Hyperliquid Whale Passes $4M Loss to HLP Vault

Hyperliquid whale trader, 0xf3F, opens a 50x ETH long trade with a position value of over $300M on Hyperliquid, with their liquidation price a mere 1.6% from their average entry price. The position quickly grows in profit as copy traders pile in and bears close out their shorts. But instead of closing their position, 0xf3F begins withdrawing collateral from their account, raising the liquidation price on their position. Eventually, the position was liquidated at a price of $1,915, netting the trader over $1.86M in profit.

This behavior suggests a tactic known as "strategic liquidation." By withdrawing collateral, the trader likely calculated that the penalty fee for being liquidated was cheaper than the "slippage" cost of selling such a massive position on the open market. Essentially, they forced the protocol to absorb the price impact of exiting the trade, allowing them to keep more profit than if they had closed the order normally.

However, in order to close out the position, ownership of the position was transferred to the Hyperliquidity Provider (HLP) vault. Due to the size of the position, the slippage involved in closing the position resulted in $4M of losses incurred by the HLP vault.

The Hyperliquid team has since reduced leverage offered to 40x and 25x on BTC and ETH respectively, seeking to mitigate future similar trades. However, many of the HLP vault depositors have seen their confidence shaken, with the vault seeing over $130M in withdrawals over the past day.

For depositors in the HLP vault, this incident illustrates the hidden risks of automated market making. Vault participants essentially act as the "house," acting as the counterparty to traders on the platform. While this usually generates revenue from fees and trader losses, it also means the vault must absorb "toxic flow" - such as taking over large, difficult-to-close positions - socializing the resulting losses across all depositors.