Bybit CEO Ben Zhou shares his thoughts on the massive Hyperliquid ETH whale liquidation which led to the platform losing $4 million. He highlights issues that come with leverage on CEXs and DEXs.
In a recent post, Zhou explained how the whale was able to pull off an enormous liquidation with a long position of 175,000 ETH (ETH) (valued around $340 million) with 50x leverage without triggering a market crash. He said the whale was able to make a “quick and clean” exit while letting Hyperliquid take the fall.
“Why not just try to hit the liquidation price by withdrawing floating P&L [profit and loss] and push the liquidation price up. Once it’s triggered, let HP take the whole position at the liquidation price, so its not your problem anymore. HP would suffer some loss,” said Zhou.
The Bybit CEO elaborated further be saying both centralized and decentralized exchanges tend to let their liquidation mechanism absorb long positions when whales get liquidated. In the case of the ETH whale, Hyperliquid’s liquidation engine, the HLP Vault, took over the position at around $1,915 per ETH and lowered the leverage by half to cushion the fall.
“That’s one way to do it and probably the most effective one, however this will hurt business as users would want higher leverage,” Zhou continued, referring to the $4 million loss Hyperliquid incurred.
Aside from lowering the leverage, he also suggested platforms could deploy tools such as a dynamic risk limit mechanism. The mechanism automatically adjust the leverage based on the overall positions size. Therefore, if the position gets bigger, the leverage gets smaller.
According to Zhou, in CEX, the whale’s position leverage might drop to around 1.5x at the large amount. However, he also acknowledged the limitations, namely that users can still bypass it by using multiple accounts. Since not all exchanges employ know-your-customer requirements and it doesn’t cost much to open multiple accounts.
Zhou believes that if DEXs want to avoid this problem, they would have to deploy more risk management mechanisms. These include market surveillance tools designed to detect abusers and market manipulators on-chain and open interest limitations.
“Even with this current dropped leverage (BTC to 40x , ETH to 25x) on Hyperliquid, it could still be abused, unless they start to introduce CEX level risk management or drop their leverage even lower,” said Zhou.
What happened to Hyperliquid’s vault?
On March 12, a whale opened a long position on Hyperliquid with 50x leverage for 175,000 ETH worth $340 million. After closing at 15,000 ETH, the whale transferred around 17.09 million USDC (USDC) in margin back to their address.
Once the margin was withdrawn, the remaining 160,000 ETH long position triggered a liquidation from the platform’s mechanism. Due to large liquidation size, Hyperliquid HLP took over the position at $1,915 and worked towards unraveling it. As a result, Hyperliquid lost more than $4 million.
In an official statement on its X account, Hyperliquid clarified that the $4 million loss was not due to a protocol exploit or cyber attack. Instead, the user withdrew when they still had unrealized profit and loss, which lowered their margin and led to liquidation.
Despite the liquidation, the whale managed to secure a net profit of approximately $1.8 million. While the vault lost more than $4 million because it absorbed the large position. As a result, the protocol has decided to lower BTC (BTC) and ETH maximum leverage to 40x and 25x respectively in order to “increase maintenance margin requirements for larger positions.”
