Hyperliquid Reports $4 Million Loss in Liquidity Provider Vaults
Within a span of 24 hours, Hyperliquid experienced a significant loss of $4 million in its Liquidity Provider (HLP) vaults. The incident was triggered by a major liquidation event involving a high-risk trader, as reported on March 12 by X.
Market Reaction
Following the news of the loss, Hyperliquid’s native token, HYPE, witnessed a negative response, with a drop of over 3% in the past day. The token hit a low of $12.80 before showing a slight recovery to $13.90 at the time of reporting.
Overview of Hyperliquid
Hyperliquid stands as the largest decentralized perpetual exchange by trading volume, commanding more than 64% of the market share.
Details of the Incident
According to the protocol, a trader identified by the wallet address 0xf3f4 held a substantial Ethereum (ETH) long position. On-chain analyst EmberCN revealed that the trader initiated a 50x leveraged long position of 175,000 ETH, valued at around $340 million.
However, the trader decided to close a portion of the position, withdrawing $17.09 million USDC. This action decreased the margin on the remaining 160,000 ETH long position, resulting in extensive liquidations across the platform.
Hyperliquid confirmed the occurrence but highlighted that the trader still managed to exit with a profit of approximately $1.8 million. Nonetheless, the incident had a detrimental impact on HLP, leading to a $4 million loss during the specified period.
Insights on HLP
Hyperliquid emphasized that HLP does not come without risks, even though the vault has maintained a historical net profit of roughly $60 million. HLP functions as a community-driven liquidity vault within Hyperliquid’s ecosystem, supporting market-making and liquidation strategies.
This model enables users to stake USDC in exchange for a portion of the platform’s profits or losses, bringing institutional-level trading strategies to retail users. Revenue is generated through trading fees, funding rates, and liquidations, with the vaults currently showing a negative annualized return of 34%.
In response to the incident, Hyperliquid announced adjustments to the maximum leverage for BTC and ETH, setting them at 40x and 25x respectively. This move aims to increase maintenance margin requirements for larger positions, providing a better buffer for backstop liquidations of significant positions.
