How has Hyperliquid improved its margin system? How can it balance DeFi characteristics with low risk?

PANews Editor’s Note: On March 12, 2025, a trader opened a high-leverage (up to 50x) long ETH position on Hyperliquid, with a total value of approximately $200 million. By withdrawing part of the margin, the trader triggered liquidation, resulting in a $4 million loss for the HLP vault when unlocking the trade. The trader ultimately profited around $1.8 million, while the HLP vault absorbed the loss. Hyperliquid confirmed that this was neither a protocol vulnerability nor a hack but a special case of trading mechanics under extreme conditions.

To guard against this risk, Hyperliquid announced on its official Twitter on March 13:

So far, Hyperliquid’s trading volume has exceeded $1 trillion, making it the first DEX to rival CEXs in scale. As trading volume and open interest continue to grow, the challenges faced by the margin system are also increasing. The incident on March 12 highlighted the need to strengthen the margin mechanism to better handle extreme situations. We immediately conducted a review, then analyzed the scenario in detail and explored ways to prevent similar occurrences. Risk management has always been a top priority. Even if we do not emphasize it publicly every day, it remains a critical focus for us. To address this, during the network upgrade at 08:00 (UTC+8) on March 15, the required margin ratio for margin transfers will be set at 20%. “Margin transfer” refers to funds leaving cross-margin wallets and isolated margin positions. Examples include withdrawals, transfers from perpetual accounts to spot, and adding or removing isolated margin. This change will not affect the opening of new cross-margin positions and will only impact new isolated margin positions when cross-margin usage exceeds 5x after an isolated position is opened. This upgrade aims to establish a more robust margin requirement system and reduce the overall impact on the system when liquidating large positions. As always, Hyperliquid is committed to providing a high-performance, transparent, and resilient trading environment while delivering the best experience for users. Compiled by: Tim, PANews Meanwhile, there are several misconceptions in the community discussions about Hyperliquid’s margin design. This article will analyze common misunderstandings and explain how Hyperliquid improves its system based on first-principles reasoning. This move by Hyperliquid marks the first of its kind in margin system innovation and may provide insights for other teams. Just like great theories in physics, the best margin design should be simple, standardized, interpretable, and capable of handling various extreme scenarios:

• Some people have concluded that a centralized force is needed to detect and restrict malicious behavior. This completely goes against the original intent of DeFi and everything Hyperliquid stands for, forcing users back into the Web2 world, where platforms have the final say. Even if building truly decentralized finance is ten times more difficult, it is still worth pursuing. Just a few years ago, no one believed that the trading volume ratio between DEXs and CEXs would reach today’s level. Hyperliquid is at the forefront of decentralization and shows no signs of slowing down.
• Some believe that copying the CEX model into DeFi is feasible. The most common suggestion is to adopt a tiered margin requirement based on position size per address, similar to CEXs. However, this design is ineffective in preventing market manipulation in a DEX—savvy attackers can easily bypass restrictions by spreading positions across multiple accounts. That said, this mechanism can still mitigate the market impact of “harmless whales” to some extent, so it has been included in the development roadmap.
• Another suggestion is to sacrifice Hyperliquid’s usability in exchange for security. For example, if unrealized profits and losses were non-withdrawable, many types of attacks would become impossible. In fact, Hyperliquid pioneered isolated perpetual contracts for illiquid assets, which incorporate this security mechanism. However, such changes would significantly impact funding arbitrage strategies, as Hyperliquid’s unrealized profits and losses need to be withdrawn to offset losses on other platforms. Meeting real user needs remains the top priority in system design.
• Additionally, some have proposed introducing innovation into margin design by setting margin requirements based on global parameters. However, it must be clearly stated: the liquidation price must be a deterministic function of price and position size. If global parameters like open interest are included in margin calculations, users would completely lose confidence in using leverage.

So what exactly is the answer?

We all want DeFi, but permissionless systems must be able to withstand manipulation at any scale. The key lies in understanding the real risk of large positions: in certain cases, prices are difficult to mark. When market impact approaches the maintenance margin level, a linear valuation model that simply multiplies the marked price by size becomes ineffective. Since order book liquidity is inherently a path-dependent function that evolves over time based on market participants’ behavior, we cannot precisely simulate market impact. Without an effective market impact simulation, liquidation mechanisms may serve as a low-slippage exit strategy, but such prices often have adverse effects on liquidators. Therefore, Hyperliquid’s margin system update has the following ideal characteristics: any liquidated position is either at a loss relative to its entry price or has incurred at least an 18.3% loss (using 20x leverage as an example) relative to the last time margin was withdrawn, calculated as (20% - 2 * maintenance margin ratio / 3). Even if a typical 20x leverage user achieves a 100% return on equity after a 5% price movement, they can still withdraw most of their unrealized gains without closing the position. However, by introducing independent margin requirements for transferring funds and opening new positions, any attack attempting to profit through manipulation would need to push the marked price by nearly 20%, making such attacks unfeasible from a capital investment perspective. Finally, as market makers continue to scale on Hyperliquid, the marked price issue will naturally resolve itself. The Hyperliquid trader in question is likely in an overall loss—despite generating $1.8 million in P&L from long positions on Hyperliquid, this may be entirely offset by price-pushing operations on other trading venues or hedged positions in other Hyperliquid accounts. Meanwhile, market maker HLP took on an unfavorable position and ultimately lost $4 million. The only market participants consistently profiting as a whole are the market makers. With profit-and-loss opportunities in the multi-million-dollar range emerging every minute, seasoned market participants have recognized that Hyperliquid has become one of the most liquid derivatives trading platforms. As liquidity continues to improve, the capital cost required to induce price fluctuations will rise. While margin system improvements are crucial, market makers’ instinct to chase profits will, over time, establish an independent security barrier. The future belongs to decentralization!

Hyperliquid will prevail!

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