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Bybit CEO Ben Zhou Discusses $4 Million Hyperliquid ETH Whale Liquidation

Bybit CEO Ben Zhou recently shared insights on the massive Hyperliquid ETH whale liquidation that resulted in the platform losing $4 million. He touched on key issues related to leverage on centralized exchanges (CEXs) and decentralized exchanges (DEXs), shedding light on the mechanics behind such liquidations.

How the ETH Whale Executed the Liquidation

Zhou explained how the whale managed to execute a significant liquidation without triggering a market crash. The whale held a long position of 175,000 ETH (valued at approximately $340 million) with 50x leverage. This position was strategically liquidated while Hyperliquid absorbed the loss.

“Why not just try to hit the liquidation price by withdrawing floating P&L [profit and loss] and push the liquidation price up? Once it’s triggered, let HP take the whole position at the liquidation price, so it’s not your problem anymore. HP would suffer some loss,” said Zhou.

According to Zhou, this approach allowed the whale to make a “quick and clean” exit, leaving Hyperliquid’s liquidation engine, the HLP Vault, to absorb the position at $1,915 per ETH. The vault reduced the leverage by half to mitigate the impact, but Hyperliquid still incurred a $4 million loss.

Challenges of Leverage on Exchanges

Zhou emphasized that both centralized and decentralized exchanges often rely on liquidation mechanisms to handle large positions. However, this strategy can hurt business as users typically prefer higher leverage. To address this, Zhou suggested implementing tools like dynamic risk limit mechanisms, which automatically adjust leverage based on position size. For instance, larger positions would have smaller leverage limits.

He noted that while centralized exchanges might reduce leverage to around 1.5x for extremely large positions, this approach has its limitations. Users can bypass these safeguards by creating multiple accounts, especially on platforms that lack strict know-your-customer (KYC) requirements.

Risk Management for Decentralized Exchanges

To mitigate these risks, Zhou proposed that DEXs deploy advanced risk management mechanisms. These measures could include:

  • Market surveillance tools: Designed to detect on-chain market manipulation and abuse.
  • Open interest limitations: Restricting the total volume of leveraged positions.

“Even with this current dropped leverage (BTC to 40x, ETH to 25x) on Hyperliquid, it could still be abused, unless they start to introduce CEX-level risk management or drop their leverage even lower,” Zhou stated.

Details of the Hyperliquid Vault Incident

On March 12, the whale opened a long position on Hyperliquid with 50x leverage for 175,000 ETH worth $340 million. After closing 15,000 ETH, the whale transferred approximately $17.09 million USDC in margin back to their address. This withdrawal reduced the margin, triggering a liquidation for the remaining 160,000 ETH position.

Hyperliquid’s HLP Vault absorbed the liquidation at $1,915 per ETH. The platform clarified in an official statement that the $4 million loss was not due to a protocol exploit or cyberattack. Instead, the user’s withdrawal of unrealized profit and loss led to the liquidation. Despite the protocol’s loss, the whale secured a net profit of roughly $1.8 million.

Hyperliquid’s Response

In response to the incident, Hyperliquid announced adjustments to its leverage limits. The maximum leverage for Bitcoin (BTC) and Ethereum (ETH) positions was lowered to 40x and 25x respectively. This move aims to increase maintenance margin requirements for larger positions, reducing the risk of similar losses in the future.

These developments spotlight the ongoing challenges faced by exchanges in balancing user preferences for high leverage with the need for robust risk management. As the cryptocurrency industry evolves, platforms must continuously adapt their strategies to safeguard against significant losses while maintaining user trust.

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