Hyperliquid introduces a portfolio margin mechanism, a significant upgrade in the on-chain derivatives market. This mechanism has previously brought over 7 trillion USD in incremental volume to traditional finance. Now transplanted on-chain, it could become a turning point to attract institutional capital and improve capital efficiency. This article is based on an article by Jaleel and Liu Liu.
(Background: From on-chain pricing of unlisted giants: Hyperliquid opens a new battlefield for Pre-IPO contracts)
(Additional context: Hyperliquid faces a “suicide attack” with a vault evaporating 5 million MGB, and a bigger disaster may be quietly approaching?)

Table of Contents

• What is Hyperliquid’s Portfolio Margin
• How Portfolio Margin Saved the Traditional Financial Derivatives Market
• What This Means for the On-Chain Derivatives Market

This is one of Hyperliquid’s most important upgrades in the long term. Past upgrades of various DeFi protocols and Perp DEXs in the crypto market have essentially been solving the same problem: how to make limited funds generate greater liquidity.

The traditional finance derivatives market had an extremely effective solution: Portfolio Margin. This mechanism once brought over 7 trillion USD in incremental volume, 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 a new boom in the on-chain derivatives market.

What is Hyperliquid’s Portfolio Margin

Let’s start with the most intuitive change.

In most CEXs and Perp DEXs in the past, we distinguished between “spot accounts,” “contract accounts,” “lending accounts,” etc., each with its own calculation method. After Hyperliquid enabled Portfolio Margin, these accounts no longer need to be separated.

With the same funds, you can hold spot assets while directly using them as collateral for contracts. If your available balance is insufficient when placing an order, the system will automatically check if you have assets that meet the criteria and, within safety limits, borrow the necessary funds to complete the trade. The entire process is almost seamless.

Even better, the “idle funds” in the account will automatically accrue interest.

In a Portfolio Margin account, as long as an asset is available for lending and not currently being traded or used as collateral, the system will automatically treat it as supplied funds and start accruing interest based on current utilization rates. Most HIP-3 DEXs will include assets in the portfolio margin calculation, eliminating the need to deposit assets into a separate lending pool or switch between protocols frequently.

Coupled with HyperEVM, this mechanism opens up more possibilities: in the future, more on-chain lending protocols can be integrated, and new asset classes and derivatives in HyperCore will also support portfolio margin gradually. The entire ecosystem is becoming an organic whole.

Naturally, the liquidation process has also changed.

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

Of course, in the current pre-alpha stage, Hyperliquid is quite conservative. Borrowable assets, available collateral, and account limits are capped, and once the limit is reached, it will revert to normal mode. Currently, only USDC can be borrowed, and HYPE is the only collateral asset. The next phase will add USDH as a borrowable asset and BTC as collateral. This stage is more suitable for small accounts to familiarize themselves with the process rather than pursuing large-scale strategies.

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.

How Portfolio Margin Saved the Traditional Financial Derivatives Market

The 1929 Great Crash was another well-known systemic financial collapse before the 2008 financial crisis.

In the 1920s America, the post-war prosperity and industrial acceleration were in full swing. Automobiles, electricity, steel, radio—almost every emerging industry showcased the era’s prosperity. The stock market became the most direct way for ordinary people to participate in this boom, and leverage was perhaps more common than today.

A very common practice when buying stocks was “on margin.” You didn’t need to pay the full amount; you only needed about 10% cash, and the rest was borrowed from brokers. The problem was, this leverage had almost no limit and lacked unified regulation. Banks, brokers, and dealers were intertwined, with layered loans, many of which were short-term borrowings from elsewhere. Behind a single stock, there could be multiple layers of debt.

Starting in spring and summer 1929, the market experienced multiple violent swings, and some funds began to quietly withdraw. But the mainstream sentiment was still: “This is just a healthy correction. After all, the US economy is strong, industrial expansion is ongoing, 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 rapidly, and brokers began issuing margin calls. But for investors, this was very difficult to fulfill. Large-scale forced liquidations ensued, further driving down prices, which triggered more accounts to be liquidated.

A chain reaction caused the market to spiral out of control, with stock prices crashing through multiple layers without any buffer.

Unlike 2008, there was no single iconic institution like Lehman Brothers collapsing; almost the entire financing system collapsed together. The stock price collapse quickly propagated to brokers, then to banks. Banks failed due to securities losses and bank runs, losing their financing sources, leading to layoffs and factory closures. The stock market crash didn’t stop at the financial system but dragged the US economy into a prolonged Great Depression.

In this context, regulators developed an almost instinctive fear of “leverage.” For those who experienced that crash, the only reliable solution was to impose simple, blunt restrictions on borrowing ability.

Thus, in 1934, the US government established a regulatory framework centered on “limiting leverage,” setting minimum margin requirements. Like many regulations, the initial intention was good, but overly simplified, ultimately stifling liquidity. Since then, the US derivatives market was burdened with “shackles” for a long time.

This contradiction was only addressed in the 1980s.

Futures, options, and interest rate derivatives developed rapidly. Institutional traders moved from simple directional bets to extensive hedging, arbitrage, spread, and portfolio strategies. These strategies are inherently low-risk and low-volatility but require high turnover to generate income. Under these shackles, capital efficiency was severely limited. Continuing this way, the growth ceiling of the derivatives market was very low.

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

The impact on market structure was immediate. Later statistics showed that the Portfolio Margin mechanism ultimately added at least 7.2 trillion USD to the derivatives market in traditional finance.

This volume is enormous—today’s total crypto market cap is only about 3 trillion USD.

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 is a significant improvement in crypto capital efficiency. With the Portfolio Margin system, the same funds can support more trading activity and accommodate more complex strategies.

More importantly, this change allows a large category of “traditional finance-only” institutions to see more possibilities on-chain. As mentioned earlier, most professional market makers and institutional funds care less about individual trades’ profits and more about overall capital utilization over time.

If a market doesn’t support portfolio margin, their hedging positions are regarded as high-risk, with high collateral requirements, making returns incomparable to traditional trading platforms. Under such conditions, even if they are interested in on-chain markets, it’s hard to deploy large-scale capital.

This is why, in traditional finance, Portfolio Margin is considered a “fundamental configuration” for derivatives trading platforms. With it, institutions can support long-term liquidity and institutional strategies. Hyperliquid’s upgrade is essentially aimed at attracting these traditional institutions and funds.

When such capital enters the market, the impact is not just on trading volume growth. A deeper change is the transformation of market structure. The proportion of hedging, arbitrage, and market-making capital will increase, making the order book thicker, bid-ask spreads narrower, and depth during extreme market conditions more controllable and resilient.

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