Lower leverage as positions grow

Bybit CEO Ben Zhou commented on a recent $4 million loss suffered by decentralized exchange (DEX) Hyperliquid due to an Ether whale’s high-leverage trade, noting that centralized exchanges (CEXs) face similar challenges.

On March 12, a crypto investor walked away with $1.8 million and forced the Hyperliquidity Pool (HLP) to bear a $4 million loss after a trade that used leverage on the Hyperliquid decentralized exchange (DEX). 

The trader used about 50x leverage to turn $10 million into a $270 million Ether (ETH) long position. However, the trader couldn’t exit without tanking their own position. Instead, they withdrew collateral, offloading assets without triggering a self-inflicted price drop, leaving Hyperliquid to cover the losses.

Smart contract auditor Three Sigma said the trade was a “brutal game of liquidity mechanics,” not a bug or an exploit. Hyperliquid also clarified that this was not a protocol exploit or a hack. 

Hyperliquid lowers leverage trading for BTC and ETH

In response to the trade, Hyperliquid lowered its Bitcoin (BTC) leverage to 40x and its ETH leverage allowance to 25x. This increases the maintenance margin requirements for larger positions on the DEX. “This will provide a better buffer for backstop liquidations of larger positions,” Hyperliquid stated. 

In an X post, the Bybit CEO commented on the trade, saying that CEXs are also subjected to the same situation. Zhou said their liquidation engine takes over whale positions when they get liquidated. While lowering the leverage may be an effective solution, Zhou said this could be bad for business: 

“I see that HP has already lowered their overall leverage; 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 suggested a more dynamic risk limit mechanism that reduces the overall leverage as the position grows. The executive said that in a centralized platform, the whale would go down to a leverage of 1.5x with the huge amount of open positions. Despite this, the executive recognized that users could still use multiple accounts to achieve the same results.

The Bybit CEO added that even the lowered leverage capabilities could still be “abused” unless the DEX implements risk management measures such as surveillance and monitoring to spot “market manipulators” on the same level as a CEX. 

Related: Crypto trader gets sandwich attacked in stablecoin swap, loses $215K

Hyperliquid sees $166M net outflow

Following the liquidation event of the ETH whale and the losses the HLP Vault suffered, the protocol experienced a massive outflow of its assets under management. Dune Analytics data shows that Hyperliquid had a net outflow of $166 million on March 12, the same day as the trade.