Bybit CEO Ben Zhou recently expressed his views on the large-scale ETH position liquidation event that occurred on the Hyperliquid platform, stating that this issue is not merely about individual trades, but concerns broader leverage mechanisms and the fundamental differences in risk management between decentralized exchanges (DEX) and centralized exchanges (CEX).
The crux of the event lies in a whale utilizing Hyperliquid’s liquidation mechanism to close positions, thereby avoiding losses due to market slippage. This trader employed 50x leverage, opening a $300 million ETH long position with only $15 million in margin, and manipulated the floating P&L to push the liquidation price higher, ultimately triggering a liquidation that Hyperliquid took over. As a result, the trader successfully exited, while Hyperliquid absorbed part of the losses.
This incident exposed the potential risks of high-leverage trading, especially regarding the risk control capabilities of DEXs when faced with large positions.
Challenges of Leverage Trading: CEX vs. DEX
Ben Zhou pointed out that whether in a DEX or CEX, when a whale is liquidated, the exchange’s liquidation engine must take over the position. To mitigate the impact of such events, Hyperliquid has already reduced its leverage limits, decreasing BTC leverage from 50x to 40x, and ETH leverage from 50x to 25x. However, while reducing leverage can lessen risks, it may also affect trading volume, as many users still desire high-leverage opportunities.
This highlights a key issue for DEXs: If they want to provide high leverage in the long term, do they need CEX-level risk management?
Solutions: Dynamic Risk Control and Market Monitoring Mechanisms
Ben Zhou proposed a possible improvement method—the Dynamic Risk Limit Mechanism. This mechanism operates by automatically reducing leverage as position sizes increase; for example, in a CEX, leverage might drop to 1.5x when a position reaches a certain size. However, this approach cannot completely eliminate risk, as traders in a DEX environment can easily circumvent leverage restrictions by opening multiple accounts, particularly when KYC is not required and the cost of account creation is extremely low.
To effectively manage risk, DEXs may need to adopt risk control measures similar to those of CEXs, such as:
- Market Surveillance: Detecting abnormal trading behavior to prevent market manipulation and abuse of liquidation mechanisms.
- Open Interest Limit: Setting an overall position cap in the market to prevent whales from creating risks through high leverage.
- Risk Control AI and Real-time Monitoring: Utilizing machine learning and big data analysis to identify risk patterns and provide early warnings of abnormal leverage operations.
Is Hyperliquid’s Leverage Adjustment Sufficient?
Even though Hyperliquid has lowered its leverage limits, Ben Zhou believes that this alone cannot fully prevent similar events from happening again unless DEXs adopt stricter risk control mechanisms or further reduce leverage levels. This incident also raises a larger question: Can decentralized exchanges establish sufficiently robust risk management mechanisms while maintaining high leverage?
In the future, we may see more innovative liquidation mechanisms, such as:
- Smart Liquidation Mechanisms: Automatically adjusting liquidation methods based on market liquidity and price movements to avoid excessive risk for the exchange.
- Decentralized Risk Control Systems: Utilizing blockchain technology to achieve transparent risk management, allowing market participants to collaboratively monitor and adjust leverage levels.
No matter what the ultimate solution is, the Hyperliquid incident demonstrates that if DEXs wish to compete in the high-leverage market with CEXs, they will undoubtedly require more comprehensive risk management mechanisms.
Risk Reminder
Investing in cryptocurrencies is highly risky, and their prices may fluctuate dramatically, leading to potential losses of all principal. Please carefully assess the risks.