Whale's $1.8M Profit Leaves Hyperliquid with $4M Loss

Hyperliquid, a decentralized exchange, recently faced a significant financial setback when a large trader, often referred to as a "whale," exited a highly leveraged Ethereum trade. The whale managed to secure a profit of $1.8 million from this trade, which involved a substantial position of 160,000 ETH. Initially, Hyperliquid took over this position at a price of $1,915 per ETH. However, due to market volatility, the protocol had to absorb a floating loss of $4 million while unwinding the position. Hyperliquid clarified that this liquidity drain was not due to an exploit or hack but rather a high-risk strategy employed by the trader.

The trader's actions involved using high leverage, ranging from 13X to 19X, with an underlying capital of $23 million. The position was liquidated for over $306 million, highlighting the extreme risk involved. The trader's strategy allowed them to lock in profits within a short period, after which the position was liquidated, leaving Hyperliquid to cover the losses. This incident has prompted Hyperliquid to reconsider its leverage levels for Bitcoin and Ethereum to discourage such high-risk strategies in the future.

The funds used to cover the position came from the HyperLiquidity Provider (HLP) community vault, which earns from providing funding to other traders. The vault, which previously held over $408 million in liquidity, saw a loss of over $4.2 million in PnL due to the liquidation. This event underscores the risks associated with providing liquidity in decentralized finance (DeFi) platforms, where community liquidity and decentralized vaults play a crucial role.

The trader's actions were seen as more than just risk-taking; the strategic withdrawal of margin collateral after less than an hour of trading allowed the whale to achieve gains while leaving the bad debt to the exchange. Copy traders who followed similar positions also faced varying results. The whale's long position on ETH was considered extremely risky and counter-intuitive, leveraging the recent recovery from local lows.

Hyperliquid reminded traders that joining the HLP pool to make passive income from traders is not a risk-free strategy. Despite the recent loss, the vault still has over $60 million in gains over its lifetime. The incident has raised concerns among analysts about the potential deliberate nature of the whale's actions, which may have been amplified by copy-traders. The liquidation of a 160,000 ETH position was seen as a deliberate attempt to cause the HLP vault to take over the toxic position, potentially benefiting the whale through a short position, though no corresponding whales shorting ETH were identified at that moment.

The large long liquidation exploited the HLP vault, distributing profits and losses to all participants. This event has left liquidity providers saddled with the large-scale loss to cover the long position. The incident also affected the native HYPE token, which temporarily dipped by up to 10% before recovering. Ethereum (ETH) also saw a price drop to $1,915.83, around the levels where the large whale position was liquidated. This risky trade on Hyperliquid may impact the broader crypto market, potentially halting the recent ETH rally above $2,000.