Compiled by: Tim, PANews
Editor's Note from PANews: On March 12, 2025, a trader opened a high-leverage (up to 50x) ETH long position on Hyperliquid, with a total value of about $200 million. By withdrawing part of the margin, the trader triggered a liquidation, causing a loss of $4 million for the HLP treasury when unlocking the trade. The trader ultimately made a profit of about $1.8 million, while the HLP treasury absorbed the loss. Hyperliquid confirmed that this was not a protocol vulnerability or hacking attack, but a special case of the trading mechanism under extreme conditions.
To prevent this risk, Hyperliquid announced on its official Twitter on March 13:
So far, Hyperliquid's trading volume has exceeded $1 trillion, becoming the first DEX to rival the scale of CEXs. As trading volume and open interest continue to grow, the margin system is facing increasing challenges. The incident on March 12 highlighted the need to strengthen the margin mechanism to better withstand extreme situations. We immediately conducted a review, then analyzed the scenario in detail and studied ways to avoid similar situations. Risk management has always been a top priority. Even if we don't publicly emphasize this point every day, it is still worth our continuous attention.
To this end, in the network upgrade after 8:00 am Beijing time on March 15, the margin transfer margin ratio will be required to be 20%. "Margin transfer" refers to the transfer of funds out of the cross-margin wallet and isolated margin positions, such as withdrawals, transfers from perpetual accounts to spot, and the addition or removal of isolated margin. This change will not affect the opening of new cross-margin positions, and will only affect the opening of new isolated margin positions when the cross-margin usage exceeds 5 times.
This upgrade aims to establish a more robust margin requirement system and reduce the potential market impact on the overall system when large positions are liquidated.
As always, Hyperliquid is committed to providing a high-performance, transparent and resilient trading environment, and delivering the best user experience.
At the same time, there are many misunderstandings in the community's discussions on Hyperliquid's margin design. This article will analyze the misconceptions in the common views and explain Hyperliquid's approach to improving the system based on first principles. Hyperliquid's move is the first of its kind in margin system innovation, and may provide inspiration for other teams. Just like excellent theories in physics, the best margin design should be concise, standardized, explainable, and able to withstand various extreme scenarios.
Some have concluded that a centralized force is needed to detect and restrict malicious behavior. This completely goes against the original intention of DeFi and everything Hyperliquid represents, forcing users back into the Web2 world where the platform has the final say. Even if building truly decentralized finance is 10 times more difficult, it is still worth doing so. Just a few years ago, no one believed that the trading volume of DEX/CEX would reach today's proportion. Hyperliquid is at the forefront of decentralized construction, and it seems to have no signs of stopping.
Some believe that copying the CEX model to DeFi is feasible. The most common suggestion is to emulate the CEX's "adjusting margin requirements based on address-level holdings" model. However, this design cannot effectively prevent market manipulation in DEX - savvy attackers can easily bypass the restrictions by dispersing their positions across multiple accounts. Nevertheless, this mechanism can still mitigate the market impact of "harmless whales" to a certain extent, and has been included in the development plan.
Another suggestion is to sacrifice Hyperliquid's usability in exchange for security. For example, if unrealized profits and losses are not withdrawable, many attacks would not be possible. In fact, Hyperliquid was the first to launch isolated perpetual contracts for non-liquid assets, which have this security mechanism. However, this improvement will have a serious impact on arbitrage strategies, as Hyperliquid's unrealized profits and losses need to be withdrawn to offset losses elsewhere. User's real needs are the top priority in system design.
In addition to the above, there are also suggestions to introduce innovations 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 interest are included in the margin calculation, users will completely lose confidence in using leverage.
So what is the answer?
We all want DeFi, but the prerequisite is that permissionless systems must be able to withstand manipulation of various scales.
The answer lies in understanding the true risk of large positions: prices can be difficult to mark in certain situations. When market shocks are close to the maintenance margin level, a linear valuation model based solely on mark price and size will fail. Since the nature of order book liquidity is a path-dependent function that evolves over time and changes with the behavior of market participants, we cannot accurately simulate market shocks. In the absence of effective market shock simulation, the liquidation mechanism may become a low-slippage exit, but such prices often have an adverse impact on the liquidated party.
Therefore, the updates to Hyperliquid's margin system have the following ideal characteristics: any liquidated position must either be in a loss relative to the entry price, or have incurred a loss of at least (20% - 2 * maintenance margin ratio / 3) = 18.3% relative to the last margin withdrawal point (using 20x leverage as an example). Even if an ordinary 20x leverage user achieves a 100% equity return after a 5% price fluctuation, they can still withdraw most of the profit without liquidation. However, by introducing independent margin requirements between fund transfers and new position openings, any attempt to profit through manipulation would require pushing the mark price close to 20%, which is not viable in terms of capital investment.
Finally, as market makers continue to expand their scale on Hyperliquid, the mark price issue will also be self-resolving. The Hyperliquid trader is likely to be in an overall loss - the $1.8 million profit and loss generated by their long position on Hyperliquid may be completely offset by their price manipulation operations on other trading venues, or by their hedging positions on other Hyperliquid accounts. The market maker HLP took over the adverse position and ultimately lost $4 million. The only market participants who are undoubtedly profitable overall are the market maker community. As profit and loss opportunities worth hundreds of millions of dollars per minute continue to emerge, mature market participants have clearly recognized Hyperliquid as one of the best liquidity platforms for derivative trading. As liquidity continues to improve, the capital cost required for price fluctuations will become higher and higher. Although margin system improvements are crucial, the profit-seeking instinct of market makers will form an independent safety barrier over time.
The future belongs to decentralization!
Hyperliquid will prevail!
