DEX Vault Security and Risk Control: Starting from the Hyperliquid Incident

On March 12, 2025, a certain DEX platform's treasury suffered significant losses, exceeding $4 million. This incident was triggered by a trader who used 50x leverage to actively trigger a liquidation as the price of Ethereum fell, resulting in approximately 160,000 ETH (worth $306 million) of long positions being forced to close. Due to the massive scale of the liquidation, the price of ETH continued to drop during the liquidation process, further exacerbating the losses.

This event once again highlights the importance of security and risk control on DEX platforms. As a practitioner in the DEX industry, I believe it is necessary to explore the issues of DEX vaults from the perspectives of protocol mechanisms and risk management.

Overview of DEX Vault

DEX vaults are typically divided into two types: single-type and composite-type. A single-type vault is an innovative architectural design aimed at improving capital efficiency and user experience. It centrally manages user assets through a smart contract system, allowing users to deposit all their assets into the same contract, thereby avoiding the hassle of repeatedly authorizing and transferring assets across multiple protocols, effectively reducing Gas fees. The assets within the vault can be used for various purposes simultaneously, such as providing flash loans, participating in yield farming, or serving as liquidity for automated market makers.

The single-type vault is not only a place for asset storage but can also be seen as a decentralized "app store". Developers can build various DeFi applications on this flexible underlying architecture. The core advantage of this model lies in its modular design, allowing developers to focus on application logic development while leaving the underlying token management and accounting to the vault.

In March 2021, a well-known DEX platform launched its first single-type vault. This vault allows developers to build lending protocols, leveraged trading tools, and other applications on top of it, enabling these applications to share the assets in the vault, thereby achieving higher capital efficiency. Since the smart contracts of the vault have undergone rigorous auditing and testing, it not only lowers the development threshold for ecological applications but also enhances the overall security of the protocols.

Another important function of a single-type vault is to support collaboration between various DeFi applications. By concentrating all assets in one vault, different decentralized applications can connect with each other and share assets, creating a strong network effect. For example, the V2 vault of a well-known AMM platform allows developers to freely build various automated market-making strategies, utilizing the idle assets in the vault for yield farming or lending.

The vault that suffered damage in this incident is a composite vault, composed of multiple strategy modules, mainly including market making, order taking, funding rates, and transaction clearing.

1. Market Making Strategy: Calculate the fair price based on the quote data from major exchanges, execute trades around that price, and provide profitable liquidity 24/7.

2. Order Execution: Actively seek profitable trading opportunities based on market dynamics and order book depth to earn the bid-ask spread.

3. Funding Rate: By participating in the funding rate collection of the perpetual contract market, it provides additional income for the platform while balancing the long and short positions in the market.

4. Liquidation Strategy: Responsible for handling liquidation operations on the platform, taking over the positions of users with insufficient margin, ensuring the stable operation of the platform.

This composite vault provides strong liquidity support and diversified sources of income for DEX platforms, enhancing the overall efficiency and stability of the platform while offering users low volatility and high-return investment opportunities.

DEX Risk Management

In retrospect of this incident, a trader used high leverage to convert 10 million USDC into a long position of 271 million USD in ETH, and then withdrew the collateral, forcing the treasury to take over the transaction. The trader ultimately made a profit of 1.8 million USD, while the treasury suffered a loss of 4 million USD.

The trader cleverly exploited a loophole in the liquidation strategy. If he had executed market orders directly through the order book, he would have faced significant slippage losses. However, by withdrawing collateral, he forced the platform to liquidate his position, causing the treasury to passively bear a $286 million ETH long exposure. The trader could then immediately open a reverse short position on other exchanges to hedge and profit.

The reason for the vault loss of up to $4 million is that when forced to take over a position of $290 million, the protocol could only quickly match trades due to limited market depth, leading to significant slippage being unavoidable. Afterwards, the platform promptly took remedial measures, reducing the maximum leverage for BTC and ETH to 40 times and 25 times respectively, and increasing the margin requirements for large positions.

In the face of similar risks, some professional DEXs have taken additional protective measures. For example, a certain exchange has designed a trader risk limit, categorizing users into different levels based on their trading volume, and controlling the overall risk of the exchange accordingly. During periods of severe market volatility, the platform dynamically adjusts the maximum leverage ratio or maintains the margin ratio for users to open positions, in order to reduce potential risks. This dynamic mechanism is automatically adjusted by the risk control module within the protocol based on market conditions, ensuring the safety and stability of the DEX while maximizing user engagement.

Conclusion

This incident profoundly reveals the complexity and importance of DEX liquidity pools in terms of security, yield, and risk control. Although the composite vault provides strong support for the platform through various strategy modules, it also increases the potential for risk exposure in extreme market conditions.

The incident exposed the significant risks that liquidation strategies can pose in special circumstances. When faced with artificially induced severe volatility, positions taken passively can lead to substantial slippage losses. Therefore, DEX platforms need to place greater emphasis on the design of risk control mechanisms.

In the context of the rapid development of the DEX industry, security and risk control have always been core issues. Whether it is a single or composite vault, there is a need to continuously optimize risk control strategies while pursuing high returns.

Only through rigorous smart contract audits, reasonable strategy design, and dynamic risk management mechanisms can DEX platforms achieve sustainable profit growth while ensuring the safety of user assets. In the future, the DEX industry needs to continuously explore more efficient and safer vault structures and risk management solutions to cope with the increasingly complex market environment and potential risks.