Hyperliquid’s HLP vault keeps losing liquidity after risky whale’s Ethereum (ETH) trades

Hyperliquid protocol is suffering a liquidity drawdown after one whale took a risky Ethereum (ETH) position. Hyperliquid had to take over a 160,000 ETH position and start unwinding it, using the protocol’s own liquidity. 

A recent high-risk Ethereum (ETH) long position served as a stress test for Hyperliquid. A whale opened a large-scale position, liquidated a part of it in profit, and then let the position get liquidated. 

Hyperliquid had to take over the position at $1,915 per ETH, with the task of unwinding the entire 160,000 ETH. Due to market turbulence, Hyperliquid initially absorbed a floating loss of $4M. 

Hyperliquid protocol clarifies the liquidity drain is not an exploit

The protocol denied the liquidation and liquidity drain to be a deliberate exploit or a hack. The trader simply used a high-risk strategy, which allowed him to be long on ETH for a little under an hour and lock in profits. After that, the trader let the position expire, while the DEX had to absorb losses. 

Regarding commentary and questions on the 0xf3f4 user's ETH long:

To be clear: There was no protocol exploit or hack.

This user had unrealized PNL, withdrew, which lowered their margin, and was liquidated. They ended with ~$1.8M in PNL. HLP lost ~$4M over the past 24h. HLP's…

— Hyperliquid (@HyperliquidX) March 12, 2025

As a result, Hyperliquid will rethink its leverage levels for Bitcoin (BTC) and Ethereum (ETH), to discourage the high-risk strategy. As a final result, the whale walked out with $1.8M, while causing $4M unrealized losses for Hyperliquid and the task of unwinding the position. 

The funds to cover the position originated from a HyperLiquidity Provider (HLP) community vault, which earns from providing funding to other traders. Currently, the vault carries over $408M in liquidity, but the removal of the top whale position erased over $4.2M in PnL. 

Hyperliquid usually offers basic low leverage of 3-5X even for meme tokens, and competes with other exchanges by offering the riskiest trades. The decentralized market relies on community liquidity and decentralized vaults, hence the lack of regulation or a conservative approach to leverage. 

HLP vault took on bad debt

The trader’s actions were seen as more than simple risk-taking. The strategic withdrawal of the margin collateral after less than an hour of trading meant the whale managed to achieve gains while leaving the bad debt to the exchange. 

In addition to the whale’s own actions, copy traders also took similar positions, with varying results. The whale’s long position on ETH was considered extremely risky and counter-intuitive, making use of 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. The vault still has over $60M in gains over its lifetime. 

The biggest fear for Hyperliquid is that the whale’s actions were deliberate, and were amplified by the involvement of copy-traders. For many analysts, the liquidation of a 160K ETH position was deliberate, aiming to cause the HLP vault to take over the toxic position. The initial withdrawal of the margin collateral also helped bring about the liquidation for the main trader and for anyone copying the position.

The large long liquidation exploited the HLP vault. The liquidity pool works by distributing profits and losses to all participants, so now the liquidity providers would be saddled with the large-scale loss to cover the long position. There are also suspicions the whale may have also held a short position to benefit from the liquidation, though there were no known corresponding whales shorting ETH at that same moment.

Reportedly, the trader used 13X to 19X leverage to maximize the early earnings. The whole operation was performed with $23M in underlying capital, though the final liquidation was for over $306M.

Soon after the news of the large liquidation at the expense of the HLP pool, the native HYPE token lost up to 10% of its price in a temporary dip. 

HYPE fell toward $12.80 before recovering to $13.35. The high-level liquidation position also affected Ethereum (ETH). The asset fell to $1,915.83, around the levels where the large whale position was liquidated. The recent Hyperliquid risky trade may affect the larger crypto market, stopping the recent ETH rally above $2,000.

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