HYPE Token of Hyperliquid Drops 8.5% Following Whale Liquidation Event, HLP Vault Suffers $4 Million Loss

HYPE, the native token of decentralized derivatives trading platform Hyperliquid, dropped by 8.5% earlier on Wednesday, following a major whale liquidation event that appears to have caused a $4 million loss in the Hyperliquid HLP (Hyperliquidity Provider) vault. Some community members speculated there might have been manipulation involved, but Hyperliquid has claimed there were no vulnerabilities or hacks.

Hyperliquidity Provider is a core component of the Hyperliquid protocol. The vault is community-owned and responsible for running market-making and liquidation strategies. It allows users to deposit USDC stablecoins and share profits or bear losses based on their holdings. This mechanism enables ordinary users to participate in trading strategies traditionally reserved for institutional market makers, earning revenue from trading fees, funding rates, and liquidations. The deposit lockup period is four days, and the vault’s performance can be tracked on-chain.

Some community members and analysts believe that an individual or entity may have manipulated the HLP to extract value, resulting in losses for the vault and impacting the token price. The user may have triggered automatic liquidation activities to withdraw funds from the HLP vault. During this process, HLP, acting as the counterparty, absorbed the loss, which eventually amounted to around $4 million, or 1% of the vault’s total locked value of $451 million.

Blockchain analysis platform Lookonchain pointed out that a Hyperliquid whale had deposited 15.23 million USDC to establish a long position in Ethereum (ETH), reaching 160,234 ETH (worth approximately $306.85 million). According to Lookonchain, the trader was later liquidated but successfully withdrew 17.09 million USDC, making a profit of $1.86 million.

Hyperliquid responded by stating that the event was not caused by a protocol vulnerability or a hack but was due to the liquidation engine being unable to handle such a large position. The Hyperliquid team wrote on social media platform X:

Hyperliquid further mentioned that the maximum leverage for BTC and ETH would be updated to 40x and 25x, respectively, to increase the maintenance margin requirements for larger positions, providing better buffers for the liquidation of large positions.

Source