Investors in Hyperliquid’s market maker instrument are down $4 million on Wednesday morning, sparking fears that the trading platform had been exploited.

A trader, whose wallet address begins with the characters 0xf3f4, bet $340 million on Ether’s price increasing, netting around $8 million in unrealised profit.

But instead of closing the trade, 0xf3f4 removed their collateral, liquidating the position.

“Due to the excessively large liquidation size, Hyperliquid HLP took over the position at $1,915 and is gradually unwinding it, currently facing a floating loss exceeding $4 million,” Kasper Vandeloock, a crypto trader and adviser to several crypto trading platforms, told DL News.

The trade made 0xf3f4 $1.8 million in profit.

Users taking the other side through HLP, Hyperliquid’s market maker vault, lost over $4 million.

It’s the biggest one-day loss the HLP vault has suffered since it launched in May 2023.

“There was no protocol exploit or hack,” the official Hyperliquid X account said. “HLP is not a risk-free strategy.”

Hyperliquid lets users trade crypto using perpetual futures, a type of derivative.

It’s the most popular decentralised trading platform, handling over $8.2 billion worth of trades over the past 24 hours.

Hyperliquid did not immediately respond to a request for comment.

What is HLP?

In addition to trading, Hyperliquid lets users trade passively by depositing funds into HLP, an instrument that conducts market making strategies and liquidations on Hyperliquid and receives a portion of trading fees.

Anyone can deposit funds.

In aggregate, HLP is usually positioned against Hyperliquid traders. In other words, as long as traders overall lose money, HLP investors profit.

However, because parts of HLP are automated, it’s possible that a savvy trader could find a way to trick the vault into taking bad trades.

That’s what appears to have happened when 0xf3f4 removed their collateral, forcing the HLP vault to take over the position.

Hyperliquid’s HYPE token fell some 12% as investors feared the remaining $432 million in the HLP vault was also at risk.

The token has since recovered.

Overall the HLP vault is still profitable, returning $60 million for investors since its launch.

Not the first time

The event is similar to one that happened on the GMX trading platform in 2022, DeFiyst, a pseudonymous crypto trader, said on X.

In that case, a trader took advantage of the way asset prices were calculated on GMX to open large trades without moving the price.

The trader extracted between $500,000 and $700,000 in profit, according to Joshua Lim, co-founder of crypto trading firm Arbelos Markets.

North Korea

It’s not the first time that the crypto industry has become concerned about Hyperliquid.

In December, Taylor Monahan, the lead security researcher at the crypto wallet MetaMask, identified that North Korean state sponsored hackers the Lazarus Group were trading on Hyperliquid.

Many feared that the hermit kingdom was looking for a way to exploit the trading platform. “DPRK doesn’t trade. DPRK tests,” Monahan said on X.

To prevent future attacks, Hyperliquid said in its X post that it has lowered the maximum leverage users can access on Bitcoin and Ether trades, and that it has increased margin requirements for large trades.

“This will provide a better buffer for backstop liquidations of larger positions,” Hyperliquid said.

Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.