An Event of Liquidation Shakes Hyperliquid
The native token of Hyperliquid, HYPE, experienced a sharp drop of 8.5% on Wednesday morning, a direct result of a massive liquidation involving a whale on the platform. This incident resulted in a loss of approximately $4 million for the HLP Vault (Hyperliquidity Provider), a key element of the protocol.
The price of HYPE went from $14 to $12.4 before stabilizing and returning to its opening price. This movement has raised questions within the community, with some suspecting market manipulation. However, Hyperliquid quickly responded, stating that there had been no attack or exploitation of the protocol.
Regarding commentary and questions on the 0xf3f4 user’s ETH long:
To be clear: There was no protocol exploit or hack.
This user had unrealized PNL, withdrew, which lowered their margin, and was liquidated. They ended with ~$1.8M in PNL. HLP lost ~$4M over the past 24h.
— Hyperliquid (@HyperliquidX) March 12, 2025
The HLP Vault: A Market-Making Mechanism Shaken
The HLP Vault is a cornerstone of the Hyperliquid protocol, a decentralized perpetual futures exchange operating on its Layer 1 blockchain. It allows users to deposit USDC to participate in market-making and liquidation strategies, usually reserved for institutional players. This mechanism generates revenue through trading fees, funding payments, and liquidations.
However, this event has highlighted a structural weakness of the HLP, with Hyperliquid insisting that it is not a risk-free strategy. A user reportedly withdrew some of their funds, reducing their margin level, before being automatically liquidated. The HLP Vault, taking the opposite position, thus absorbed a net loss of $4 million, which is nearly 1% of the total locked value of the HLP, amounting to $451 million.
The Liquidation of a Whale Impacts Hyperliquid: What Happened?
Earlier in the day, a whale deposited 15.23 million USDC to build a large long position on Ethereum, totaling approximately $306.85 million. After liquidation, this trader managed to withdraw 17.09 million USDC, resulting in a net profit of $1.86 million, while the HLP absorbed most of the losses.
The incident has highlighted the market’s vulnerability to positions of this magnitude. In response, the platform announced adjustments to leverage levels, reducing the maximum to 40x for Bitcoin and 25x for Ethereum. This decision aims to increase margin requirements to prevent such situations from recurring.
However, some users have noticed a potential strategy for malicious actors looking to take advantage of the HLP vault:
Oke thought about this HL whale some more…
He’s abusing HLP vault’s liq mechanics?I honestly dont know why he didnt wait for CPI to do this
Here is what i would do as a BadActor™
>Build ~300m ETH long pos
>Hedge on binance secretly
>5sec before CPI, remove margin/collat… pic.twitter.com/SujeLlBUX0— illiquidity providooooor (@skyquake_1) March 12, 2025
A Warning About the Risks of the HLP Vault
Hyperliquid has emphasized that the HLP Vault is not a risk-free strategy and that such losses are inherent to its operation. Despite this incident, the HLP’s historical PNL remains positive at around $60 million.
This episode highlights the challenges faced by decentralized trading platforms, particularly in managing massive liquidations. If Hyperliquid manages to strengthen its liquidation engine, this event could mark a turning point in its approach to risk management.
