Bybit CEO’s Commentary: The Hyperliquid ETH Whale Liquidation Incident Highlights the Risks of High Leverage in DEXs

Bybit CEO Ben Zhou recently commented on the large-scale ETH position liquidation event that occurred on the Hyperliquid platform, pointing out that this issue is not just about a single trade, but rather concerns broader leverage mechanisms and the fundamental differences in risk management between decentralized exchanges (DEX) and centralized exchanges (CEX).

The core of the event lies in a whale using Hyperliquid’s liquidation mechanism to close positions, thus avoiding losses due to market slippage. This trader utilized 50x leverage, opening a long position of $300 million in ETH with a margin of only $15 million, and by adjusting the floating profit and loss (P&L), raised the liquidation price, ultimately triggering a liquidation that was taken over by Hyperliquid. As a result, the trader successfully exited while Hyperliquid incurred a portion of the losses.

This incident exposed the potential risks of high-leverage trading, especially regarding the risk control capabilities of DEX when faced with large positions.

Challenges in Leverage Trading: CEX vs DEX

Ben Zhou pointed out that whether it is a DEX or a 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 lowered its leverage limits, reducing BTC leverage from 50x to 40x and ETH leverage from 50x to 25x. However, while reducing leverage can decrease risk, it may also affect trading volume, as many users still wish to access high-leverage opportunities.

This reflects a key issue for DEX: to provide high leverage in the long term, do they need risk management comparable to that of CEX?

Solutions: Dynamic Risk Control and Market Monitoring Mechanisms

Ben Zhou proposed a potential improvement method—the Dynamic Risk Limit Mechanism. This mechanism operates such that as the position size increases, the leverage ratio automatically decreases. For instance, in CEX, when a position reaches a certain size, leverage may drop to 1.5x. However, this method cannot completely eliminate risk, as in a DEX environment, traders can easily circumvent leverage restrictions by opening multiple accounts, especially when KYC is not required and the cost of opening accounts is very low.

To truly control risk, DEX may need to adopt risk control measures similar to those of CEX, such as:

• Market Surveillance: Detecting abnormal trading behaviors to prevent market manipulation and abuse of liquidation mechanisms.
• Open Interest Limit: Setting an overall position limit 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 for abnormal leverage operations.

Is Hyperliquid’s Leverage Adjustment Sufficient?

Even though Hyperliquid has reduced leverage limits, Ben Zhou believes this still cannot fully prevent similar events from occurring again unless DEX adopts stricter risk control measures or further lowers leverage levels. This incident has also raised 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:

• Intelligent Liquidation Mechanisms: Automatically adjusting liquidation methods based on market liquidity and price fluctuations to avoid excessive risk for the exchange.
• Decentralized Risk Control Systems: Utilizing blockchain technology to achieve transparent risk management, allowing market participants to jointly monitor and adjust leverage levels.

Regardless of what the ultimate solution may be, this Hyperliquid incident demonstrates that if DEX wants to compete in the high-leverage market with CEX, they will inevitably need more comprehensive risk management mechanisms.

Risk Warning

Investing in cryptocurrency carries a high level of risk, and its prices may be highly volatile. You may lose all of your principal. Please carefully assess the risks.