Original Source: AZEx Community
1. Historical Review: What Really Happened?
In the early morning of August 26, XPL experienced a roller coaster ride on Hyperliquid for a few minutes:
05:36 Huge buy orders swept the order book, with the size of a single transaction ranging from tens of thousands to hundreds of thousands of US dollars, and the price of XPL was rapidly pushed up.
From 05:36 to 05:55, the mark price, dominated by internal market matching, jumped far more than the CEX external market reference, causing a large number of short positions to fall below the maintenance margin. The system initiated liquidation: liquidation orders were directly entered into the order book, creating a positive feedback loop of "book sweep → liquidation → re-book sweep", continuously pushing up the XPL price.
05:55 The price surged to a peak, increasing by nearly 200% in just over ten minutes. Meanwhile, whale accounts took profits, raking in over $16 million in profits in a single minute. Some short positions were liquidated, losing millions of dollars in a matter of minutes.
05:56 The market recovered, prices quickly fell, and the XPL contract market returned to normal, but a number of short accounts had lost all their money. Almost simultaneously, the price of ETH perpetual swaps on the Lighter platform also plummeted, briefly dropping to $5,100.
This shows that this is not a problem with a single platform, but rather a concentrated exposure to the structural risks of the entire DeFi perpetual contract.
2. What did these circumstances cause?
Whales profited handsomely, while short sellers suffered heavy losses. Even low-leverage hedgers were affected.
Many people believe that 1x leverage hedging equals "risk-free." However, in this incident, even 1x leveraged short positions with substantial collateral were liquidated during the crash, resulting in millions of dollars in losses. This has led many users to conclude, "I'll never touch this kind of segregated market again." But the truth is far more complex.
3. Core Issue: Structural Flaws in the Order Book Model
After the XPL incident, much discussion focused on “reliance on a single oracle” or “lack of position limits.” However, these issues miss the point.
The Perp protocol itself has multiple implementation paths:
Orderbook (order book driven)
Peer-to-Pool
and AMM/Hybrid hybrids
The problem today is the order book implementation. Its structural flaws are:
Effective Depth and Chip Distribution
1. The order book looks deep, but the actual effective depth depends on the chip distribution.
2. When the chips are concentrated in the hands of a few big players, even pushing a few points can trigger a chain reaction.
Price anchoring depends on internal transactions
1. In a thin market, order book transactions will directly dominate the mark price.
2. Even with an oracle, as long as the external spot anchor is not strong enough, this reliance will be a weakness.
Liquidation and order book form positive feedback
1. The liquidation order itself needs to enter the order book → further push the price → trigger more liquidations.
2. In a market with thin liquidity, this is an "inevitable stampede" rather than an accidental accident.
As for measures like "setting position limits for individual users," they're actually meaningless. Positions can be split across multiple sub-accounts or wallets, and market-level risks still exist. Therefore, price manipulation isn't the result of manipulation by bad actors, but rather the fate of the order book mechanism under low liquidity conditions.
4. Back to the basics: What exactly does a perpetual contract solve?
When you say “I’m going long ETH,” what’s actually happening behind the scenes?
-If it is a spot transaction, you pay 1000U to buy ETH. If it goes up, you make money, and if it goes down, you lose money.
-If it is a perpetual contract, you pay a margin of 1,000U and can open 10 times more orders, leveraging a position of 10,000U. While amplifying the profit, the risk is also amplified.
There are two key questions to ask here:
Where does the money come from?
Your profits must come from your counterparty (short sellers) or the capital pool provided by LP.
Who determines the price?
Traditional market: Order book transactions directly reflect prices. The more you buy, the higher the price. This is the feedback mechanism of market trends.
On-chain perpetual: Most protocols (such as GMX) do not have their own matching books, but rely on CEX oracle prices.
5. Problems with the Oracle Model
The oracle price is usually derived from the spot transactions of CEX, which means that the transaction volume on the chain cannot be fed back into the price.
Although the oracle has a delay, the more fundamental problem is:
You opened a position of 100 million U on the chain, but there was no corresponding trading volume in the external spot market.
In other words, the transaction demand on the chain cannot in turn affect the price, and the risks are "accumulated" in the system.
This is exactly the opposite of the order book model: the order book price feedback is too fast and easy to be manipulated; the oracle price feedback is delayed and the risk is easily delayed.
6. Basis and Funding Rate
This brings up another key question: How to correct the price difference (basis) between spot and contract?
In the traditional market, if there are far more bullish investors than bearish investors, the contract price will be higher than the spot price.
Perpetual contracts introduce a funding rate mechanism to regulate:
Too many long positions → Funding rate turns positive, long positions have to pay short positions;
Too many short positions → Funding rate turns negative, shorts have to pay longs.
In theory, the funding rate can anchor the contract price back to the spot price.
But for on-chain perps, the situation is more complex: if the spot market lacks depth, even high funding rates may not correct the basis. Especially for unpopular commodities, on-chain contracts may deviate from spot prices for a long time, becoming a nearly independent "shadow market."
7. The Illusion of On-Chain Depth
Many people believe that only unpopular assets are susceptible to manipulation, while top-tier assets are immune. However, the reality is that the true depth of on-chain spot trading is far less than imagined.
Take the top three tokens in each ecosystem as an example:
-On Arbitrum, the depth of mainstream tokens other than ETH is often only millions of dollars within the 0.5% price spread range.
-On leading DEXs like Uniswap, even for an "eco-coin" like UNI, its on-chain spot depth is not enough to support an instantaneous impact of tens of millions of dollars.
what does that mean?
The effective depth is often far lower than the book depth, especially when the chips are concentrated, the actual bearing capacity is even weaker.
In this environment, the threshold for price manipulation is not high. Even the top three tokens in the ecosystem can be easily pushed up or down in extreme market conditions.
In other words: the structural risk of on-chain perps is not a "special case" in unpopular markets, but the "norm" of the entire ecosystem.
8. Design Direction of Next-Generation Protocols
From this XPL plug-in incident, we can see more clearly that the problem is not a vulnerability in a certain platform, but a structural contradiction between the existing order book and on-chain liquidity.
Therefore, if we want to discuss the "new generation Perp protocol", there are at least three directions worth exploring:
1. Preemptive risk control: Before opening a position, swapping, increasing or decreasing liquidity, or closing or closing a position, simulate the market health after execution. If the risk exceeds the threshold, limit or adjust it in advance, rather than passively liquidating the position after it falls below the maintenance margin.
2. Spot Pool Linkage: The current dominant on-chain models either provide overly fast feedback (order books) or delayed feedback (oracles). A better approach is to link contract positions with the spot pool. When risks accumulate, changes in the depth of the spot market can buffer or dilute them. This avoids delayed backlogs and reduces instantaneous stampedes.
3. Prioritize LP protection: Whether in an order book or peer-to-pool, LPs are the most vulnerable link. Next-generation protocols need to integrate LP risk management mechanisms into the protocol layer, making LP risks transparent and controllable, rather than passively accepting the risk.
9. Exploration and Opportunities in Practice
It is easy to talk about the direction, but it is difficult to actually implement it.
But there are some new attempts taking place:
Pre-emptive risk control: Before executing a transaction, simulate market health and filter risks in advance.
Contracts are linked to the spot pool: positions are fed back into spot liquidity to avoid risk accumulation or instantaneous stampedes.
LP priority protection: LP risk control is written into the protocol layer, rather than letting LP passively provide a guarantee.
At the same time, we cannot ignore a larger market fact:
The perpetual swap market generates over $30 billion in fees and commissions annually. In the past, this pie was almost exclusively shared by a handful of centralized exchanges and professional market makers. If next-generation protocols can incorporate AMM technology, breaking down market making into pooled liquidity provision, more ordinary participants can share in this market dividend. This is not just an innovation in risk management, but also a restructuring of incentive mechanisms.
Amidst these explorations, some new projects are also experimenting with different approaches. For example, AZEx, based on the Uniswap v4 Hook mechanism, is attempting to combine pre-execution risk control, dynamic funding rates, and market freezes in extreme situations with LP pooling and profit sharing.
Next week, AZEx will open its testnet. Interested readers can get the latest progress at [https://x.com/azex_io].
10. Conclusion
The XPL plug incident reminds us: the risk is not in the chart, but in the protocol.
Today’s DeFi perpetual contracts are mostly order-book driven. As long as liquidity is insufficient and chips are concentrated, similar stories are bound to repeat themselves.
The real competition among the new generation of Perp protocols isn't about UI, points, or rebates. It's about: Can we design a new Perp protocol that closes the loop between price discovery, risk management, and LP protection, eliminating the repeated stampedes in extreme market conditions? Can we shift the $30 billion market share from a few to a wider audience?
The next generation of protocols must not only address risk but also redistribute benefits. Whoever can achieve both will have the opportunity to define the next generation of the DeFi perpetual contract market.
This article is from a submission and does not necessarily represent the views of BlockBeats.
