PANews Editor's Note: On March 12, 2025, a trader opened a highly leveraged (up to 50x) long ETH position on Hyperliquid, with a total value of approximately $200 million. By withdrawing part of the margin, the trader triggered liquidation, causing the HLP vault to lose $4 million when unlocking the transaction. The trader ultimately made a profit of approximately $1.8 million, while the HLP vault absorbed the loss. Hyperliquid confirmed that this was not a protocol vulnerability or hacker attack, but a special case of the trading mechanism under extreme conditions.

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

Hyperliquid has surpassed $1 trillion in trading volume to date, making it the first DEX to rival CEX in size. As trading volume and open interest continue to grow, the margin system is increasingly tested. Yesterday’s (March 12) incident highlighted the need to strengthen margin mechanisms to more robustly handle extreme situations. We immediately conducted a review and then analyzed the scenario in detail and looked at ways to avoid similar situations. Risk management has always been a top priority. Even if it is not publicly emphasized every day, it deserves our continued attention.

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

The upgrade aims to establish a more robust margin requirement system and reduce the overall impact of potential market shocks on the system when large positions are closed.

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

Compiled by: Tim, PANews

At the same time, there are many misunderstandings in the community's discussion about Hyperliquid's margin design. This article will analyze the misunderstandings in common views and explain Hyperliquid's ideas for improving the system based on first principles. Hyperliquid's move is the first of its kind in the margin system, and may provide inspiration for other teams. Just like excellent theories in physics, the best margin design should be concise, standardized, explainable, and able to cope with various extreme scenarios.

  • Some have concluded that a centralized force is needed to detect and limit malicious behavior. This completely defeats the purpose of DeFi and everything Hyperliquid stands for, forcing users back to the Web2 world where platforms have the final say. Even if building true decentralized finance is 10 times harder, it's worth it. Just a few years ago, no one believed that DEX/CEX trading volumes would reach today's proportions. Hyperliquid is leading the way in building decentralization and seems to show no signs of stopping.
  • Some people believe that it is feasible to copy the CEX model to DeFi. The most common suggestion is to follow the CEX model of "gradually adjusting margin requirements according to the size of address positions". However, this design cannot effectively prevent market manipulation in DEX - savvy attackers can easily bypass restrictions by dispersing positions through multiple accounts. Despite this, the mechanism can still alleviate the market impact of "harmless whales" to a certain extent, so it has been included in the development plan.
  • Another suggestion is to sacrifice Hyperliquid’s usability in exchange for security. For example, if unrealized PNL is not withdrawable, many attacks cannot occur. In fact, Hyperliquid pioneered the isolated perpetual contract for illiquid assets, which has this security mechanism. However, this improvement will have a serious impact on financing arbitrage strategies, because Hyperliquid’s unrealized PNL needs to be withdrawn to offset losses in other venues. The real needs of users are the top priority of system design.
  • In addition to the above, some people have suggested introducing innovation in margin design: setting margin based on global parameters. However, the liquidation price must be a deterministic function of price and position size. But 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 the margin calculation, users will completely lose confidence in using leverage.

So what is the answer?

We all want DeFi, but only if the permissionless system is resistant to manipulation at all scales.

The answer lies in understanding the real risk of large positions: prices are difficult to mark in some cases. When market shocks are close to the maintenance margin level, the linear valuation model that simply multiplies the mark price by the size will fail. Since order book liquidity is essentially a path-dependent function that changes over time and the behavior of market participants, we cannot accurately simulate market shocks. In the absence of effective market shock simulation, liquidation mechanisms may become a low-slippage exit method, but such prices often have an adverse impact on the liquidator.

Therefore, Hyperliquid's margin system update has the following ideal characteristics: any liquidated position is either at a loss relative to the entry price, or at least (20% - 2 * maintenance margin ratio / 3) = 18.3% loss relative to the last time the margin was transferred out (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 closing their positions. However, by introducing independent margin requirements between transferring funds and opening new positions, any attack attempting to profit from manipulation requires pushing the mark price by nearly 20%, which is no longer feasible from a capital investment perspective.

Finally, as market makers continue to scale on Hyperliquid, the mark price issue will resolve itself. The Hyperliquid trader is likely to be in a loss overall - the $1.8 million P&L on his long position on Hyperliquid is likely to be fully offset by other venues pushing up prices or using hedging positions in other accounts on Hyperliquid. The market maker HLP took on the unfavorable position and ultimately lost $4 million. The only market participant who is definitely profitable overall is the market maker community. With millions of dollars of profit and loss opportunities emerging every minute, it is clear to mature market participants that Hyperliquid has become one of the most liquid derivatives trading platforms. As liquidity continues to improve, the cost of funding price fluctuations will become higher and higher. While improvements to the margin system are critical, the market maker's instinct to pursue profits will form an independent safety barrier over time.

The future belongs to decentralization!

Hyperliquid wins!