Ben Zhou, CEO of Bybit, shares insights on the significant liquidation of a Hyperliquid ETH whale that resulted in a $4 million loss for the platform. He addresses the complications associated with leverage in both centralized and decentralized exchanges.
In a recent tweet, Zhou detailed how the whale executed a massive liquidation with a long position of 175,000 ETH (approximately valued at $340 million) using 50x leverage, all without causing a market crash. He noted that the whale was able to exit “quickly and cleanly,” leaving Hyperliquid to bear the consequences.
“Why not simply try to reach the liquidation price by pulling out floating P&L [profit and loss] to raise the liquidation price? Once triggered, let Hyperliquid handle the entire position at that liquidation price, making it no longer your concern. Hyperliquid would incur some losses,” Zhou stated.
The Bybit CEO further explained that both centralized and decentralized exchanges tend to have their liquidation mechanisms take over long positions when whales face liquidation. In this instance, Hyperliquid’s mechanism, known as the HLP Vault, assumed control of the position at approximately $1,915 per ETH and halved the leverage to mitigate the decline.
“That approach is effective, but it can hurt business since users typically seek higher leverage,” Zhou remarked, referencing Hyperliquid’s $4 million loss.
In addition to reducing leverage, he proposed that platforms might consider implementing dynamic risk limit mechanisms that automatically adjust leverage based on the total size of the positions. Thus, as the position increases, the leverage would decrease.
Zhou indicated that in centralized exchanges, the whale’s leverage could fall to about 1.5x under a substantial amount. However, he recognized the drawbacks, noting that users can still circumvent limits by creating multiple accounts, particularly since not all exchanges enforce stringent KYC requirements and it is relatively inexpensive to set up numerous accounts.
He believes that if decentralized exchanges want to prevent such issues, they must implement more robust risk management strategies. These might include monitoring tools to detect abusive behavior and market manipulation on-chain, as well as imposing open interest limits.
“Even with the current reduced leverage (BTC to 40x, ETH to 25x) on Hyperliquid, abuse could still occur unless they adopt CEX-level risk management or further reduce the leverage,” Zhou commented.
What transpired with Hyperliquid’s vault?
On March 12, a whale initiated a long position on Hyperliquid using 50x leverage for 175,000 ETH, equivalent to $340 million. After closing at 15,000 ETH, the whale transferred back approximately 17.09 million USDC (USDC) in margin to their account.
Once the margin was withdrawn, the remaining 160,000 ETH long position set off a liquidation via the platform’s mechanism. Due to the large liquidation amount, Hyperliquid’s HLP took over the position at $1,915 and worked on mitigating it. Consequently, Hyperliquid faced losses exceeding $4 million.
In an official statement on its X account, Hyperliquid clarified that the $4 million loss was not a result of a protocol breach or cyberattack. The user withdrew funds while still having unrealized profit and loss, which diminished their margin and resulted in the liquidation.
Even after the liquidation, the whale managed to net a profit of around $1.8 million, despite the vault incurring over $4 million in losses due to absorbing the large position. As a precautionary measure, the protocol has decided to reduce the maximum leverage for BTC (BTC) and ETH to 40x and 25x, respectively, to “increase maintenance margin requirements for larger positions.”