Bybit CEO Warns of Over-Leverage Risks, Hyperliquid Slashes $ETH Leverage

Hyperliquid, a well-known Decentralized Exchange (DEX), has recently witnessed significant $ETH liquidation. Ben Zhou, the CEO of the prominent crypto exchange Bybit, highlighted the challenges triggered by Hyperliquid’s enormous $ETH liquidation in the case of over leverage. The executive took to social media to discuss over-leverage and the likely solutions for the institutions endeavoring to mitigate risk.

Hyperliquid Sees Enormous $ETH Liquidation, Incurring Substantial Losses

Ben Zhou emphasized the concerns highlighted by the recent $ETH liquidation on Hyperliquid. Particularly, a Hyperliquid-based whale held a considerable $ETH position with a value of up to $300M. The whale had just $15M in margin, with a 50x leverage. Hence, rather than closing the respective position via a market order, the whale supposedly manipulated liquidation price. Following the market order would have led to significant slippage, thus, the whale withdrew floating profit and loss (P&L). As a result, liquidation threshold spiked, guaranteeing that the platform would absorb the position at the respective liquidation price. This led to massive losses for Hyperliquid.

Hyperliquid Decreases Maximum $ETH Leverage from 40x to 25x

The respective incident signifies a crucial vulnerability in how DEXs tackle liquidations, particularly when encountering over-leveraged positions. Bybit CEO pointed out that both centralized and decentralized exchanges experience analogous challenges when it comes to whale liquidations. The liquidation engine reportedly takes over the whole position, raising the possibility of substantial losses for the company. To avoid future occurrences, Hyperliquid has decreased the maximum $ETH leverage from 40x to 25x.

Leveraging Dynamic Risk Limit Mechanism to Mitigate Risk

Nonetheless, though lowering leverage serves as an effective action, Zhou has pointed toward its potential negative impact on businesses. He asserted that several traders prefer high-leverage opportunities for significant gains. Keeping this in view, he has stressed using alternative mechanisms like Dynamic Risk Limit Mechanism. It could reportedly assist in mitigating risk. The approach would automatically decrease the existing leverage in the case of increasing position size.

Implementing Advanced Risk-Management Strategies for DEXs

According to Zhou, even minimized leverage limits also face a major concern. In this respect, traders could create multiple accounts to aboid restrictions, particularly on non-KYC companies which offer easy and inexpensive opening accounts. Therefore, Zhou recommends that DEXs implement cutting-edge risk management strategies analogous to those utilized by CEXs. They reportedly include Open Interest limits, market surveillance, and advanced liquidation mechanisms.