How a Trader Used Liquidations to Cash Out

In the high-stakes world of crypto trading, liquidity can be both a weapon and a weakness. A recent trade on Hyperliquid’s HLP vault wiped out $4 million—not due to a bug or an exploit, but through a calculated move that exploited market mechanics. A trader turned $10 million USDC into a $271 million Ethereum long position, walked away with $1.8 million in profit, and left HLP to absorb the loss. It is considered as the biggest single day loss since its launch in May 2023. Crypto analyst Three Sigma is questioning whether protocols relying on liquidations are playing into the hands of savvy traders.

The Setup: A Trader’s Clever Play

In simple terms, HLP is Hyperliquid’s liquidity pool, where users can deposit funds to passively earn from market-making and liquidations. It generally profits when traders lose, but automated strategies can sometimes be exploited. This happened when a trader withdrew collateral, forcing HLP to take over a bad trade, leading to a $4 million loss. 

Trading at massive size comes with a challenge—how to exit a position without crashing the market. Instead of selling ETH directly into the order books, the trader played the system. They withdrew their collateral, reducing their margin and triggering a forced liquidation. This move offloaded their entire position onto Hyperliquid’s HLP vault, which took on the $286 million ETH long.

Knowing that HLP’s forced selling would drive ETH prices lower, the trader had a hedge ready. By shorting ETH on another exchange—potentially Binance—they ensured profits from the price drop while HLP absorbed the risk. It was a calculated move, not an accident.

Analyst View: Was This an Exploit?

Hyperliquid maintains that this wasn’t a traditional exploit. Unlike GLP, which is forced to take the other side of trades, Hyperliquid’s model allows for market makers to step in. In this case, while HLP suffered a $4 million loss, it wasn’t system-breaking—the vault remains profitable overall. The loss was simply execution slippage, meaning the liquidator couldn’t perfectly match entry and exit prices.

Analyst further points out that this isn’t the first time HLP has been targeted. In 2023, an attacker manipulated SNX prices on centralized exchanges, exploiting the vault for $37,000. Since then, Hyperliquid has adjusted its pricing models to prevent similar incidents.

Will This Happen Again? Hyperliquid Responds

Following the loss, Hyperliquid quickly implemented risk adjustments, including lowering max leverage to 40x for Bitcoin and 25x for Ethereum, and increasing margin requirements for large positions. More adjustments to HLP’s risk models are likely on the way.

The incident briefly caused a 12% drop in Hyperliquid’s HYPE token, though it later recovered. Despite the loss, HLP remains profitable, having generated $60 million for investors since launch.

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