5 trading hours, but Hyperliquid is already 24/7. This is the natural attribute of a permissionless system: lower fees, instant settlement, no position size limits, lower margin costs, higher capital efficiency, non-custodial, and no geographical restrictions.

Hyperliquid does things differently from all other platforms. This platform has no investors and is not influenced by any external pressures; Jeff can freely decide what the company wants to do. In this regard, Hyperliquid is very much like Telegram ------ it does not need to spend much on marketing; the key lies in the belief itself. If the product is good enough, people will eventually come to use it.

People have countless reasons to migrate from traditional exchanges to Hyperliquid for trading the same assets, and they will also gain the ability to build new trading strategies because of its truly excellent composability.

I predict that within a year, the trading volume of Hyperliquid's binary options and bounded options will exceed that of any centralized exchange's options trading volume.

What About Standard Options?

There is an important clarification that needs to be made: HIP-4 does not support "vanilla options" and "perpetual options" (note that perpetual options are not perps; perpetual futures are perps).

There are neither calls nor puts here. The profit above the strike price for standard options is unlimited ------ the higher the price, the greater the profit. However, the current design of HIP-4 is exactly the opposite: its profit ceiling is capped at 1 USDH.

The exclusion of standard options in HIP-4 means three things:

• As the first introduced category of options, standard options are much more complex than binary options and bounded options.
• Prediction markets are the first attempt to integrate some form of native options into the margin engine of a Perp DEX (of course, this is not the first attempt to bring permissionless options into the crypto world).
• In terms of complexity, binary options are closer to perpetual contracts than standard options.

I am 99% confident that the next HIP-5 or HIP-6 update will introduce standard options because this is the next logical step on the complexity spectrum. The work of Hyperliquid Labs can be roughly summarized into two things: introducing new markets and introducing new trading tools.

Currently, Hyperliquid does not have enough markets to support standard options trading; it is essentially still leaning towards an equity-like tool.

Hyperliquid currently does not have enough stock markets to support the introduction of standard options. In other words, "there are people who have this demand, but not enough." To truly unleash the potential of standard options, more markets are needed, and simpler options products ------ namely binary options and bounded options ------ need to be validated first; otherwise, introducing vanilla options directly now would not make much sense.

However, I believe there is another reason why HIP-4 did not introduce standard options ------ they are not the most suitable tools for crypto assets.

Although the trading volume of commodities has now surpassed that of crypto, Hyperliquid is still primarily a crypto-first exchange, and in most people's perception, it is still primarily associated with the crypto market. HIP-4 targets two audiences: crypto traders and traditional traders, and binary options happen to be applicable to and indeed needed by both groups ------ whether they are trading crypto, commodities, or stocks.

It provides new tools for both groups. You could certainly argue that standard options are clearly more suitable for trading stocks, indices, and commodities, but crypto assets do not fully fit this logic ------ they do not have a natural event calendar (like dividends, earnings reports, etc.), and the standard options market can quickly fall into liquidity shortages because each combination of strike price and expiration date corresponds to an independent order book.

Although Hyperliquid is rapidly moving towards this goal, it has not yet truly become a global trading venue for non-crypto assets. Once more stocks, indices, and commodities begin trading on Hyperliquid, introducing standard options will be a logical step. This action can be taken now, but the timing is not reasonable.

The reason prediction markets may succeed where standard options have struggled to break through is precisely because they strip away all the complexities of options while still retaining the non-linear, capped downside risk return structure that perpetual contracts cannot provide.

Hyperliquid has the opportunity to capture the entire cryptocurrency options market because, over the past several years, no protocol has been excellent enough to truly achieve this.

Hyperliquid also has the opportunity to capture a significant portion of the binary options and bounded options market in stocks, indices, and commodities because, in terms of permissionlessness and cost, no mainstream exchange's technology can compare to Hyperliquid.

Market Sentiment is Terrible

Now, almost everyone agrees, to some extent, that the market is roughly at the bottom.

Bitcoin has broken below its previous historical high set in 2021 ------ this situation has only occurred once before, corresponding to the previous market bottom at the end of 2022; almost every day, protocols are shutting down, VCs are unusually silent, and they are extremely disappointed with their investments made between 2024 and 2025 ------ that was a phase where even scam projects could easily raise large sums of money; Trump even launched his own memecoin… market sentiment could hardly be worse (unless another large CEX directly collapses).

But bear markets are actually the best time for VCs to place bets. Indeed, the number of builders in the market has decreased, but those who remain are almost all genuinely committed to doing work, and they have more time to repeatedly refine ideas, continuously adjust directions, and complete multiple iterations before competition becomes fully heated and attention grabbing spirals out of control.

For builders, this is a window period for laying the foundation; for VCs, it is also a stage where they can finally think calmly rather than being driven by FOMO. Although Hyperliquid is not a new product in this cycle ------ it was launched in the first quarter of 2023 ------ because it laid a solid foundation between 2022 and 2023, it now has more opportunities. With HIP-4, more new opportunities worth betting on will emerge in the market.

Especially with the FIFA World Cup taking place in the United States this summer, a large number of new users will be further brought into prediction markets; for events like this, fast settlement will become the core demand.

Crypto is Dead

As Dougie DeLuca pointed out in one of his articles, the so-called "crypto-native" industry is heading towards extinction, and the boundary between "crypto" and "everything else" is gradually dissolving.

Protocols are finally beginning to realize that relying solely on the same batch of on-chain users cannot truly lead a project to success ------ although this has been clear enough from the beginning.

True success is allowing people outside the crypto circle to use crypto products without realizing they are using crypto products. This takes time and is one of the reasons why the Hyperliquid Policy Center (HPC) was established. It is inherently difficult to get millions of people to directly use on-chain products; but if these on-chain products are embedded into systems that millions of people are already using ------ namely the traditional financial system ------ then it becomes much easier.

The builder code model of HIP-4 means that any company can deploy on Hyperliquid, and they can each bring their existing user bases while pooling liquidity into the same underlying engine.

Winners will build products that are truly oriented towards the real world, embedding cryptocurrency as underlying implementation details; losers will continue to cling to the old narrative of "crypto for the sake of crypto" and expect the whole world to adapt to them.