This is one of Hyperliquid's most significant upgrades to date.

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

And now, Hyperliquid has brought it onto the chain. In today's liquidity squeeze, this may be a turning point for a new wave of prosperity in on-chain derivatives markets.

What is Hyperliquid's Portfolio Margin

Let's start with the most intuitive change.

In most of the past CEX and Perp DEX platforms, we would distinguish between a "spot account," a "futures account," a "lending account," etc. Each account had its own way of calculation, but after Hyperliquid launched Portfolio Margin, these accounts no longer need to be distinguished.

With the same funds, you can hold spot positions on one side and directly use them as collateral for futures contracts on the other. If your available balance is insufficient when placing an order, the system will automatically check if you have the required assets in your account, then securely borrow the necessary funds on your behalf to complete the transaction, making the whole process nearly seamless.

What's even better is that the "idle funds" in your account will also automatically accrue interest.

In a Portfolio Margin account, as long as an asset is within the lendable range and is not currently being traded or used as margin, the system will automatically consider it as a supply fund and start accruing interest based on the current fund utilization rate. Most HIP-3 DEX platforms will incorporate Portfolio Margin calculations, eliminating the need to individually deposit assets into a specific lending pool or switch frequently between different protocols.

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

Naturally, the liquidation process has also changed.

Hyperliquid no longer sets a liquidation threshold for individual positions but monitors the overall account's security status. As long as the combined value of spot holdings, contract positions, and lending relationships still meets the minimum maintenance requirement, the account is secure. A short-term fluctuation in a single position will not trigger immediate liquidation; the system only intervenes when the overall account's risk exposure exceeds the threshold.

Of course, in the current pre-alpha stage, Hyperliquid is also very conservative. Borrowable assets, collateralizable assets, and the limit for each account are all capped, and once reached, they will automatically revert to normal mode. Currently, only USDC can be borrowed, and HYPE is the only collateral asset. In the next stage, USDH will be added as a borrowable asset, along with BTC as a collateral asset. However, this stage is more suitable for small accounts to familiarize themselves with the process rather than pursue scale.

Before we delve into the significance of Hyperliquid's launch of the Portfolio Margin upgrade, we need to first look back at what the Portfolio Margin mechanism has gone through in traditional finance and its impact in order to better understand why this is one of Hyperliquid's most important upgrades to date.

How Portfolio Margin Saved the Traditional Financial Derivatives Market

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

In the United States of the 1920s, the post-war prosperity and accelerated industrialization were in full swing. Industries such as 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, buying stocks had a very common practice called "on margin." You didn't need to pay the full amount; you just needed to put up about 10% of the cash, and the rest of the money was borrowed from the broker. The problem was that this leverage had almost no limit and almost no unified regulation. Banks, brokers, and dealers were intertwined, with loans nested in layers, and much of the borrowed money was itself short-term borrowed from elsewhere. Behind a stock, there could be several layers of debt.

By the spring and summer of 1929, the market had experienced several violent fluctuations, and some funds had quietly begun to withdraw. But the mainstream sentiment at the time was still, "This is just a healthy pullback. After all, the U.S. economy is so strong, the industry is expanding, production is growing, how could the stock market really collapse?"

However, a collapse is difficult to predict. On October 24, 1929, when the market opened, an unprecedented selling pressure emerged. Stock prices plummeted rapidly, brokers began issuing margin calls to margin accounts. However, for investors, this was very difficult to accomplish. So, massive forced liquidation led to further price declines, which, in turn, triggered more accounts to be liquidated. A series of chain reactions caused the market to spiral out of control, with stock prices being smashed layer by layer without any cushion.

Unlike in 2008, there was no single iconic institution like "Lehman Brothers" that collapsed in 1929. Instead, almost the entire financing system collapsed together. The stock price crash quickly transmitted to brokerages, then to banks. Banks collapsed due to securities losses and runs, causing companies to lose their source of funding, leading to layoffs and closures. The stock market crash did not stop at the financial system but directly dragged the U.S. economy into the Great Depression for several years.

It was in this context that regulators developed an almost instinctual fear of "leverage." For those who lived through that generation's collapse, the only reliable method was to bluntly restrict everyone's borrowing capacity.

Therefore, in 1934, the U.S. government established a regulatory framework centered on "leverage limits" and mandated minimum margin requirements. Like many regulatory measures, the intention of this policy was good, but it was overly simplistic, ultimately stifling liquidity. It can be said that since then, the U.S. derivatives market has been "shackled" for a long time.

It wasn't until the 1980s that the contradictions of this shackle were addressed.

Futures, options, and interest rate derivatives rapidly developed, institutional traders no longer just took directional bets but extensively used hedging, arbitrage, spread, and combination strategies. These strategies themselves are low-risk and low-volatility but rely on high turnover for profit. Therefore, under this shackle, capital efficiency was severely constrained. If this approach continued, the derivatives market's growth ceiling would be very low.

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

The impact on market structure was immediate. According to later statistics, the Portfolio Margin mechanism ultimately brought at least $7.2 trillion in incremental size to the derivatives market within the traditional financial system.

This incremental size was substantial, considering that today the total market capitalization of cryptocurrency is only $3 trillion.

What Does This Mean for the On-Chain Derivatives Market

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

The first impact this brings is a significant improvement in crypto capital efficiency. With the Portfolio Margin system, the same amount of money can support more trading activities and carry more complex strategy structures.

More importantly, this change has enabled a large category of institutions that were originally "focused only on 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 they earn from a single transaction, but the overall efficiency of their funds over a long period of time.

If a market does not support portfolio margin, their hedge positions will be treated as high-risk positions, their margin requirements will remain high, and naturally, their returns cannot compete with traditional trading platforms. In this case, even if they are interested in the on-chain market, it is very difficult for them to truly allocate scale-up funds.

This is also why, in the traditional financial system, Portfolio Margin is considered the "basic configuration" of derivative trading platforms. With it, institutions can have the ability to support long-term liquidity and institutional strategies. The upgrade by Hyperliquid this time is essentially attracting these traditional institutions and funds.

When this type of funds enters the market, the impact is not only reflected in the increase in trading volume. A deeper change is the transformation of market structure. The proportion of hedge positions, arbitrage positions, and market-making funds will increase, the order book will become thicker, the bid-ask spread will shrink, and the depth of extreme market conditions will be more manageable and resilient.

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