Following yesterday’s whale liquidation event on Hyperliquid, which saw the decentralized exchange (DEX) lose $4 million, some analysts are characterizing it as a necessary stress test that could ultimately strengthen decentralized finance (DeFi) protocols.

Others have even suggested that the incident could benefit Hyperliquid’s native HYPE token in the long run.

Lessons Learned

The loss occurred when a trader, identified by the wallet address 0xf3f4, opened a 175,000 ETH long position with 50 times leverage, valued at $340 million. After securing an unrealized profit of $8 million, the trader reportedly withdrew $17.09 million in margin, triggering an automatic liquidation of the remaining 160,000 ETH. Hyperliquid’s HLP vault absorbed the position at $1,915 per ETH, putting it $4 million in the red.

However, some analysts remain optimistic about the platform’s future. Prominent DeFi commentator Aylo argued that stress tests, like the one Hyperliquid went through, are necessary to improve protocol design.

“In this case, 1% hit on HLP was a very reasonable price to pay for the lesson learned and the apparent vulnerabilities discovered,” he said.

Additionally, he noted that while HYPE remains a risky investment given prevailing market conditions, its revenue stream and market share in the perps trading space make it undervalued.

According to data from DefiLlama, the token’s price-to-earnings (P/E) ratio stands at 7.06, which, in Aylo’s opinion, hints at a potential upside if Hyperliquid continues to grow.

In the aftermath of the liquidation, HYPE lost 8.5% of its value but recovered soon after. Still, the broader market jitters seem to have caught up with it, dropping 11.4% from its price in the last 24 hours and just under 28% across the week.

Ben Zhou Calls for More Risk Management Tools

Bybit CEO Ben Zhou also weighed in on the event, highlighting the risks associated with high leverage on both centralized and decentralized exchanges. In a post on X, he explained how the protocol’s liquidation engine took over the massive position and cushioned its impact by lowering leverage.

The crypto executive, whose company was recently on the wrong end of the largest hack in the industry’s history, suggested that DEXs must put in place stronger risk management mechanisms, including dynamic risk limits and market surveillance tools, to prevent similar occurrences in the future.

The incident has prompted Hyperliquid to lower its maximum leverage for Bitcoin and Ethereum to 40x and 25x, respectively. He pointed out that HLP had been operating successfully for about two years with minimal issues and that the team has a track record of quick responses to challenges.