Hyperliquid Overhauls Margin Mechanism After $4 Million Loss

Hyperliquid, the Layer 1 and perpetual decentralized exchange (DEX), is facing its first major crisis of confidence following increased selling pressure from HYPE stakers, and a $4 million loss taken by its HLP vault.

HYPE has fallen by 40% over the last month to $13.8 from $23.6, touching as low as $12.1 on Mar. 13.

The plunge can be attributed to the crypto market’s general slump, with HYPE falling as low as $14, but the selloff was exacerbated after a user built up a $250 million levered ETH position and began withdrawing their margin, prompting a liquidation which the Hyperliquid HLP vault was forced to cover.

The stunt resulted in HLP losing $4 million, while the trader profited roughly $1.8 million. HYPE fell another 12% to $12.1, with some users calling for the need for centralized control to prevent users from abusing protocol standards and permissionless finance.

Hyperliquid founder Jeff Yan laid out thoughts and an action plan on X on Mar. 13, where he doubled down on prioritizing decentralization and said, “True decentralized finance is worth it, even if it is 10x harder to build.”

To prevent a repeat of the attack, Hyperliquid is changing its margin design where any liquidated position is either a loss relative to the entry price, or at least an 18.3% loss relative to the last margin removal. “By introducing separate margin requirements between transfers and opening new positions, profitable manipulation attempts require moving the mark price almost 20%. This kind of attack is infeasible from a capital perspective,” said Yan.

Hyperliquid staking outflows may also be contributing to selling pressure on the token. HYPE stakers must wait seven days before being able to successfully unstake and sell their tokens. This mechanism may have delayed selling pressure during the first week of the general crypto market’s selloff.

However, as the market downturn continues, users have had more time to unstake and sell spot HYPE. According to community-built dashboard HypurrScan, there is 6.6 million HYPE, worth $91 million, set to be unlocked over the next seven days, with March 20 seeing a single entity unlocking 500,000 HYPE, worth nearly $7 million.

While these staking unlocks are not guaranteed to be market sold, the general market sentiment and recent fear given the HLP event points towards increased selling pressure.