HYPE has fallen to around $52, but Hyperliquid is opening its doors to KYC on the testing website Is this a narrative setback for DEX, or the first ticket for institutional funds to go on the blockchain? Recently, the community has been paying more attention to KYC for Hyperliquid, and with frequent submissions of various documents, everyone's first reaction is almost always negative: Isn't Hyperliquid primarily designed to be permissionless? If identity verification is also required in the future, what is the difference between it and centralized exchanges? This concern is understandable, but it overlooks a key difference Hyperliquid is not prepared to require all users to undergo KYC Currently, there is an allowlist feature available for HIP-3 deployment partners Simply put, a deployment party can set up an address whitelist for their own market, allowing only verified wallets to participate in transactions The restriction only applies to the deployment party's own market Hyperliquid native market and other HIP-3 deployment providers can still maintain permissionless status So, this is not about transforming the entire Hyperliquid into an exchange that requires real name authentication It's more like opening a dedicated entry point for compliance funds next to the existing unlicensed market Why do we need this entrance? Because the KYC understood by retail investors and institutions is not the same thing at all When ordinary users see KYC, they think of: The platform needs to check my identification to determine if I can trade. But for institutions managing external funds, another issue that KYC solves is even more important: Who is my fund trading with? Many hedge funds use not the boss's own money, but funds from pension funds, family offices, university endowments, and other investors These investors usually sign very strict agreements with the fund, specifying where the funds can be placed, through what channels they can trade, and which types of counterparties they can access The fund not only needs to prove that it has not violated any rules, but also needs to prove that the trading venue it uses has screened other participants If an order book allows any anonymous wallet to enter, it will be difficult for the fund to explain to the compliance officer and investors: Will funds be traded with sanctioned addresses? Is there a problem with the funding source of the counterparty? If regulatory agencies investigate, can the complete funding path be restored? Will assets be frozen due to illegal funds involved in the trading venue? For retail investors, a successful wallet connection, sufficient liquidity, and fast transaction speed may already meet their needs However, for institutions, there is no answer to these questions, and it is difficult to obtain approval no matter how fast the trading system is and how low the handling fees are That's also why Perp DEX has developed so rapidly, and the main trading volume of a large number of hedge funds still remains on centralized exchanges They may not necessarily prefer CEX more Only CEX can provide clear customer identities, account subjects, transaction records, and compliance responsible parties, allowing the fund to explain to investors where the money has gone. Of course, self operated institutions like Jane Street that use a large amount of their own funds for trading will face different constraints But larger assets in the market are still controlled by institutions that manage external funds It is almost impossible to completely bypass identity verification, enterprise authentication, sanction screening, and address access for these funds to enter the on chain market Hyperliquid's allow list is trying to solve this problem In the future, such a structure may emerge: A regulated institution becomes the HIP-3 deployment party responsible for launching its own stock, commodity, or cryptocurrency derivatives market It completes user KYC and enterprise authentication offline, and then adds verified wallets to the whitelist Securities firms or trading terminals can import approved clients into these markets Hyperliquid provides the underlying order book, collateral system, matching and settlement facilities Whoever is responsible for deploying the market is responsible for their own customer access and compliance rules And users who do not want to accept KYC can still continue to use other unlicensed markets In plain language, it means: Hyperliquid did not intend to close the original door, but instead opened another mechanism entrance nearby On one side is a permissionless market where any wallet can participate On the other side is the licensing market, where only verified individuals and institutions can enter Two markets can be built on the same Hyperliquid infrastructure, but operated by different deployment parties and adopting different admission rules What does this mean for Hyperliquid? If it can only serve retail investors and native cryptocurrency funds on the chain, then it is competing for the sustainable DEX market But if it can also allow regulated securities firms, hedge funds, and traditional financial institutions to deploy their own licensed markets, it will no longer just compete for DEX trading volume It has begun to enter the territory of CEX, securities firms, and traditional derivatives exchanges Previously, we used to understand Hyperliquid as an exchange Open the page, recharge USDC, trade BTC, ETH or HYPE But HIP-3 and allowlist show another possibility: Hyperliquid itself can become a set of financial market infrastructure Different teams can open their own markets on it, deciding what assets to launch, what oracle machines to use, how much fees to charge, and whether participants are required to complete identity verification Deploying for ordinary users can continue to remain permissionless For deployment to US institutions, a whitelist market can be established to undertake KYC, corporate certification, and regulatory responsibilities What is truly worth discussing about KYC functionality It's to provide a compliance interface for funds that were previously inaccessible Of course, this matter is far from as simple as' KYC function launched, institutional funds immediately enter the market '. Firstly, the relevant functions are still in the testing stage and cannot be written as Hyperliquid. KYC has been fully implemented Secondly, a whitelist of addresses does not necessarily equate to obtaining regulatory approval in the United States Before institutions can truly enter, they still need to address issues such as licensing, custody, clearing, sanction screening, customer asset isolation, transaction reporting, and market regulation Allowing the deployment party to control which addresses can be traded only provides one basic capability In addition, the licensing market may also bring new problems The same asset may have both permissionless and KYC versions, and trading volume and market making funds may be dispersed across different markets Institutional deployment parties may also freeze addresses, restrict regions, or reject some users, forming new centralized power If these licensing markets ultimately dominate the majority of liquidity, it remains to be seen whether the permissionless market can maintain sufficient depth KYC is not without cost, it sacrifices some openness in exchange for another portion of funds being able to enter legally But what needs to be distinguished is: The establishment of a licensing marketplace by a certain deployment party is completely different from Hyperliquid forcing KYC for all users The former is adding a market type, while the latter is changing the admission rules of the entire agreement At least from the current design perspective, Hyperliquid has chosen the former When the market is not doing well, it is easy for the market to interpret all changes as bearish KYC has encountered the most sensitive permissionless narrative in the encryption community, which naturally makes some users resistant And this feature will not automatically increase trading volume in the short term, nor will it immediately cause HYPE to rise But if we extend the time, it may provide a piece of puzzle that Hyperliquid previously lacked: Allow regulated funds to use on chain trading infrastructure without being exposed to anonymous order flows For those who are already able to freely use Hyperliquid, KYC is like a wall But for institutions that manage billions or tens of billions of dollars but are unable to enter perpetual DEX due to compliance rules, it is more like a door If Hyperliquid can only accommodate permissionless on chain funds, it could become the largest perpetual DEX If it can accommodate both permissionless and regulated markets, what it wants to become may no longer be a DEX But rather a financial foundation that enables any team, asset, and type of fund to establish a market Is KYC weakening Hyperliquid or giving it the first opportunity to steal trading volume from CEX institutions? The answer will not be determined by a test network function But the door that institutional funds need to enter the on chain market, Hyperliquid, has already begun to try to create it HYPE Hyperliquid HIP3