Analyzing HIP-4: Hyperliquid and Kalshi Join Forces to Reshape the on-chain prediction market

Recently, Hyperliquid has been very active, first allowing anyone to create perpetual contract markets with HIP-3, then sparking heated discussions with the stablecoin bidding, and now, they have put forward a major 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 simple 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 disrupt the landscape of prediction markets.

Hyperliquid partners with Kalshi

Hyperliquid has already become the absolute king in the on-chain perpetual contract field, capturing nearly 80% of the market share. However, for any successful project, there is always a need to seek new growth points. HIP-4 is the key step they have taken.

One of the most interesting points 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 prominently hired Crypto KOL John Wang as its Head of Crypto. The author lineup of HIP-4, which spans decentralized investment institutions and centralized prediction market practitioners, is quite intriguing, as it is rare for traditional competitors to collaboratively draft proposals. As an important player in the compliant prediction market in the United States, Kalshi's participation in drafting HIP-4 suggests that the proposal is not intended to "disrupt" existing players in the prediction market space, but rather reflects a mindset of collaboration or differentiated coexistence.

• The advantages of Hyperliquid lie in its world-class on-chain trading technology and a large user base. Its high-performance on-chain order book, processing capabilities of up to 100,000 TPS, and sub-second transaction finality also provide the necessary technical foundation for a qualified on-chain prediction market. Hyperliquid already has a large and active user community, most of whom are experienced traders and speculators, which are also the target users of prediction markets. If Hyperliquid enters the "prediction market" sector, it could expand boundaries, enrich narratives, and provide new imaginative space for capital markets. The cryptocurrency field has never lacked funding; what is missing is a good story. The perpetual DEX story has mostly been told, and if it can successfully enter the prediction market sector, it could add a whole new variable to support HYPE valuation.
• Kalshi's Core Advantages are precisely the opposite of Hyperliquid: it has extensive experience in creating compliant and attractive markets, successfully addressing regulatory challenges in the United States (even winning a lawsuit against the CFTC) and establishing strong institutional credibility. Its shortcoming lies in the lack of a decentralized, crypto-native technological foundation, as well as 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 a large number of low-quality markets.

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

You may ask, since HIP-3 already allows users to create perpetual contracts "permissionlessly", why can't it be used directly to create prediction markets? The answer is: technically it doesn't work.

Standard perpetual contract's "incompatibility"

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

1. Rely 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 themes of prediction markets, such as "Can Team A win the match?", have results that occur instantaneously, with probabilities jumping directly from one value to 0 or 1, meaning there is fundamentally no continuous price to track, therefore there is no need for a continuous oracle price feed.
2. Price movements have an upper limit: To prevent drastic market fluctuations, Hyperliquid has set a 1% limit on single price movements. This safety design has become a fatal flaw in the prediction market. The HIP-4 proposal provides a vivid example: at the start of a game, one team's probability of winning is 50%, and the price is 0.5. At the moment the game ends, the price should immediately change to 1 or 0. However, under the single movement limit of 1%, it requires approximately 50 adjustments to change the price from 0.5 to 1.0, taking nearly an hour. During this time, anyone who knows the result in advance can engage in risk-free arbitrage, completely undermining the fairness of the market.

Customizing the 'Event Perpetual Contract'

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

• Abandoning Continuous Oracles and Funding Rates: This is the most fundamental change. The "Event Perpetual Contract" completely removes the reliance on continuous oracle pricing and funding rate mechanisms, as both are completely unnecessary for the prediction market. Before the event outcome is revealed, the price of the contract is entirely determined by the trading actions of market buyers and sellers, fluctuating freely within a preset range (e.g., 0.001 to 0.999). Only at the end of the event will a single, authoritative "Resolution Oracle" publish the final result (0 or 1) for market settlement.
• 1x Isolated Margin: Unlike the high-leverage perpetual contracts, the “event perpetual contract” disables leverage (only supports 1x) and each market's margin is independent. This is clearly for risk control purposes, as it greatly reduces users' liquidation risk and strictly limits 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 the prediction market with other markets on Hyperliquid.
• Support for Slot Reuse: HIP-4 inherits from HIP-3, requiring a pledge of 1 million HYPE to create a market. However, the prediction market differs from the perpetual market; the perpetual market can exist long-term, while the prediction market loses its significance after the event results are announced. Pledging such a large amount of tokens can only establish a one-time market, which is clearly an unprofitable deal. To improve the efficiency of capital and platform resource utilization, HIP-4's infrastructure supports market "recycling". After an event market is settled, the on-chain resources (slots) it occupied can be immediately released and used to deploy a new event market without needing to re-participate in the deployment auction.

Comparative Analysis: HIP-4 vs. Polymarket

Entering the prediction market, Hyperliquid inevitably has to compete with the current leader Polymarket. However, Hyperliquid has chosen not to imitate, but instead has taken a distinctly different differentiated path.

Elite Curation vs. Laissez-faire

This is the core difference between the two.

• Hyperliquid's "Builder" Mode: Want to create a market? You can, but the barrier is extremely high—you must stake 1 million HYPE tokens (currently worth over $57 million). This high economic threshold acts as a filter, ensuring that only well-funded and serious professional teams are qualified to create markets. They have a strong incentive to launch those high-quality markets with potential that can attract liquidity to earn fee returns. Due to the high entry and trading costs, the prediction markets on Hyperliquid are expected to focus more on "financial nature" topics, such as macroeconomic events (interest rate decisions, inflation data), cryptocurrency industry events (major upgrades, project launches, regulatory dynamics), and major sports 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 markets on Polymarket. This makes the topics on the platform diverse, always keeping up with current events and full of vitality. Polymarket, with its zero fees and UGC content, is a paradise for retail investors and enthusiasts. Various imaginative bets, news hot topics, gossip, and interesting life anecdotes will appear on Polymarket, attracting users who are not very knowledgeable about finance but are keen on entertainment and social discussions. They often place small bets and value participation and topicality more, being sensitive to fees, which Polymarket perfectly meets. However, the downside is that it has also generated many vague and repetitive low-quality markets, diluting liquidity.

Value Capture by Protocol 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 a flawless network effect, while deferring the future profit model to a later resolution. 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 the transaction fees. The HYPE token here is not just a governance tool, but more like a "business operating license," its value is directly supported.

In simple terms, Polymarket follows the typical Web2 growth strategy - burning money to gain market share, while Hyperliquid has been committed to building a crypto-native, sustainable economy since day one.

Unleash Potential: Advanced Gameplay of 1+1+1 > 3

By placing various financial instruments under the same account and margin system, the operational complexity and capital friction for traders are greatly reduced. Traders can seamlessly move funds and risk exposure between different products, allowing them to build more refined and efficient portfolios. This composability is a core advantage of Hyperliquid compared to specialized prediction market platforms.

Strategy 1: Hedge Event-Driven Volatility Risk

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

• Scenario: A trader holds a long position in a perpetual contract for XYZ tokens worth $100,000. He anticipates that the XYZ project team will release significant positive news at the upcoming industry conference. However, if the news released at that time does not meet expectations, the token price may face a significant drop, which constitutes a substantial "event risk".
• Strategies on Hyperliquid: The trader can simultaneously buy shares of the "NO" contract in the "event perpetual contract" market, which is themed: "Will XYZ announce a partnership with MegaCorp before today's market close?" This "NO" contract functions like insurance against that specific positive event.

• Result One (Positive Outcome Realized): XYZ announces a partnership, leading to a significant surge in its perpetual contract price. Traders' profits on the perpetual contracts greatly exceed their losses on the "no" contracts in the prediction market (the entire principal invested).
• Result Two (Positive Expectations Fail): XYZ did not announce a partnership, and the perpetual contract price plummeted due to disappointment. At this point, the 'no' contract on the prediction market will settle at $1 per share, and the profit from this can effectively offset some of the losses from the perpetual contract position.

• Advantages: Compared to traditional methods of hedging, such as shorting correlated assets, this approach is more direct, precise, and capital efficient, as it directly hedges the core events that drive price fluctuations.

Strategy 2: Basis Trading between Perpetual Contracts and Prediction Markets

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

• Scenario: The theme of a perpetual contract market for an event is: "Will the ETH/BTC exchange rate be higher than 0.06 by the end of the month?", and the current price of the "Yes" (YES) contract is $0.70, which implies a 70% probability of occurrence as implied by the market. Meanwhile, the ETH/USD and BTC/USD perpetual contract markets on the platform are also trading normally.

• Strategy on Hyperliquid: A quantitative analyst determines through his model that the real probability of the ETH/BTC exchange rate being above 0.06 at the end of the month is only 60%, and he believes that the market pricing of this event (70%) is too high. He can construct a relative value trade to capture this 10% "probability spread":

  1. Short Implied Probability: Sell the "Yes" contract on the prediction market (price is $0.70).
  2. Hedging Market Risk: In order to eliminate the impact of the volatility of the ETH/BTC exchange rate itself, he needs to construct a delta-neutral position. He can go long on the perpetual contract market with the same nominal value of ETH and short the same nominal value of BTC, thus synthesizing a long exposure in ETH/BTC to hedge against the short exposure generated from selling the "yes" contract in the prediction market.

• Profit Source: Through the above operations, the trader maintains a neutral position on the actual exchange rate trend of ETH/BTC, but he short sells the market's "event premium" or "implied probability". As long as the price of the prediction market eventually converges towards what he considers a more reasonable 60% probability, or the event ultimately does not occur (price goes to zero), he can profit from it. The essence of this strategy is trading the difference between "views" and "market consensus".

sings against HIP-4

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

Fee Paradox

As mentioned earlier, Polymarket currently does not charge any fees. This has previously been explained as Polymarket attracting users through a "free" strategy, but in reality, there are deeper considerations behind this. This is because in a prediction market, the price of an option theoretically represents the market's perception of the probability that this option will come true in the end. Introducing transaction fees introduces trading friction, causing the option price to deviate from the market's predicted probability. One of the main functions of a prediction market is to reflect the market's predictions about the future through intuitive prices, and after introducing transaction fees, this function is greatly weakened.

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

However, the prediction market in HIP-4 is obtained by market builders through staking 1 million HYPE (currently valued at approximately 58 million USD) for the "privileged operating rights", the purpose of which is to earn 50% of the transaction fee revenue. This will inevitably affect user trading behavior, causing the prices in HIP-4 to deviate from the predicted probabilities in the market.

For example, due to transaction costs, the sum of Yes and No in the Hyperliquid market may be less than $1 (buying one Yes and one No requires paying double fees). Although the fees are small, a significant trading dead zone may appear when liquidity is insufficient. For instance, if the true probability in a market is 50%, the prices of YES and No options on Polymarket align with 0.50, but on Hyperliquid, it might be Yes=0.48 and No=0.49, summing up to only 0.97. The 0.03 difference implies a 3% cut for the bookmaker. This is detrimental to the accuracy of price discovery and harms user experience.

Add constraints to the price

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

The cornerstone of Polymarket's implementation of this mechanism is through an arbitrage system:

• First, it is stipulated 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 to redeem 1 USDC.
• For example, when the market price of YES token is 0.70 and NO token is 0.40, the arbitrageur deposits 1 USDC into the contract, mints 1 share of YES and 1 share of NO, and then immediately sells them on the order book at prices of 0.7 and 0.4, respectively, realizing a risk-free profit of 0.1 USDC. A large number of such actions will increase selling pressure, driving the prices of YES and NO down simultaneously until their total returns to 1 USDC.
• When the market price of YES token is 0.60 and NO token is 0.3, arbitrageurs will first buy 1 share of YES and 1 share of NO at the prices of 0.6 and 0.3 respectively on the order book, and then redeem them through the contract for 1 USDC, achieving a risk-free profit of 0.1 USDC. A large number of such actions will drive the prices of the two shares to rise synchronously until the total returns to 1 USDC.

However, in the proposal for HIP-4, there is no similar content, and we cannot know how HIP-4 will constrain the prices of YES token and NO token. Moreover, the prediction market in HIP-4 is likely to charge fees, which adds many uncertainties to the extent to which the option prices in HIP-4 can reflect market expectations.

Current mechanism limits collaborative potential

Some readers may be excited about the author's beautiful vision of "Spot, Futures, Prediction: 1+1+1>3" described in the previous chapter. Unfortunately, the author has to pour a bucket of cold water here: under the current Hyperliquid "margin" system, although Hyperliquid supports Cross-Margin within the perpetual market, the three major product lines of spot, futures, and future predictions are still isolated from each other, and the aforementioned synergy advantage of "1+1+1>3" cannot be realized at all.

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

1. For example, if you profit 1000 USDC in the prediction market, this money will not automatically increase the margin of your contract account unless you actively transfer it.
2. Similarly, if the contract account's margin is insufficient for liquidation, even if the prediction market account has a balance, it cannot be automatically used to replenish.
3. Currently, Hyperliquid does not support using non-USDC assets as collateral (the so-called "coin-based" model has not yet been launched). The spot coins held by users cannot be directly used to open or close contracts or prediction positions and need to be exchanged for USDC first.

Such an isolation design can be understood in the early stage for the sake of robustness, but it also limits the power of cross-market synergy strategies. If users want to hedge contract positions using the prediction market, they must constantly manually adjust the funds in the two accounts, which is cumbersome and has delays. It can be seen that there are still many basic functions within Hyperliquid that need to be improved. Before fully realizing the integration of the three major product lines, the synergistic effects brought by the prediction market business will be discounted.

low profit, few people, many tasks

• Thin profits: Assuming that after the launch of HIP-4, Hyperliquid can initially capture only about 10% of Polymarket's trading volume (considering that Polymarket currently has a large volume and first-mover advantage). Polymarket's trading volume in August 2025 is 664 million dollars, so 10% is approximately 66 million dollars/month in transaction volume. Based on the common 0.1% fee for DEX, the monthly revenue would be 66,000 dollars, of which Hyperliquid itself might get half (the other half goes to builders), about 33,000 dollars. Compared to Hyperliquid's overall profitability, this is just a drop in the bucket. It should be noted that Hyperliquid's profitability in 2025 was once claimed to exceed that of NASDAQ, with monthly revenue conservatively estimated in the millions or even tens of millions of dollars. If the prediction market can only increase revenue by a few tens of thousands of dollars each month, it will have almost no direct uplift effect on the value of HYPE tokens or the project's finances.
• Few people, many tasks: Hyperliquid's push for the implementation of 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 members (including about ten developers). Recently, they are also advancing the specific implementation of HIP-3, supporting the integration of the native stablecoin USDH, and upgrading platform performance, etc. It can be said that the development schedule is quite tight. When HIP-4 is actually coded, many underlying issues need to be resolved, and this work cannot be done overnight.

In summary, even if HIP-4 is approved, its actual launch time is likely to be after 2026, falling under mid to long-term planning. For Kalshi, which is eager to expand onto the chain, this is like "distant water cannot quench present thirst"; in the short term, they still cannot meet the demand for decentralized markets through HIP-4. Correspondingly, Polymarket's position remains solid in the foreseeable future, and it will not feel a direct threat from Hyperliquid at least until next year. By the time HIP-4's prediction market products mature, Polymarket may have further expanded its leading advantage or launched its own token to form a new moat.

Conclusion: A carefully planned game.

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

• Kalshi hopes to leverage Hyperliquid's mature on-chain architecture to quickly expand its business to the blockchain, reaching global users without permission. In August 2025, Kalshi prominently hired Crypto KOL "John Wang" as its Head of Crypto, marking the completion of the first step of its "ideological" phase. This time, the HIP-4 initiative that John Wang is involved in can be seen as the first step Kalshi takes towards a more "pragmatic" approach on the blockchain.
• Hyperliquid aims to leverage its technological advantages in high-performance trading infrastructure, along with a large user base, to enter the prediction market, a completely new vertical, bringing a new narrative to HYPE. By collaborating with regulated entities like Kalshi, which provides compliance and credibility support, HIP-4 focuses its market positioning on institutional and high-net-worth investors, with market themes primarily centered on “finance” and “policy”, distinguishing itself from its main competitor Polymarket, which pursues a market positioning of permissionless, bottom-up, and catering to entertainment for the masses.

The success or failure of this game will depend on whether Hyperliquid can leverage its technological advantages and high-quality experience to overcome the inherent challenges of fragmented liquidity 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 transition from single applications to platformization, and how traditional financial institutions can integrate with the decentralized world. The market will be the final arbiter of this experiment.

• This article is based on publicly available information and does not constitute investment advice. Investing in cryptocurrencies carries significant risks, please make careful decisions, DYOR.*
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