PANews Editor's Note: On March 12, 2025, a trader opened a high-leverage (up to 50x) long position in ETH on Hyperliquid, with a total value of approximately $200 million. By withdrawing part of the margin, the trader triggered a liquidation, resulting in a loss of $4 million for the HLP treasury during the unlocking transaction. The trader ultimately made a profit of about $1.8 million, while the HLP treasury absorbed the loss. Hyperliquid confirmed that this was not a protocol vulnerability or a hacking attack, but rather a special circumstance of the trading mechanism under extreme conditions.

To mitigate this risk, Hyperliquid announced on its official Twitter on March 13:

So far, Hyperliquid's trading volume has exceeded $1 trillion, making it the first DEX to rival the scale of CEXs. As trading volume and open contracts continue to grow, the challenges faced by the margin system are also increasing. The incident yesterday (March 12) highlighted the need to strengthen the margin mechanism to better respond to extreme situations. We immediately conducted a review, then analyzed the scenarios in detail and studied ways to avoid similar situations. Risk management has always been a top priority. Even if we do not emphasize this publicly every day, it is still worth our continuous attention.

To this end, after the network upgrade at 08:00 Beijing time on March 15, the margin ratio required for margin transfers will be set at 20%. "Margin transfer" refers to funds leaving the cross-margin wallet and isolated margin positions. Examples include withdrawals, transfers from perpetual accounts to spot, and adding or removing isolated margin. This change will not affect the opening of new cross-margin positions and will only impact new isolated margin positions when the cross-margin usage exceeds 5 times after opening the isolated position.

This upgrade aims to establish a more robust margin requirement system and reduce the overall impact of potential market shocks during large position liquidations.

As always, Hyperliquid is committed to providing a high-performance, transparent, and resilient trading environment, ensuring the best experience for users.

Compiled by: Tim, PANews

Meanwhile, there are many misunderstandings in the community discussions about Hyperliquid's margin design. This article will analyze the misconceptions in common viewpoints and explain Hyperliquid's approach to improving the system based on first principles. Hyperliquid's initiative is the first of its kind in margin systems and may inspire other teams. Like excellent theories in physics, the best margin design should be simple, standardized, interpretable, and capable of handling various extreme scenarios.

• Some people conclude that a centralized force is needed to detect and limit malicious behavior. This completely contradicts the original intention of DeFi and everything Hyperliquid represents, forcing users back into the Web2 world where platforms have the final say. Even if building true decentralized finance is ten times more difficult, it is worth pursuing. Just a few years ago, no one believed that DEX/CEX trading volumes would reach today's proportions. Hyperliquid is at the forefront of decentralized construction and shows no signs of stopping.
• Some believe that replicating the CEX model in DeFi is feasible. The most common suggestion is to mimic CEX's "tiered margin requirements based on address position size" model. However, this design cannot effectively prevent market manipulation in DEXs—savvy attackers can easily bypass restrictions by diversifying positions across multiple accounts. Nevertheless, this mechanism can still somewhat mitigate the market impact of "harmless whales," so it has been included in the development plan.
• Another suggestion is to sacrifice Hyperliquid's usability for security. For example, if unrealized profits and losses are non-withdrawable, many attacks would not be possible. In fact, Hyperliquid was the first to launch isolated perpetual contracts for illiquid assets, which have this security mechanism. However, this improvement would severely impact financing arbitrage strategies, as Hyperliquid's unrealized profits and losses need to be withdrawn to offset losses in other venues. The real needs of users are the top priority in system design.
• In addition to the above, some have suggested introducing innovations in margin design: setting margin based on global parameters. However, the liquidation price must be a deterministic function of price and position size. It must be clear that the liquidation price must be a deterministic function of price and position size. If global parameters such as open interest are included in margin calculations, users will completely lose confidence in using leverage.

So what is the answer?

We all want DeFi, but the premise is that permissionless systems must be able to withstand manipulation of various scales.

The answer lies in understanding the true risks of large positions: prices can be difficult to mark in certain situations. When market shocks approach the maintenance margin level, a linear valuation model using marked prices multiplied by size will fail. Since order book liquidity is essentially a path-dependent function that evolves over time and is influenced by market participant behavior, we cannot accurately simulate market shocks. In the absence of effective market shock simulations, the liquidation mechanism may become a low-slippage exit method, but such prices often adversely affect the liquidating party.

Therefore, Hyperliquid's margin system update has the following ideal characteristics: any position that is liquidated must either be in a loss position relative to the entry price or incur at least (20% - 2 * maintenance margin ratio / 3) = 18.3% loss relative to the last time margin was withdrawn (taking 20x leverage as an example). Even if an ordinary 20x leverage user achieves a 100% equity return after a 5% price fluctuation, they can still withdraw most of their profits and losses without liquidating. However, by introducing independent margin requirements between transferred funds and opening new positions, any attempts to profit through manipulation would require pushing the marked price nearly 20%, making such attacks unfeasible from a capital investment perspective.

Finally, as market makers continue to scale on Hyperliquid, the marked price issue will resolve itself. The Hyperliquid trader is likely overall in a loss position—the $1.8 million profit and loss generated from their long position on Hyperliquid may be completely offset by price-raising operations in other trading venues or by hedging positions in other Hyperliquid accounts. Meanwhile, market maker HLP took over the unfavorable position, ultimately losing $4 million. The only market participants who are undoubtedly profiting overall are the market makers. As millions of dollars in profit and loss opportunities continue to emerge every minute, mature market participants clearly recognize that Hyperliquid has become one of the best liquidity derivative trading platforms. As liquidity continues to improve, the capital costs required for price fluctuations will increase. While improvements to the margin system are crucial, the instinct of market makers to chase profits will form an independent safety barrier over time.

The future belongs to decentralization!

Hyperliquid will prevail!

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