A trader, "Inside Man," exploited Hyperliquid's flaws, withdrawing massive profits before liquidation of his $270 million ETH long position, causing a $4 million loss for the platform due to its lack of a bankruptcy mechanism and unrestricted withdrawal of unrealized gains.
Giant whale enters the market, laying the foundation for initial operation
On the afternoon of March 12, "Brother Insider" (address: 0xf3f496c9486be5924a93d67e98298733bb47057c) deposited US$5.22 million into Hyperliquid. He then opened a long ETH at $1,884.4 (liquidation price $1,838.2) and a long BTC at $82,003.9 (liquidation price $61,182). In the previous two days, he had gone long twice with his 100% winning rate, making a net profit of US$2.2 million. This entry operation seemed to be easy.
Continue to increase positions, and the holding scale has risen rapidly
Immediately afterwards, Brother Insider increased his long position of ETH to 72924.87, worth about US$138 million, reaching the highest record of personal opening order coins. After a series of operations, its floating profit reached US$993,000, but the liquidation price was only US$29 from the market price. He then converted all BTC positions into ETH longs, bridged $10 million to Hyperliquid as margin, and placed a long order of 5,508.08 ETH at a price of $1,921. At this time, he transferred 15.23 million USDC margin, and ETH long positions increased to 140,000, worth US$270 million, accounting for 24.65% of the total position of Hyperliquid ETH contract, and the position floating profit was as high as US$3.1 million.
Operation changes suddenly, and the "Stealing Method" is launched. Prelude
As of now, Brother Insider's operation seems normal, with the liquidation price of US$1,877 below the market price. But at around 17:08, the situation suddenly changed. According to Hyperscan, he tried to withdraw three consecutive times at 17:05 when his long position was open. For the first time, he failed to "the withdrawal amount exceeded the single transaction limit", and then he divided $8 million and $9 million to try to withdraw more than $17 million USD, which was nearly $2 million more than the margin he provided about $15 million.
Induce liquidation, the platform bears huge losses
As a large amount of margin was withdrawn, the price of Insider Brother's position liquidation rose rapidly. At 17:08, more than 100,000 ETH long positions were closed at US$1,915 and were liquidated by Hyperliquid treasury. Due to the huge amount, ETH continued to fall during the closing process, and HLP eventually suffered a loss of about US$4 million. Brother Insider has already locked in nearly $2 million in profits and withdrawn about $8 million in USDC. The price of ETH also fell sharply due to his closing position, falling from $1,970 to around $1,910 in 5 minutes.
Platform defects, the root cause of the problem gradually emerges
HLP is essentially a liquidated fund. This time, Hyperliquid suffered huge losses. The main problems are that it allows arbitrary withdrawal of floating profits, unlimited leverage for large-scale orders, and the HLP vault takes over liquidated positions at a fixed price. Extraction of floating profits in most CEXs is not allowed because they are unrealized profits, and large withdrawals are likely to cause liquidity risks. Hyperliquid liquidity originated from foreign markets such as Binance, and there is no position-breaking mechanism. In the past, the price difference could be made by clearing HLP at a small position. The amount of liquidation this time was too large, resulting in huge losses.
History lessons, OKX case comparison highlights
The well-known KOL Hanbalongwang once posted a message to explain why CEX does not allow extraction of floating profits. In July 2018, OKX had a super big player who started with Bitcoin at $7,000, and made a crazily more than $8,400 with 20 times of leverage, and then removed the margin. After the order was overturned, 50,000 unclosed BTC sell orders were posted. If the decline continued, short order holders need to spread the losses through the position. After that, OKX improved the contract system to limit the risk of crossing positions, and Hyperliquid had obvious loopholes in this regard.
Market impact, liquidity providers are damaged
Before the liquidation incident, HLP liquidity providers can benefit from about 20% of APY. But the huge loss has left all liquidity providers’ earnings in the last month vanished within minutes. This also reflects the risk of Defi investment. The liquidity pool is easily manipulated by price. Even a relatively liquid pool like HLP, it is difficult to withstand the impact of the black swan event.
