Author: Zuo Ye Web3
Using Outcomes to Ignite
History doesn’t repeat itself, but it does rhyme.
In 2022, mainstream media wrote extensively about how high leverage is harmful to both oneself and others. The SEC launched a regulatory campaign against CEXs such as Binance and FTX. The stories in these articles are true. Contract trading is indeed a case of one success at the expense of many. However, the US does not want to eliminate leverage, but rather to participate in the profit sharing.
In 2026, the WSJ and Bloomberg once again targeted "prediction markets." Polymarket's collective wisdom did not seem to work, with 3% of traders guessing most of the answers correctly, and 0.1% of accounts taking 67% of the profits.
It's like the boy who cried wolf again. Coinbase has written to legitimize prediction markets, and Hyperliquid has officially launched HIP-4 on the Outcome Market. If we all knew that legalization would come, then the question becomes: who can predict the winner?
Yes: The "events" represented by Polymarket can drive self-fulfilling prophecies;
No: Hyperliquid, representing "market making," transforms predictions into financial engineering.
Truth has no market
“
The success of predicting market narratives is built on a rebellion against the democratic political ideals represented by polls.
Since Trump's first election in 2016, the entire Western world has needed to answer why he was able to penetrate so many barriers and reach the heart of the Western secular world, becoming a pope like a heretic.
Theorists hurled insults at "populist politics," while quantitative analysts presented data from "prediction markets." In 2016, Iowa Electronic Markets (IEM) performed best, predicting Trump's chances of winning by about 28%, which was higher than other mainstream platforms.
Problems still exist, but some insightful individuals have seen opportunities and predicted that the market has a chance to overtake competitors, and their accuracy can be further improved.
In 2020, FTX officially launched the Trump vs. Biden binary options and successfully predicted the market, reaching a record high of $8 million in daily trading volume. Simultaneously, Jeff, the founder of Polymarket and Hyperliquid, also attempted to predict the market during this period.
The 2024 presidential election solidified prediction markets as the next super product after CEX and DeFi. Even though in terms of daily data, sports betting > politics > crypto > long tail (culture, entertainment), predicting presidential candidates has a real entertainment value and public opinion has a huge leverage of influence.
Just as presidents can't be elected every day, prediction markets must find a way to operate in everyday scenarios, making the desire for liquidity an extreme urge for all platforms. The most typical example is the early Polymarket, which didn't charge any fees, explicitly refused to gamble against users, and did its utmost to maintain the platform's fairness.
To this day, theoretically speaking, it cannot be said that Polymarket is a scam, but in reality, as mentioned earlier, only 3% of experts can guess the answer correctly. In terms of trading fairness, Polymarket has not only started charging transaction fees, but also constantly shifts standards and values among bots, market makers, and ordinary retail investors.
This is the double lock for predicting the market:
The first lock: To achieve liquidity, bots and market makers must be retained; however, once retained, "collective wisdom" effectively becomes the wisdom of 3% of experts plus bots, with retail investors merely serving as liquidity providers, causing the narrative to collapse from within. The second lock: If bots and market makers are expelled to "restore collective wisdom," liquidity will immediately collapse. Worse still, retail investors trading alone will not approach the truth; instead, it will cause market failure. The idea that "collective wisdom can approach the truth" is itself disproven. Bots are both the oxygen for predicting the market and the poison for its narrative.
While Polymarket doesn't act as a market maker, its bot+ experts have become a new form of market maker, effectively pumping liquidity from the entire market for their own profits. Without taking a cut, the protocol wouldn't generate revenue, and the $POLY price would be unsustainable.
Liquidity is a demon; it requires souls to exchange for it.
However, from another perspective, it is precisely because of this deadlock that its liquidity structure is anchored—where the experts, bots, and retail investors are, the capital size, behavior patterns, and entry and exit rhythms of each role are repeatedly verified by the market. This is a pool with clear profiles and stable participants; internally it's a paradox, but externally it's a ready-made sample. Since Polymarket couldn't solve its internal problems, several alternative routes naturally emerged in the industry. Kalshi took the "rebranding" approach—focusing on sports betting. The results were objective and clean, eliminating the need to debate "whether collective wisdom can approach the truth," because there was no "truth" to approach, only the score. With the support of compliance licenses, Kalshi's valuation of $22 billion in the capital market steadily surpassed Polymarket's $15 billion, not because of more accurate predictions, but because its problems were less severe.
Image caption: Comparison of PL and Kalshi OI
Image source: @notnotstorm
Paradigm takes a "product category shift" approach—besides betting on Kalshi, it also supports long-tail products such as attention markets, decision markets, and opportunity markets, transforming the 1/0 step into a continuous "fat-tailed" distribution, thus avoiding the most fatal mechanism problem of prediction markets. Hyperliquid, on the other hand, takes a "framework shift" approach—it doesn't intend to prove whether collective intelligence exists. It downgrades the prediction market to a component of derivatives hedging, using the liquidity of this pool to create a new market.
Image caption: Prediction Market Classification
Image source: @zuoyeweb3
Engineering of fluidity
"Human uniqueness may lie in the ability to identify which direction is worth devoting one's life to even without feedback signals."
HIP-1 opened the spot market, and HIP-2 opened "non-manual" instant liquidity. HyperCore provides initial order placement capabilities on-chain, solving the "cold start" problem from a technical perspective. In other words, from Hyperliquid's perspective, liquidity is an engineering problem, not a problem of trading willingness.
Of course, Hyperliquid's spot market has not been a success, and HIP-2 is not a third-party volume-boosting bot, but the attitude it conveys is very intriguing: Hyperliquid welcomes any bot that increases liquidity.
Image caption: HIP-3 liquidity
Data source: @21shares
Hyperliquid's spot trading is highly concentrated on a few coins such as BTC/ETH/HYPE, and the spot trading mechanism of auction listing has not made a breakthrough. However, the TradeFi tokens introduced by HIP-3 have indeed brought incremental growth to HyperCore Perp.
Trade[xyz] has effectively become a mainstream player in on-chain RWA Perp, bringing Hyperliquid one step closer to becoming the AWS of liquidity, especially as Trade[xyz] begins to enter the pre-IPO market, which is essentially an event contract where the market is betting on its IPO price.
Whether it's Trade[xyz] or HyperCore, the vast majority of their trading volume comes from Bots inflating trading volume. This is not fraud, but the real source of liquidity.
HIP-3 was a prototype of the paradigm. It didn't add new SKUs to itself, but rather packaged the existing liquidity of RWA into HyperCore. Looking at HIP-4 along this path, the question is not "whether it will create another prediction market category", but "how it will take over the liquidity of prediction markets as well".
In reality, the leverage problem in predicting the market stems from its abrupt nature, where it can instantly reverse from 1/0, leaving you with no opportunity to add margin to resist the trend. It's not a matter of speed, but rather the inherent mechanism.
Image caption: Leveraging insurance
Image source: @zuoyeweb3
The significance of HIP-4 lies in its organic combination of PERP and Outcome. It has a unified margin requirement and can be combined in reverse. It predicts small, fully-funded investments without leverage, while contracts offer unlimited leverage for small amounts of capital, which is equivalent to adding leverage to the contracts.
When opening a long position in a contract, buy the opposite short position in anticipation. If the price rises at expiration, you will only lose the prediction margin and make a profit overall.
When opening a long position in a contract, buying the opposite short position in anticipation of a price drop at expiration will result in a huge loss for the contract, even if the predicted market profit is realized.
Insurance is valid when prices rise, but invalid when prices fall.
However, HIP-4's insurance mechanism is "inadequate insurance," making it difficult to design a mechanism that fully offsets PERP losses. While it has positive aspects in mitigating cascading liquidations and avoiding riots like 10/11, PERP leverage is theoretically unlimited. Combined with spot mechanisms and more sophisticated financial engineering, the entire system can become cyclically nested, ultimately leading to a systemic crisis.
The only certain benefit is that margin calls can increase liquidity for current PERP accounts, slowing down liquidation.
A more real concern lies in fairness: HIP-4 currently focuses on "price guessing" products, and it is not impossible for BTC to deviate from the target price in the short term. There are already signs of this on the first day. Smaller cryptocurrencies rely on off-chain oracles, which creates more room for controversy.
HIP-4 itself may not be larger than HIP-3, and judging solely from "price guessing" products, it may even be limited to a mid-range category. However, the value of HIP-4 lies not in its size, but in its paradigm. It simultaneously accomplishes three things: "leveraging existing market liquidity + hedging mechanisms + margin interoperability," allowing the cold start of new derivatives to proceed without starting from scratch.
Conclusion
HIP-1/2 solved "how to get yourself started," HIP-3 solved "how to get others to start TradFi on my platform," and HIP-4 solved "how to take over liquidity from other markets." This is a progressive engineering roadmap, and House of All Finance is not just a slogan, but the natural endpoint of this roadmap.
The cold start of any new derivative doesn't require educating users from scratch or buying liquidity from zero. Instead, it involves finding an existing market with proven liquidity, designing a hedging mechanism, and naturally channeling liquidity from that existing market into the new product. Polymarket uses a narrative of collective wisdom to raise liquidity, treating it as a belief; Hyperliquid uses an engineering approach to redistribute liquidity, treating it as a component. The former struggles with the tension between fairness and commission rates, while the latter bypasses this issue entirely. Whether you make money or not is irrelevant; what matters is whether your position is a hedge against another position. The primary driver of liquidity doesn't come from marketing, but from market structure.
