This is one of the most significant upgrades for Hyperliquid in a long time.

In the past, various upgrades of DeFi protocols and Perp DEXs in the crypto market have been addressing the same issue: how to maximize liquidity with limited funds. The traditional financial derivatives market had an extremely effective solution: Portfolio Margin. This mechanism once brought over $70 trillion in incremental scale to the traditional derivatives market, fundamentally changing the game for institutional trading.

Now, Hyperliquid has brought it on-chain. In today's liquidity-constrained environment, this could be a turning point for the on-chain derivatives market to usher in a new prosperity.

What is Hyperliquid's Portfolio Margin

Let’s start with the most intuitive change.

In most CEXs and Perp DEXs in the past, we would distinguish between "spot accounts," "contract accounts," "lending accounts," etc., each with its own calculation method. However, after Hyperliquid enabled Portfolio Margin, these accounts no longer need to be differentiated.

With the same funds, you can hold spot while directly using it as collateral for contracts. If the available balance is insufficient when placing an order, the system will automatically check if there are qualifying assets in your account and then borrow the necessary funds within a safe range to complete the transaction, making the entire process almost seamless.

Even better, the "idle money" in the account will automatically accrue interest.

In a Portfolio Margin account, as long as a certain asset is within the borrowable range and is not currently being traded or used as margin, the system will automatically treat it as available funds and start accruing interest based on the current capital utilization rate. Most HIP-3 DEXs will include Portfolio Margin calculations, eliminating the need to deposit assets into a separate lending pool or frequently switch between different protocols.

With HyperEVM, this mechanism also opens up more possibilities: in the future, more on-chain lending protocols can be integrated, and new asset classes and derivatives from HyperCore will successively support Portfolio Margin. The entire ecosystem is evolving into an organic whole.

Naturally, the way liquidation occurs has also changed.

Hyperliquid no longer sets a forced liquidation line for a single position but instead monitors the overall safety status of the account. As long as the combined value of the spot, contract positions, and lending relationships still meets the minimum maintenance requirements, the account is considered safe. Short-term fluctuations in a specific position will not immediately trigger liquidation; only when the overall risk exposure of the account exceeds a threshold will the system intervene.

Of course, at the current pre-alpha stage, Hyperliquid is also quite restrained. The borrowable assets, available collateral, and limits for each account all have caps, and once they are reached, the account will automatically revert to normal mode. Currently, only USDC can be borrowed, and HYPE is the only collateral asset. The next phase will introduce USDH as a borrowable asset and BTC as a collateral asset. However, this stage is more suitable for familiarizing oneself with the process using small accounts rather than pursuing strategic scale.

Before discussing the significance of Hyperliquid's Portfolio Margin upgrade, we need to look back at what the Portfolio Margin mechanism has experienced in traditional finance and its impact, to better understand why this is one of Hyperliquid's most important upgrades in a long time.

How Portfolio Margin Saved the Traditional Financial Derivatives Market

The stock market crash of 1929 was another well-known systemic financial collapse before the 2008 financial crisis.

In the 1920s, the United States was in a phase of post-war prosperity and accelerated industrialization. Automobiles, electricity, steel, and radio—almost every emerging industry showcased the prosperity of that era. The stock market became the most direct way for ordinary people to participate in that prosperity, and the use of leverage was perhaps more common than today.

At that time, a very common practice for buying stocks was called "on margin." You didn't need to pay the full amount; you only had to put down about 10% in cash, with the rest borrowed from a broker. The problem was that this leverage had almost no limits and was hardly regulated. Banks, brokers, and dealers were intertwined, with loans nested layer upon layer, and much of the borrowed money was itself borrowed short-term from elsewhere. Behind a single stock, there could be several layers of debt.

Starting in the spring and summer of 1929, the market began to experience severe fluctuations, and some funds started to quietly withdraw. However, the prevailing sentiment at the time was still: "This is just a healthy correction. After all, the U.S. economy is so strong, industries are expanding, production is increasing; how could the stock market really crash?"

But crashes are hard to predict. On October 24, 1929, the market opened with unprecedented selling pressure. Stock prices plummeted, and brokers began issuing margin calls to margin accounts. For investors, this was a difficult task to fulfill. Thus, large-scale forced liquidations led to further price declines, which triggered more accounts to be liquidated. A series of chain reactions caused the market to spiral out of control, with stock prices being crushed layer by layer without any buffer.

Unlike 2008, there was no single iconic institution like "Lehman Brothers" collapsing in 1929; it was almost the entire financing system that fell apart. The collapse of stock prices quickly transmitted to brokers and then to banks. Banks failed due to securities losses and bank runs, companies lost their sources of financing, and began layoffs and factory closures. The stock market crash did not stop at the financial system but directly dragged the U.S. economy into a prolonged Great Depression.

In this context, regulators developed an almost instinctive fear of "leverage." For those who experienced that generation's crash, the only reliable method was to simply and brutally limit everyone's ability to borrow money.

Thus, in 1934, the U.S. government established a regulatory framework centered on "limiting leverage," mandating minimum margin requirements. Like many regulatory measures, the initial intention of this policy was good, but it was overly simplistic and ultimately stifled liquidity. It can be said that since then, the U.S. derivatives market has been operating under a "shackle" for a long time.

The contradictions of this shackle were not addressed until the 1980s.

Futures, options, and interest rate derivatives developed rapidly, and institutional traders no longer simply bet on direction but began to use hedging, arbitrage, spreads, and portfolio strategies extensively. These strategies themselves are low-risk and low-volatility but rely on high turnover to generate profits. Therefore, under this shackle, capital efficiency was severely constrained. If this approach continued, the growth ceiling of the derivatives market would be very low.

In this context, the Chicago Mercantile Exchange (CME) took a crucial step in 1988 by implementing the Portfolio Margin mechanism.

The impact on market structure was immediate. Subsequent statistics showed that the Portfolio Margin mechanism ultimately brought at least $7.2 trillion in incremental scale to the derivatives market within the traditional financial system.

This incremental scale is enormous; after all, the total market capitalization of cryptocurrencies today is only about $3 trillion.

What This Means for the On-Chain Derivatives Market

Now, Hyperliquid has brought this mechanism on-chain. This is the first time Portfolio Margin has truly entered the on-chain derivatives space.

The first impact of this is a significant improvement in the efficiency of crypto funds. The same amount of money can support more trading activities and accommodate more complex strategy structures under the Portfolio Margin system.

But more importantly, this change allows a large class of institutions that originally "only did traditional finance" to see more possibilities on-chain. After all, as mentioned earlier, what most professional market makers and institutional funds care about is not how much profit a single trade makes, but the overall efficiency of capital usage over a long period.

If a market does not support Portfolio Margin, their hedging positions will be treated as high-risk positions, leading to high margin usage, and naturally, the return rates cannot compare with traditional trading platforms. In this case, even if they are interested in the on-chain market, it is difficult for them to truly invest scaled funds.

This is also why, in the traditional financial system, Portfolio Margin is regarded as the "basic configuration" for derivatives trading platforms. With it, institutions can have the capacity to support long-term liquidity and institutional strategies. Hyperliquid's upgrade essentially aims to attract these traditional institutions and funds.

When such funds enter the market, the impact is not just reflected in the increase in trading volume. A deeper change is the transformation of market structure. The proportion of hedging, arbitrage, and market-making funds will rise, making the order book thicker, reducing the bid-ask spread, and making the depth during extreme market conditions more controllable and resilient.

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