According to public information, the margin loss of the HLP fund pool during this ETH 50x leverage arbitrage trading incident mainly stemmed from the following mechanisms and market conditions:
1. **Traders withdrawing margin triggering liquidation**
- A trader opened a long position in ETH worth approximately $200 million on Hyperliquid with **50x leverage**. Subsequently, the trader lowered their position maintenance margin level by **withdrawing part of the margin** (i.e., 'margin transfer'), causing the position to hit liquidation conditions.
- Due to Hyperliquid's liquidation mechanism, the system will automatically close positions when the margin is insufficient to maintain them. In this process, the HLP (Hyperliquidity Provider) treasury takes over the liquidated positions and must close them at market price.
2. **Market shocks and insufficient liquidity**
- The liquidated long position in ETH amounted to **160,000 ETH** (approximately $30.6 million), and due to insufficient market liquidity at the time of liquidation, the ETH price further declined, resulting in an actual liquidation price lower than expected (liquidation price was $1,915). This large-scale sell-off triggered **market shocks**, exacerbating price volatility, ultimately causing the HLP treasury to incur a loss of $4 million.
- Due to the path-dependent nature of order book liquidity, large liquidation orders are difficult to complete without significantly affecting market prices, thus HLP bore this slippage loss.
3. **Design flaws in the margin mechanism**
- Before the incident, Hyperliquid allowed users to withdraw unrealized profits while **maintaining insufficient margin**. Traders lowered their margin ratio through withdrawal, making their positions more susceptible to liquidation, while HLP was forced to take over the loss-making positions.
- In the original mechanism, margin transfers (such as withdrawals) did not set strict margin ratio limits. For example, users could withdraw funds and only need to maintain a low margin level, leading to insufficient system risk resistance.
4. **Protocol upgrades and subsequent adjustments**
- Hyperliquid upgraded its margin rules after the incident, requiring a **20% margin ratio to be met for margin transfers**, and reduced the maximum leverage for BTC and ETH (adjusted to 40x and 25x, respectively) to limit the amplification of similar risks.
- This adjustment aims to prevent users from manipulating margin levels through withdrawal while providing a buffer for large position liquidations, reducing the negative impact of market shocks on HLP.
Summary
The core of the HLP fund pool's loss lies in:
Traders actively triggered liquidation by leveraging and margin withdrawal rules, while insufficient market liquidity caused the liquidation price to deviate from expectations, ultimately leading HLP to bear the actual losses.
The incident exposed the limitations of risk control mechanisms of DeFi derivatives platforms under extreme market conditions, and also prompted improvements in Hyperliquid's margin system.
