If you get ruthless, you can even cut the exchange! A deep article on how Hyperliquid was fucked for $1.8 million?

Author: Scof, ChainCatcher

Edited by: TB, ChainCatcher

Today, the 50-fold leverage giant whale on Hyperliquid entered the market again, opening an ETH long order of about US$300 million, with a maximum floating profit of US$8 million. However, he quickly withdrew most of the principal and profits, actively compressing the liquidation price, which eventually led to the liquidation of 160,234.18 ETH (total value of US$306 million) being liquidated and leaving with 1.8 million USDC.

Contrary to the whale's profit, Hyperliquid's HLP vault suffered considerable losses in the incident. According to official Hyperliquid data, HLP lost about $4 million in 24 hours to fill the deficit caused by the huge position liquidation.

Leverage stress tests to get the exchange

Before this full-chain operation, the whale has achieved brilliant results of four battles and four victories:

• March 2nd - Long BTC and ETH with 50 times leverage, making a huge profit of US$6.83 million in 24 hours.
• March 3 - Short BTC 50 times before the opening of the US stock market, accurately capturing the market downturn, and making a profit of US$300,000.
• March 10th - Turn the direction and go long for ETH 50 times, quickly earning US$2.15 million in just 40 minutes.
• March 11 - Long ETH with a limit of 50 times within two minutes, with a small profit of US$5,000, but the holding time is extremely short, which is suspected to be a test of the market.

However, this profit method is different from the previous precise opening positions, but through stress tests, the basic steps are as follows:

The first step is to raise positions and prices with high leverage:

First, we use 50 times high leverage to establish huge long positions in a short period of time to leverage huge market positions with relatively small funds. In essence, it is to guide the market in a direction that is beneficial to oneself through continuous increase in investment and capital injection, laying the foundation for subsequent arbitrage.

The second step is to decisively withdraw profits at a high level when floating profits:

When a large floating profit occurs in the position, the whale decisively converts the floating profit into real profits - by withdrawing the profit part of the margin and even the principal, these funds are free from exchange risks. This move is equivalent to "locking" the profit without closing the position. When the account assets were significantly reduced, the risk rate of the remaining positions soared, and the liquidation price was pushed closer to the current price.

Step 3: Actively incite position transfer losses:

Finally, the whale chose not to close the position by itself, but instead let the platform's forced leveling mechanism take over the position. Since Hyperliquid's HLP vault will take over positions at the liquidation price, the whale is equivalent to selling the remaining positions at the liquidation price, and there is no need to worry about slippage losses caused by market selling pressure, and these losses will ultimately be borne by the HLP fund.

But the community obviously does not think that such a giant whale will only accept a profit of $1.8 million.

According to ZhuSu, the founder of Sanjian Capital, the whale opened a large short order on CEX while opening a position on the chain, and activated the ETH price to generate instantaneous liquidity, thereby achieving profits.

The encryption KOL@CryptoApprenti1 directly indicates that the address is using cross-border money laundering, reminding the community not to "follow orders".

Analysis of Hyperliquid 's "Vulnerability" mechanism

Since the incident happened, the most discussed question in the community is: How did the giant whale complete the "self-explosion profit" trading operation? How does Hyperliquid's contract mechanism give it an opportunity to take advantage of it?

****1. There is no upper limit on holdings, and leverage can be

infinitely amplified****

Before this incident, Hyperliquid did not restrict the holding size and only restricted the amount of the market order.

This means that theoretically, as long as the account funds are sufficient, users can continuously expand their holdings through high leverage, and even manipulate market sentiment in a short period of time. It is precisely because whales take advantage of this and continue to increase their positions in a short period of time, quickly pushing the value of their positions to US$300 million, creating a market FOMO effect.

****2. The particularity of HLP mechanism: active market making vs.

passive opponents****

Compared with GMX's GLP adopts a passive rival trading strategy, Hyperliquid's HLP is actively market-making by the platform and makes profits through market-making price difference, capital fees and liquidation.

This model itself operates stably under normal circumstances of the market, but when the holdings of a single account are too large and highly concentrated, the liquidity of HLP will be under tremendous pressure. Whale took advantage of the loophole of no position limit to quickly build a large position, so that the platform's liquidity cannot keep up with trading demand, and ultimately causing extreme market volatility.

3. Oracle price mechanism vs. traditional matching system

Hyperliquid's contract price is marked with oracles, rather than a decision by stepping up market orders like a centralized exchange. This brings two key issues:

• Can't rely on the deep buffering of large-value transactions in the order book - In CEX, huge market orders need to eat the orders in turn, resulting in slippage, while the price of Hyperliquid is the marked price calculated by the oracle. Whales can directly build large positions at this price without being affected by the market depth.
• High leverage accelerates market price fluctuations - Since the liquidation mechanism is also based on oracle prices, when whales hold positions with high leverage, slight fluctuations in the market may quickly trigger liquidation, forming a chain reaction, further aggravating market turmoil.

****4. BUG of the liquidation mechanism: Self-destructive closing will

transfer losses to the platform****

After floating profits, whales choose to withdraw most of their principal and profits, and actively push high-definition settlement prices, making the remaining positions very easy to trigger liquidation.

Once liquidation occurs, HLP needs to take over the position at the liquidation price, resulting in some losses being passed on to the platform. Under this model, whales are equivalent to arbitrage using the platform mechanism. After obtaining large profits in the early stage, they will dump the final losses on the platform and the remaining liquidity providers.

Where will the on-chain derivatives exchange go?

The Hyperliquid incident undoubtedly exposed the systemic risks of on-chain derivatives exchanges in a high leverage environment.

Although decentralized exchanges provide a license-free and transparent trading environment, allowing users to trade freely, the existing mechanisms also give whales the opportunity to manipulate the market. High leverage and oracle pricing not only allow whales to leverage the market, but may also pass on the final losses to platforms and liquidity providers.

After this storm, although Hyperliquid adjusted the rules, it seems that it is just a stopgap measure and has not solved the fundamental problem.

We can’t help but want to ask, can active market making models such as HLP really compete with the whale strategy? Or does the future liquidity provision model need to be completely reformed and a stronger risk hedging mechanism is introduced?

How to better balance the advantages brought by security risk control mechanisms and decentralization may be the problem that "Hyperliquids" need to truly solve.