Bybit CEO Ben Zhou Comments on $4M Loss Suffered by Hyperliquid Due to Ether Whale's High-Leverage Trade

The Bybit CEO commented on the trade, saying that CEXs are also subjected to the same situation.

A recent $4 million loss suffered by decentralized exchange (DEX) Hyperliquid due to an Ether whale’s high-leverage trade has sparked discussion on the challenges faced by both DEXs and centralized exchanges (CEXs).

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.

This is a trader using ~50x leverage to put $270M in ETH LONG and get liquidated when price drops below entry. It's a brutal game of liquidity mechanics but no exploit at all. We prefer to highlight this as a learning moment for the industry. From a smart contract auditor (3Sigma). pic.twitter.com/3r6990M88c

— Three Sigma (@three_sigma) March 10, 2024

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:

We are seeing the same situation in the industry recently. When a huge position gets liquidated, our liquidation engine takes over the position.

Lowering the leverage may be an effective solution but it could be bad for business. We may want to consider a more dynamic risk limit mechanism that reduces the overall leverage as the position grows. For a centralized platform, the trader would go down to 1.5x leverage with the huge amount of open positions. Though users can still use multiple accounts to achieve the same results. We are capable of handling it. It will be interesting to see how Hyperliquid manages it.

It seems that the lowered leverage capabilities could still be abused unless they have risk management measures such as surveillance and monitoring to spot "market manipulators" on the same level as a CEX to mitigate risks. It is a common practice for CEXs to intervene in extreme market conditions to protect the stability of the platform and ensure the continuity of operations. It would be interesting to see how far they are willing to go to intervene in such a situation.

The Bybit executive 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 Hyperliquid protocol saw a massive outflow of its assets under management following the liquidation event of the ETH whale and the losses the HLP Vault suffered.

According to Dune Analytics data, Hyperliquid had a net outflow of $166 million on March 12, the same day as the trade.