Hyperliquid Co-Founders Respond to Protocol Security Concerns: Updated Leverage System and HLP Liquidation Mechanism

BlockBeats News, April 5th, Hyperliquid Co-Founder @chameleon_jeff responded to concerns about the possibility of the Hyperliquid protocol suffering significant losses due to market manipulation:

Hyperliquid's collateral design strictly ensures platform solvency through a mathematical mechanism, with HLP's losses always limited to its own treasury, and the protocol operation never relying on HLP—this feature was already in place before the JELLYJELLY incident. The additional protection mechanism implemented after the incident only enhances HLP's resilience in the event of a liquidation, without changing the protocol's underlying architecture. During the recent JELLYJELLY incident, an attacker attempted to manipulate HLP (liquidity provider pool) by establishing a large leveraged position. While the uncapped contract allowed for the establishment of a $4 million USDC position at the time, the loophole was that HLP used its entire fund balance as collateral for this liquidation. It should be clarified that the platform itself does not face solvency risks, but HLP did indeed face excessive risk exposure due to market manipulation.

The liquidation component's treasury of HLP has now set a collateral limit, limiting potential losses through a liquidation mechanism. Hyperliquid still maintains its original operational mechanism, handling undercollateralized positions in the following order: 1) Market Liquidation 2) Reserve Liquidation 3) Automatic Deleveraging (ADL). The reserve liquidation of the current HLP has added protection mechanisms, setting a loss limit that makes the cost of manipulating the mark price significantly higher than the limited gains the attacker can extract from HLP.