Hyperliquid HIP-3: The Rise of the Builder Economy

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Executive Summary

The DeFi sector has historically oscillated between two distinct operational models: the automated market maker (AMM) paradigm, which prioritizes permissionless access at the cost of capital efficiency, and the central limit order book (CLOB) model, which offers superior execution but often relies on centralized matching engines or curated listing processes. The activation of Hyperliquid Improvement Proposal 3 (HIP-3), colloquially known as "Builder-Deployed Perpetuals," represents a distinct evolution in this dialectic. By transitioning the Hyperliquid protocol from a validator-curated DEX into a permissionless financial infrastructure layer, HIP-3 has fundamentally restructured the incentives governing on-chain derivatives.

This report will deep dive into the HIP-3 implementation, spanning its technical architecture on the HyperCore Layer 1, the economic implications of its "Growth Mode" fee structure, and the burgeoning ecosystem of dependent protocols such as Unit and Kinetiq.

The Structural Evolution of On-Chain Derivatives

The Pre-HIP-3 Landscape and the Listing Bottleneck

Prior to the implementation of HIP-3, the landscape of decentralized perpetuals was characterized by a "Listing Bottleneck." Protocols such as dYdX, GMX, and the pre-upgrade Hyperliquid relied on governance processes or core team decisions to list new assets. While this ensured a baseline of quality and oracle reliability, it inherently limited the velocity at which new markets could be deployed. In the fast-paced crypto-asset environment, where narrative cycles shift weekly, the inability to rapidly list long-tail assets, pre-market tokens, or exotic derivatives (such as volatility indices or real-world assets) placed DEXs at a competitive disadvantage relative to agile centralized exchanges like Binance or Bybit.

Hyperliquid’s initial dominance capturing over 70% of the decentralized perp volume by mid-2025 was built on the performance of its HyperCore Layer 1 blockchain, which offered sub-second finality and high throughput. However, the listing process remained a centralized choke point. The vision for HIP-3 was to dismantle this choke point, effectively transforming Hyperliquid from a "store" that sells specific products into a "shopping mall" infrastructure where independent merchants (builders) can open their own storefronts (markets).

Defining HIP-3: The Exchange-of-Exchanges Model

HIP-3, fundamentally, is a protocol upgrade that allows any entity to deploy a perpetual futures market on the HyperCore blockchain without seeking permission from the core team or a governance vote, provided they meet specific capital requirements. This shifts the protocol’s role from a venue operator to an infrastructure provider.

Under this new model, the "Builder" assumes the role typically held by the exchange operator. The builder is responsible for:

• Market Definition: Specifying the contract terms, including the underlying asset, quote currency, and leverage limits.

• Oracle Integration: Selecting and maintaining the oracle feed that dictates the mark price, a critical component for liquidation logic.

• Economic Security: Staking a substantial bond (500,000 HYPE) to guarantee honest behavior.

In return for assuming these responsibilities and risks, the builder captures 50% of the trading fees generated by their market, creating a lucrative revenue stream that aligns their incentives with the long-term success of the specific market they operate. This revenue-sharing agreement is the economic engine that drives the HIP-3 ecosystem, turning market creation into a business model rather than a governance task.

Technical Architecture and Mechanism Design

The implementation of HIP-3 required a sophisticated interplay between Hyperliquid's two primary architectural components: the HyperCore (the high-performance L1 consensus layer) and the HyperEVM (the Ethereum Virtual Machine compatible smart contract layer).

Dual-State Architecture: HyperCore and HyperEVM

Hyperliquid operates on a dual-state model secured by the same consensus mechanism, HyperBFT.

• HyperCore: This is the high-performance execution layer where the order book lives. It handles matching, margin, and liquidations with extreme speed (up to 200,000 orders per second). HIP-3 markets execute here to ensure they benefit from the same liquidity and latency properties as native markets.

• HyperEVM: This is the smart contract layer where custom logic, token issuance, and governance reside. HIP-3 leverages HyperEVM for the peripheral infrastructure surrounding a market. For instance, a builder might issue a spot token on HyperEVM (e.g., a tokenized stock) and then permissionlessly list a perpetual contract for that token on HyperCore. The two layers interoperate seamlessly without the need for external bridges, allowing for atomic interactions between spot assets on EVM and derivatives on Core.

This integration is critical for the "Builder Code" functionality, which allows developers to monetize order flow. A builder can deploy a frontend or a trading bot on HyperEVM that interacts with the HyperCore order book, earning fees from the volume they route.

The Staking Bond: Economic Security at Scale

The cornerstone of HIP-3's permissionless nature is the staking requirement. To prevent spam, low-quality listings, and malicious behavior, a prospective deployer must stake 500,000 HYPE.

• Valuation Context: At the time of the HYPE token's price discovery and subsequent rally (trading between $30-$40 in late 2025), this stake represented a capital commitment of approximately $15M to $20M USD.

• Function: This high barrier to entry effectively filters for institutional-grade actors or highly organized community consortiums. It ensures that deployers have substantial "skin in the game." The stake acts as a fidelity bond; if the deployer manipulates the oracle or destabilizes the market, this stake is subject to slashing.

Lock-up Period: Crucially, even if a builder decides to shut down their market, the stake remains locked for an additional 30 days post-cessation. This "unbonding period" allows ample time for retroactive analysis of market behavior to ensure no exit scams or final-hour manipulations occurred.

The Auction Mechanism for Slot Allocation

To manage the throughput and state size of the blockchain, HIP-3 does not allow infinite simultaneous market creations. Instead, new market slots are allocated via a Dutch Auction mechanism.

• Frequency: An auction occurs every 31 hours.

• Mechanism: The auction starts at a high price and decreases until a bidder accepts the price to deploy their market.

• Implication: This mechanism serves as a congestion pricing controller. In times of high demand (e.g., a bull market where many builders want to list new meme coins), the cost to deploy rises, further filtering for high-conviction listings. Conversely, in quieter periods, deployment becomes cheaper. The winners of these auctions win the right to utilize the protocol's resources for their market.

Slashing Conditions: The Subjectivity Problem

While the protocol is permissionless, it is not unsupervised. The security model relies on the active validator set (21 nodes) to police the ecosystem. Validators can vote to slash a deployer's stake if they detect malicious activity.

The slashing criteria include:

1. Oracle Manipulation: Feeding incorrect or deviant price data to force liquidations.

2. Risk Parameter Negligence: Setting leverage limits that endanger the protocol's solvency.

3. "Irregular" Inputs: A catch-all category determined by validator vote.

This introduces a degree of subjectivity. Unlike a smart contract bug which is objectively verifiable, "manipulation" can sometimes be subtle. The protocol mitigates this by requiring a stake-weighted vote, but this ultimately places the security of HIP-3 markets in the hands of the validator set.

The Economic Model: Incentives and Growth Mode

The economic engine of HIP-3 is designed to solve the "Cold Start" problem, the difficulty of attracting liquidity to a new market. It does this through a combination of aggressive revenue sharing and fee subsidies.

Fee Split Dynamics

In a standard HIP-3 market, the trading fees are split 50/50 between the Hyperliquid Protocol (which generally directs revenue to the HYPE insurance fund or community rewards) and the Market Deployer.

• Deployer Revenue: This 50% share transforms market deployment into a cash-flow-generating asset. If a market generates significant volume, the deployer can earn substantial yield on their 500k HYPE stake. For example, early estimates projected that a successful market could allow a deployer to recover their stake value in under 100 days if daily volumes remained high.

• Protocol Revenue: The protocol continues to monetize the infrastructure usage, ensuring that HIP-3 is additive to the HYPE token's value accrual rather than extractive.

"Growth Mode": Weaponizing Fee Structures

On November 19, 2025, Hyperliquid introduced "Growth Mode," a critical enhancement to the HIP-3 framework designed to aggressively bootstrap liquidity.

• Mechanism: Deployers can elect to activate Growth Mode for their markets. When active, the taker fees (fees paid by traders removing liquidity) are slashed by over 90%.

• Fee Schedule:

  • Standard Market: ~0.045%

  • Growth Mode Market: 0.0045% - 0.009%

  • Top Tier Traders: For traders with high staking/volume tiers, fees can drop as low as 0.00144%.

This update effectively commoditized the cost of trading. By allowing deployers to subsidize fees, Hyperliquid enabled builders to undercut centralized exchanges, where fees typically range from 2 to 6 basis points for VIPs. The rationale is that lower fees attract market makers (who face less toxic flow) and high-frequency traders, deepening the order book. Once liquidity is established, a deployer could theoretically deactivate Growth Mode to harvest higher fees, though the initial focus is purely on capturing market share.

Limitations of Growth Mode

To prevent cannibalization of the protocol's core revenue, strict rules apply to Growth Mode markets:

• No Overlap: Growth Mode markets must be "entirely disjoint" from existing validator-operated markets. A builder cannot simply launch a "Bitcoin" market and turn on Growth Mode to steal volume from the official BTC-USD pair.

• Validator Veto: Validators can vote to disable Growth Mode for any market deemed "parasitic" or non-compliant with these rules.

Adoption Trends and Ecosystem Mapping

The high capital barrier of HIP-3 (500k HYPE) necessitated the creation of a specialized ecosystem. Unlike other protocols where individual developers might deploy contracts, HIP-3 encourages the formation of "Consortiums" and "Capital Aggregators."

The "Builder" Layer: Protocols as Deployers

A single individual rarely stakes $20M+ of their own capital. Instead, protocols have emerged to act as the "Builder."

• Unit Protocol: Unit functions as the asset tokenization layer. It facilitates the bridging and tokenization of spot assets (like BTC, ETH, and eventually stocks) onto Hyperliquid. Unit was the pioneer of HIP-3, deploying the XYZ100 market on Trade. Their model is to pair a tokenized spot asset with a permissionless perpetual market, creating a unified trading environment for assets that previously existed only off-chain or on other chains.

• Ventuals: Focusing on the institutional sector, Ventuals utilizes HIP-3 to launch markets for pre-IPO equities and private company valuations. By defining custom oracles that track private market secondary data, they bring assets like "Pre-IPO Stripe" or "Pre-IPO SpaceX" on-chain, utilizing Hyperliquid's matching engine for price discovery.

• Hyperbolic / Global Compute Index: This project represents the expansion into physical resource derivatives. They deployed a HIP-3 market tracking the price of GPU compute (e.g., H100 chips). This allows AI companies and data centers to hedge their hardware costs on-chain, a novel use case enabled specifically by the permissionless oracle definitions of HIP-3.

• Volmex: Leveraging HIP-3 to introduce volatility products (BVIV/EVIV indices), essentially creating an on-chain VIX. This allows traders to speculate on pure market volatility rather than directional price action.

The Liquidity Layer: The Rise of Kinetiq

Kinetiq emerged as the arguably most critical infrastructure piece for HIP-3.

• Function: Kinetiq is a liquid staking protocol. It accepts HYPE deposits from retail users and issues a receipt token, kHYPE.

• Symbiosis: The HYPE deposited into Kinetiq is used to fund the 500k staking requirements for various HIP-3 builders and validators. In return, the yield generated from HIP-3 market fees (the 50% builder share) flowed back to Kinetiq stakers.

• Growth Metrics: Kinetiq's TVL exploded in correlation with HIP-3, growing from $458M in July 2025 to over $2.1B by September/October 2025. This $2B+ pool of capital effectively acts as the "Central Bank" for the HIP-3 ecosystem, providing the stake required for new market creation.

• KNTQ Launch: The launch of the KNTQ governance token in late November further cemented this position, incentivizing liquidity provision and decentralizing the decision-making on which HIP-3 builders receive stake allocations.

Risk Assessment and Systemic Vulnerabilities

The transition to a permissionless infrastructure removes centralized gatekeepers but introduces new, potentially systemic risks.

Validator Centralization and Collusion

The most glaring risk in the HIP-3 architecture is the concentration of power within the validator set.

• Validator Count: As of the latest update in November 2025, the active validator set consists of only 21 permissionless nodes.

• Implication: A consensus set of 21 is relatively small (compared to Ethereum's hundreds of thousands or even Solana's thousands). This creates a credible risk of collusion. If a supermajority of these 21 validators decides to target a specific HIP-3 deployer (perhaps a competitor to a validator-owned desk), they could vote to slash their stake under the guise of "irregular inputs".

• Kinetiq's Influence: With over $2B in TVL, Kinetiq likely controls a massive portion of the delegated stake. This effectively makes Kinetiq the "Kingmaker." If Kinetiq's governance is captured, the entire security model of HIP-3 could be compromised, as they determine which validators remain in the active set.

The Subjectivity of Slashing

The slashing conditions for HIP-3 are not fully algorithmic.

• Ambiguity: Validators can slash for "irregular inputs." This is a subjective term. Is a market maker widening spreads during volatility "irregular" or just "risk management"? Is a niche oracle updating slowly "manipulation" or "latency"?

• Risk: This subjectivity creates regulatory uncertainty for builders. A builder might deploy a market in good faith, only to be slashed because the validator set disagrees with their parameter choices during a stress event. This "governance risk" may deter some institutional builders who require deterministic rules.

Parasitic Volume and "Vampire" Markets

The "Growth Mode" rule prohibiting overlap with existing markets is difficult to enforce perfectly.

• The Threat: A builder could launch a "Wrapped Bitcoin" market (e.g., wBTC-USD) and claim it is distinct from the validator-run BTC-USD. If they turn on Growth Mode (0.0045% fees), they could siphon volume away from the main pair (0.045% fees).

• Consequence: This would reduce the protocol's core revenue (which funds HYPE buybacks). While validators can vote to disable Growth Mode, this requires coordination and vigilance. An agile attacker could launch, siphon volume for a few days, and exit before governance reacts.

Oracle Risk (HyperStone)

HIP-3 markets rely on HyperStone (powered by RedStone) oracles. Unlike the native markets where the oracle is a protocol-level public good, HIP-3 deployers essentially "own" the oracle connection.

Risk: If a deployer compromises their oracle feed, either through malice or incompetence, they can trigger cascading liquidations in their market. While the 500k HYPE stake is meant to cover this, if the profit from the manipulation exceeds the value of the stake (approx. $20M), a rational attacker would sacrifice the stake to drain the market.

Final Thought

HIP-3 represents a fundamental shift for Hyperliquid, transforming it from a mere product into a complete platform. This transition was achieved by introducing a permissionless market structure, secured through economic bonding (500k HYPE), and fueled by strong fee incentives ("Growth Mode"), effectively resolving the scalability limitations typical of decentralized governance.

The market's reaction has been swift, driving significant capital formation, evidenced by the multi-billion dollar expansion of liquid staking layers like Kinetiq and the immediate success of novel markets such as XYZ100.

However, a core vulnerability remains: the security of this open ecosystem hinges on a small, centralized validator set of only 21 nodes. The long-term success of HIP-3 is contingent on broadening this security perimeter while simultaneously navigating the inevitable "governance wars" that will arise over fee revenues and stake allocation.

Having already closed the performance gap with centralized exchanges (CEXs), HIP-3 now positions Hyperliquid to bridge the utility gap. It aims to offer a breadth of markets that no single centralized entity could efficiently manage.

Hyperliquid is carving out a niche as the "Long Tail" exchange. Unlike CEXs, which are restricted by compliance and listing fees, HIP-3 allows Hyperliquid to list assets the instant they appear on-chain or in the news. This is already visible in "Pre-IPO" (Ventuals) and "Compute" (Hyperbolic) markets. The platform is set to become the premier price discovery venue for assets that defy the standard crypto token classification.

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Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.

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