Bybit CEO Ben Zhou addressed the recent $4 million loss suffered by decentralized exchange (DEX) Hyperliquid due to a high-leverage Ether trade, acknowledging that centralized exchanges (CEXs) face similar challenges in handling liquidation risks.
On March 12, a crypto trader walked away with $1.8 million, forcing the Hyperliquidity Pool (HLP) to absorb a $4 million loss after executing a 50x leveraged trade on Hyperliquid. The trader turned $10 million into a $270 million long position on Ether (ETH) but was unable to exit without crashing their own position. Instead, they withdrew collateral, offloading assets in a way that left Hyperliquid to cover the losses.
Blockchain security firm Three Sigma clarified that the incident was not an exploit or a hack but rather a consequence of liquidity mechanics. Hyperliquid confirmed this assessment, stating that the event resulted from market dynamics rather than a protocol failure.
In response, Hyperliquid reduced leverage limits, lowering Bitcoin (BTC) leverage to 40x and ETH leverage to 25x. The platform noted that these adjustments aim to increase maintenance margin requirements for large positions and provide a buffer against forced liquidations.
Zhou commented that CEXs also deal with similar situations, where their liquidation engines intervene when whales face liquidation. While reducing leverage is an effective solution, he warned that it could negatively impact business, as traders generally seek higher leverage. He suggested a more dynamic risk limit mechanism that scales down leverage as positions grow, similar to centralized exchanges where large positions might see leverage drop to 1.5x. However, he acknowledged that traders could circumvent these limits by using multiple accounts.
Despite the reduced leverage, Zhou noted that such mechanics could still be exploited unless DEXs implement advanced risk management systems akin to those used by CEXs. He emphasized the need for surveillance and monitoring tools to detect potential market manipulation.
Following the liquidation event and HLP’s losses, Hyperliquid saw significant investor withdrawals. Dune Analytics data recorded a $166 million net outflow from the protocol on March 12, reflecting market uncertainty surrounding the incident.