Liquidation of high lipid whales raises debate over DEXS leverage

• The 50 times more exploited ETH trade exposure risk deficiency in whales was highly lipid and risk deficiency, sparking debate over leverage limitations in decentralized exchange.
• It helps to reduce leverage, but it’s not innocent. Traders can bypass restrictions without KYC, raising concerns about sustainable DEX risk control.
• Although it may be helpful to employ dynamic risk limiting and improved settlement mechanisms, each step makes DEX similar to centralized exchange.

The massive Ethereum liquidation of hyperlipidemia has rekindled discussions about leverage and risk management in distributed exchange (DEX). Bybit CEO Ben Zhou shared insights into the case and highlighted the challenges Dexs faces in balancing leverage provision and risk management.

The whale reportedly opened a $300 million long position in ETH, with a margin of just $15 million using 50x leverage. Instead of finishing through a market order that would bring about a great deal of slipping, the traders seemed to manipulate their position.

By strategically withdrawing the floating P&L, they pushed the liquidation price higher and allowed Hyperliquid’s liquidation engine to take over its position. As a result, the platform has caused losses and shed light on the vulnerability of DEX risk management.

Leverage reduction: Short-term corrections

Following the incident, Hyperliquid reduced leverage limits, Bitcoin leverage fell 40 times, and Ethereum 25 times. This move quickly reduces risks, but raises concerns about the platform’s competitiveness. Traders support high leverage and lower limits can direct them to alternative platforms.

Moreover, reducing leverage alone alone does not eliminate abuse. Traders can create multiple accounts, bypass restrictions and maintain high exposure. Preventing such activities remains a challenge for DEXS, even without knowing about customer (KYC) checks.

Can Dexs provide sustained high leverage?

Long-term solutions require DEXS to adopt sophisticated risk management mechanisms. Zhou proposed dynamic risk limiting that replies to comments from users under the name Cryptodata. This approach reflects centralized exchange (CEX) risk control, with dynamically reducing leverage at large positions.

However, without KYC enforcement, traders can bypass these restrictions. This raises the basic question: Can DEXS maintain high leverage without centralization? Implementation of Open Interest (OI) Caps, Market Surveillance, and improved liquidation mechanics may be useful. However, each step taken towards risk control brings DEXS closer to a framework like CEX.