Revealed: What is the story behind the “short-selling method” performed by the “Insider Brother” of HyperLiquid?

On the afternoon of March 12, "Brother Insider" (address: 0xf3f496c9486be5924a93d67e98298733bb47057c) deposited US$5.22 million into Hyperliquid. He then opened the ETH and BTC at $1,884.4 (liquidation price $1,838.2) and $82,003.9 (liquidation price $61,182) with 50 times leverage. In the previous two days, he had gone long twice with his 100% winning rate, making a net profit of US$2.2 million.

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, which was only US$29 from the liquidation price. Afterwards, he 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 a total of 15.23 million USDC margin to Hyperliquid, and the long position of ETH increased to 140,000, worth US$270 million, accounting for 24.65% of the total position of Hyperliquid ETH contract (US$1.1 billion), and the floating profit of the position was as high as US$3.1 million. As of now, operations seem normal, with the liquidation price of USD 1,877, which is lower than the market price.

But soon, at 17:08, Brother Insider made three consecutive operations: closing, closing and liquidation, and then withdrew about US$8 million. ETH price fell sharply due to his closing, falling from $1,970 to around $1,910 in 5 minutes. Strangely, his liquidation price is around $1,877 and is far from the market price of $1,970, but it has attracted attention.

It turned out that when Brother Insider had unclosed his long position, he withdrew three consecutive times at 17:05. The first withdrawal was unsuccessful due to the "withdrawal amount exceeding the single limit". He then divided the USDC with a total withdrawal of more than US$17 million in two transactions. This is nearly $2 million more than its margin, meaning that all remaining positions have been liquidated and he has locked in a profit of nearly $2 million.

After a large amount of margin was withdrawn, the price of the insider's position liquidation rose rapidly.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 closing, resulting in losses, and HLP ultimately suffered a loss of approximately US$4 million.

HLP is essentially a liquidated fund, and deposit users are the biggest potential victims. The main reason for this Hyperliquid loss is that it can withdraw floating profits at will, and there is no limit on the opening of large orders. The HLP vault will also take over the liquidated position at a fixed price. Extraction of floating profits in most CEXs is not allowed because it is unrealized profits, and extraction can easily cause liquidity risks.

Hyperliquid liquidity comes from foreign markets such as Binance, and there is no position breaking mechanism. After taking over the liquidation order, it will be traded in the secondary market. Previously, HLP could make a difference in price after liquidating small positions, but the amount of liquidation this time was huge, which brought huge losses to HLP. The well-known KOL Hanbalongwang mentioned that there were similar situations of position penetration in OKX in 2018, and since then, the contract system has been improved to limit the risk of position penetration.

Prior to this incident, HLP liquidity providers could receive about 20% APY, but the losses allowed last month's gains to disappear within minutes. This reflects the risk of Defi investment, the liquidity pool may be manipulated by price, and the small pool is more risky, and even HLP is difficult to resist the black swan event.