Implications for Hyperliquid margin upgrade: How does DeFi balance low-risk and ecological game?

PANews Editor 's Note: On March 12, 2025, a trader opened a highly leveraged (up to 50 times) long position on Hyperliquid, with a total value of approximately US$200 million. By withdrawing part of the margin, the trader triggered a liquidation, causing the HLP vault to lose $4 million when unlocking the transaction. Traders ended up making a profit of about $1.8 million, while the HLP vault absorbed the losses. Hyperliquid confirms that this is not a protocol vulnerability or hacker attack, but a special case of the transaction mechanism under extreme conditions.

To prevent this risk, Hyperliquid announced on his official Twitter on March 13:

So far, Hyperliquid has traded more than $1 trillion, becoming the first DEX to compete with the size of CEX. With the continuous growth of trading volume and open contracts, the margin system is facing increasingly greater challenges. Yesterday (March 12) events highlighted the strengthening of margin mechanisms to respond more effectively to extreme situations. We immediately reviewed the situation and then analyzed the situation in detail and studied ways to avoid similar situations. Risk management has always been the top priority. Even if this is not emphasized publicly every day, it deserves our continued attention.

To this end, in the network upgrade after 08:00 on March 15, Beijing time, the margin ratio of margin transfer will be required to be 20%. "Margin Transfer" refers to the funds leaving the cross-margin wallet and isolating the margin position. Examples include withdrawals, transfers from permanent accounts to spot, and adding or removing segregation margins. This change does not affect the opening of a new cross margin position and will only affect the new quarantine margin position if the cross margin usage exceeds 5 times after the quarantine position is opened.

This upgrade aims to establish a more stable margin requirement system and reduce the overall impact of potential market shocks on the system when large-scale positions are closed.

As always, Hyperliquid is committed to providing a high-performance, transparent and resilient trading environment and providing the best experience for users.

Comprehensive editor: Tim, PANews

At the same time, there are many misunderstandings in the community's discussion on Hyperliquid margin design. This article will analyze the misunderstandings in common views and explain the idea of ​​Hyperliquid to improve the system based on first principles. Hyperliquid's move is the first innovative design of such in the margin system and may inspire other teams. Just like excellent theories in physics, the best margin design should be concise, standardized, interpretable, and able to deal with various extreme scenarios.

• Some people have concluded that there is a centralized force to detect and limit malicious behavior. This completely goes against DeFi's original intention and everything that Hyperliquid represents, forcing users to return to the Web2 world where the platform has the final decision. Even if it is 10 times more difficult to build a truly decentralized finance, it is worth it. Just a few years ago, no one believed that DEX/CEX trading volume would reach today's ratio. Hyperliquid is leading the way in decentralization and does not seem to stop.
• Some people believe that it is feasible to copy CEX's pattern into DeFi. The most common suggestion is to follow CEX's "graded adjustment of margin requirements by address position size" model. However, this design cannot effectively prevent market manipulation in DEX - smart attackers can easily bypass restrictions by diversifying their positions through multiple accounts. Despite this, this mechanism can still alleviate the market impact of "harmless giant whales" to a certain extent, and therefore has been included in the development plan.
• Another suggestion is to sacrifice the availability of Hyperliquid in exchange for security. For example, if the profit or loss is not achieved, many attacks are impossible to occur. In fact, Hyperliquid pioneered the launch of a quarantine perpetual contract for illicit assets, which has this security mechanism. However, this improvement will have a serious impact on financing arbitrage strategies, as Hyperliquid's unrealized profit and loss needs to be withdrawn to offset losses from other sites. The real needs of users are the top priority of system design.
• In addition to the above, some people also suggest introducing innovation in margin design: setting margin based on global parameters. However, the liquidation price must be a deterministic function of price and position size. But it must be clear that the liquidation price must be a deterministic function of price and position size. If global parameters such as open position volume are included in margin calculation, users will completely lose confidence in using leverage.

So what is the answer?

We all want DeFi, but only if the permissionless system must be able to withstand manipulation of all sizes.

The answer lies in understanding the real risk of large positions: prices are difficult to mark in some cases. When the market shock is close to the maintenance margin level, a linear valuation model that only multiplies the scale by the mark price will fail. Since order book liquidity is essentially a path dependency function that changes over time and market participants’ behavior, we cannot accurately simulate market shocks. In the absence of effective market shock simulations, the liquidation mechanism may become a low slippage exit method, but this price often has an adverse impact on the liquidator.

Therefore, Hyperliquid's margin system update has the ideal characteristics: any liquidated position is either in a loss relative to the entry price or at least a loss (20% - 2 * Maintenance margin ratio/3) = 18.3% (taking the 20x leverage as an example). Even if an ordinary 20 times leverage user achieves a 100% return on equity after experiencing a 5% price fluctuation, he can still withdraw most of his profits and losses without closing his position. However, by introducing independent margin requirements between transfer funds and opening new positions, any attack that attempts to make profits through manipulation will require pushing the mark price by nearly 20%, which is no longer feasible from the perspective of capital investment.

Finally, as market makers continue to expand on Hyperliquid, the problem of marking prices will also be resolved on their own. The Hyperliquid trader is likely to be in a loss overall – the $1.8 million profit and loss generated by long on Hyperliquid may be completely offset by operations that push up prices in other trading venues, or hedging positions in other accounts of Hyperliquid. Market maker HLP took over the unfavorable position and eventually lost $4 million. The only market participants who are sure to make a profit overall are the market maker group. As profit and loss opportunities continue to emerge on the order of millions of dollars per minute, mature market participants have clearly realized that Hyperliquid has become one of the best liquid derivatives trading platforms. As liquidity continues to improve, the cost of capital required for price fluctuations will become higher and higher. While margin system improvement is crucial, market makers’ instinct to pursue profits will form an independent security barrier over time.

The future is decentralized!

Hyperliquid will win!