The Hyperliquid Liquidation Event: Cold Thinking After the Leverage Storm

Key takeaways

• Research shows that on March 13, 2025, a whale on the Hyperliquid platform liquidated a long ETH position through a highly leveraged trade, resulting in a loss of approximately $4 million for HLP Vault.
• The evidence tends to believe that this was a legitimate operation and that the whale avoided slippage in the market by withdrawing unrealized profits to trigger liquidation.
• This incident has sparked discussion about the difference in capabilities between DEXs and CEXs in highly leveraged trading.
• Hyperliquid has lowered leverage caps (up to 40x for BTC and 25x for ETH) and plans to improve the margin system to prevent similar manipulations.

Hyperliquid Liquidation Event

Beginning and Background of the Event

On March 13, 2025, a whale liquidation event on the Hyperliquid platform became a hot topic in the DeFi community. Hyperliquid is a decentralized perpetual contract trading platform known for its efficient on-chain order book and high-leverage trading (up to 50x). Its HLP Vault is a community-driven liquidity pool used to support clearing and market making, but this mechanism exposes vulnerabilities in the face of extreme market behavior.

According to the Coindesk report and the NFT Evening report, the incident originated on March 12, when a giant whale (the on-chain address is often referred to as “0xf3f4”) executed a high-risk trading strategy. The whale deposited about 15.23 million USDC and opened a long position of 160,000 ETH with a total value of about $307 million, with a leverage between 13.5x and 19.2x (the specific leverage varies slightly depending on the data from different sources). This position initially showed an unrealized profit of $8 million, and the whale subsequently withdrew 17.09 million USDC (including principal and profit), significantly reducing the margin level.

As the ETH price retreated (possibly to around $1,915), the position was liquidated, Hyperliquid’s automated clearing system took over, and HLP Vault was forced to take over at a high price and gradually close the position. Due to the lack of liquidity in the market, HLP lost about $4 million in the process of closing its position. This loss represents 1% of Hyperliquid’s total value locked (TVL) and approximately 6.6% of its historical cumulative profit ($60 million).

Whale Strategy & Impact

Whale’s strategy is described as “liquidation arbitrage”, which is to transfer risk to HLP Vault by withdrawing floating profits to reduce margin, induce liquidation, and transfer risk to HLP Vault. This operation circumvented the huge slippage of market orders and allowed the whale to exit the $300 million position at a lower cost. In the end, the whale made a profit of about $1.86 million, while HLP Vault bore a loss of $4 million.

The event triggered a net outflow of $166 million, with the HYPE token price falling from $14 to $12.84, reflecting the market’s shaking trust in the platform. ETH prices were also weighed down by liquidation selling pressure, falling to around $1,915, ending a previous slight rally.

Interestingly, the same whale continued to be active after the event, opening a new 25x leveraged ETH long and 40x leveraged BTC short on March 13, showing that it was not completely out of the market, a move that could further test the platform’s risk management capabilities.

DEX vs. CEX Leverage Management

This incident has sparked a discussion about the difference in capabilities between DEXs and CEXs in highly leveraged trading. Some have dismissed this as a “trading turmoil and crisis of confidence”, questioning the sustainability of the DEX’s high leverage. Others see it as a “liquidity game” within the rules that doesn’t need to be read too much into it. CEXs can adjust leverage caps based on position size through centralized risk management, such as dynamic risk limiting mechanisms. For example, in a CEX, a position of this size may be limited to 1.5x leverage. However, DEXs such as Hyperliquid lack similar controls due to their decentralized nature, allowing users to circumvent restrictions by diversifying their risk through multiple KYC-free accounts.

In theory, the advantages of CEXs include market monitoring tools and open interest (OI) limits to detect and prevent market manipulation. The challenge for DEXs is to maintain the principle of decentralization while preventing abuse. For example, Hyperliquid can’t freeze accounts or track user identities like CEXs do, which increases the risk of manipulation.

Hyperliquid’s response

Hyperliquid officially responded afterwards, denying that the incident was a vulnerability or a hack, emphasizing that it was the result of highly leveraged trading. Based on the information we have collected, the Platform has taken the following measures:

• Reduced leverage limit: Reduced the maximum leverage to 40x for BTC and 25x for ETH to reduce the risk of liquidation of large positions.
• Improved margin system: It is planned to introduce a new margin design to ensure that liquidated positions are at a loss for traders (relative to the entry price or the last margin transfer). For example, at 20x leverage, liquidated positions need to lose at least 18.3%, making manipulation uneconomical.

In addition, Hyperliquid emphasized that with the addition of market makers in the market, the liquidity of the platform will increase, and the cost of price manipulation will increase significantly. According to Hyperliquid’s Medium article, this strategy will attract more professional players and enhance system robustness.

Event Data at a Glance

Here’s a summary of the key figures from the incident:

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Community perception with Block unicorn

The community’s perception of the incident was divided. Some have concluded that there needs to be a centralized effort to detect and limit malicious behavior. This completely defeats the purpose of decentralized finance (DeFi) and everything Hyperliquid stands for. This forces users back to the Web2 world, where the platform has the final say. True decentralized finance is worth it, even if it’s 10 times harder to set up. Just a few years ago, no one believed that DEX/CEX trading volume would reach today’s ratio. Hyperliquid is leading the way and has no intention of stopping.

While others believe that the method of copying from CEXs will also work in DeFi. The most common advice I’ve seen is that as the position size increases, the margin requirement ratio by address should be adjusted accordingly, as CEXs only offer higher leverage for smaller positions. However, this approach does not prevent manipulation attempts on DEXs, as sophisticated attackers can easily open positions on multiple accounts. Nevertheless, this will reduce the impact of the “organic whale” position to a certain extent and is one of the features to be achieved.

Another suggestion is to implement some features that severely limit the usability of the platform in exchange for security. For example, many attacks cannot be carried out if the unrealized profit and loss (PNL) is not extractable. In fact, Hyperliquid pioneered segregation-only perpetual contracts for illiquid assets that have this security mechanism. However, this change will have a serious impact on the money arbitrage strategy, as unrealized profit and loss (pnl) will need to be withdrawn from Hyperliquid to offset losses in other venues. In system design, real user needs are the primary consideration.

There are also suggestions for design innovation through margin settings based on global parameters. However, the liquidation price needs to be a deterministic function of price and position size. If global parameters such as open interest are used as input to margin requirements, users will lose confidence in using leverage.

So what’s the answer? We all want DeFi, but permissionless systems must be resistant to manipulation at all scales.

The answer lies in understanding the real problem with large positions: they are difficult to mark. When the market impact approaches the maintenance margin, the first-order approximation of the mark price multiplied by the size becomes invalid. It is impossible to accurately simulate market impact because order book liquidity is a path-dependent function of time and the behavior of other participants. If market impact is not simulated, liquidation can become a low-slippage exit method, but the price is not in favor of the liquidator.

As a result, Hyperliquid’s margin system update has the following desirable characteristics: any liquidated position is either a loss relative to the entry price, or at least (20% - 2 * Maintenance margin ratio / 3) = 18.3% loss relative to the last margin transfer (using 20x leverage as an example). An organic 20x leveraged user receives a 100% equity return after a 5% volatility and is still able to withdraw most of the profit and loss without closing the position. However, by introducing a separate margin requirement between the transfer and the opening of a new position, a profitable manipulation attempt would require moving the mark price by almost 20%. From a capital point of view, such an attack is not feasible.

I’d like to point out that as market makers continue to scale on Hyperliquid, the mark price issue will resolve itself. So yesterday’s traders were likely to lose money overall. The $1.8 million profit and loss on Hyperliquid may have been made up when pushing up prices elsewhere or using other accounts on Hyperliquid. HLP took on an unfavorable position and lost $4 million. The only market participants who are sure to make money in general are market makers, who are able to make millions of dollars in profits and losses in a matter of minutes. As liquidity improves, the cost of changing prices will become more and more expensive. So, while improvements in margin systems will be beneficial, the appeal of easy P&L attraction to market makers will provide an independent source of robustness over time.

Finally, Hyperliquid’s response reflects its adherence to the principles of decentralization while reducing the risk of manipulation through technological innovations, such as improved margin systems. However, given the open nature of DEXs, there may still be a need to explore more CEX-level risk management tools in the future, although this may spark community debate over privacy and decentralization. This incident provides valuable lessons for the DeFi ecosystem, highlighting the potential risks of highly leveraged trading and the importance of platform governance.