A recent trade on Hyperliquid’s HLP vault resulted in a loss of $4 million. This loss was not due to a hack or bug, but because a trader exploited the system. The trader converted $10 million USDC into a $271 million Ethereum long position, making a profit of $1.8 million and leaving HLP to bear the loss. This is the largest single-day loss for the vault since its launch in May 2023.
Experts are now questioning whether liquidation-based protocols like HLP are vulnerable to traders who know how to manipulate the system. They are concerned that these protocols may be leaving themselves open to exploitation.
HLP is a liquidity pool offered by Hyperliquid, where users can deposit funds to earn passive income from market-making and liquidations. It usually profits when traders lose, but in this case, a trader withdrew collateral in a way that forced HLP to take on a bad trade, resulting in the $4 million loss.
The trader executed their strategy by withdrawing their collateral, reducing their margin, and triggering a forced liquidation. This left HLP with a $286 million Ethereum long position. The trader knew that HLP’s forced selling would drive down the price of Ethereum, so they likely hedged by shorting ETH on another exchange. As the price of ETH dropped, they made a profit while HLP absorbed the losses.
Hyperliquid argues that this was not a traditional exploit because HLP allows market makers to step in. The loss was attributed to execution slippage, meaning the liquidator could not perfectly match entry and exit prices.
This is not the first time traders have tested HLP’s system. In 2023, an attacker manipulated SNX prices and exploited the vault for $37,000. Since then, Hyperliquid has made adjustments to its pricing models to prevent similar attacks.
Following this latest loss, Hyperliquid has made changes to reduce risk. They have lowered the maximum leverage for Bitcoin and Ethereum and increased margin requirements for large positions. More risk control updates are expected in the future.
Despite the setback, Hyperliquid’s HYPE token briefly dropped 12% but later recovered. HLP remains profitable, having generated $60 million for investors since its launch.
While risk and reward are inherent in the crypto world, HLP is determined to continue operating and improving its protocols.
Note: Investments carry market risks. Please invest carefully. We do not accept responsibility for any financial losses.
