Bybit CEO Ben Zhou recently addressed the issue of a whale that had woken up and liquidated millions of Ethereum (ETH), causing a massive price drop.
Amid the whale’s exit through Hyperliquid’s liquidation engine, Ethereum price dropped to $1900.
This liquidation affected market prices and exposed possible weaknesses.
It also shows the necessity of improved risk management systems in centralized (CEX) and decentralized (DEX) exchanges.
Zhou’s commentary explains how liquidation works mechanically and the impact a liquidation of this size has on the general leverage practices that exist in the cryptocurrency ecosystem.
Bybit CEO Discusses The Mechanics of Hyperliquid’s Liquidation Engine
With that whale, Hyperliquid took a big hit on what they are doing, as the wallet decided to exit its position in $340 million worth of ETH.
The investor withdrew floating profits and losses (P&L) to utilize his strategy and push the liquidation price up without crashing the market.
This allowed HP’s liquidation engine (Hyperliquid Protocol) to take the full position at the liquidation price we predetermined.
This caused a $4 million loss for Hyperliquid. Bybit CEO underlined the efficiency and neatness of the exit.
This prevented it from inflicting the usually much more significant market repercussions that come with such prominent positions.
Discussing leverage capabilities of CEXs and DEXs that this event triggered, Zhou also said both exchanges have a problem with managing prominent positions through liquidation mechanisms.
After liquidation, Bybit and other exchanges have been reevaluating their leverage settings and risk management tools.
Hyperliquid already offers reducing leverage from 50x to 25x for ETH and 40x for BTC to reduce the risks of such recurring incidents.
Zhou, however, says that reducing leverage alone will not be enough. In this, he proposes dynamic risk limit mechanisms that exchanges impose.
This will curb the leverage under the position size. The first would be to reduce the risks without limiting traders with a penchant for too much high leverage.
In addition, Zhou indicates that DEXs should introduce other risk management procedures.
These are market surveillance and open interest limits, typical in CEXs, to prevent market manipulation and abuse.
The incident has caused a discussion about the future of leverage and risk management in crypto trading. Reducing leverage can also lower risk.
However, at the same time, it can limit the market’s growth potential because it discourages traders who wish to benefit from schemes with high leverage.
According to Zhou, it would be possible to balance safety and the need for profitable trading conditions by introducing new liquidation mechanisms and more robust risk management tools.
In other words, Zhou also states that even with current measures, the scope for abuse remains.
The traders can skirt the restrictions by having multiple accounts. This is especially true on platforms where KYC procedures are not uniformly rigorous.
It reinforces the perpetual problem of exchanges to produce a secure and flexible ecosystem for the traders.
