Design and Risk Management of DEX Vaults: Starting from the Hyperliquid Incident

On March 12, 2025, a significant loss event involving the Hyperliquid treasury attracted widespread attention in the industry. A trader actively liquidated a long position of approximately 160,000 ETH (worth $306 million) using 50x leverage when the ETH price fell. Due to the massive scale of the liquidation, the ETH price further declined, ultimately resulting in a loss of over $4 million for the Hyperliquid treasury.

This event once again highlights the challenges that decentralized exchanges (DEX) face in terms of security and risk control. As an important component of the DEX ecosystem, the design and management of the treasury are crucial for the stable operation of the platform. This article will delve into the structure, functions, and risk management strategies of DEX treasuries.

Types and Functions of DEX Vaults

The DEX treasury is mainly divided into two types: single-type and composite-type. The single-type treasury is an innovative architectural design aimed at enhancing capital efficiency and user experience. It centrally manages user assets, allowing these assets to be used for multiple purposes simultaneously, such as providing flash loans, participating in yield farming, or serving as a liquidity source for automated market makers (AMM).

A single-type vault is not just a place for asset storage, but more like an "app store" for the decentralized finance (DeFi) ecosystem. Developers can build various DeFi applications on this flexible underlying architecture without having to design an asset management system from scratch. This modular design greatly reduces the difficulty of development while improving the efficiency of capital utilization.

Composite vaults, such as the HLP vault used by Hyperliquid, consist of multiple strategy modules, mainly including market making, order taking, funding rate management, and trade settlement.

1. Market Making Strategy: Calculate fair prices based on quote data from multiple exchanges, providing profitable liquidity 24/7.

2. Order Taking: Actively seek profitable trading opportunities based on market dynamics and order book depth.

3. Funding Rate Management: Participating in the perpetual contract market's funding rate collection provides additional revenue for the platform.

4. Liquidation Strategy: Handle liquidation operations on the platform to ensure stable operation of the platform.

These strategies complement each other, providing not only strong liquidity support for the DEX platform but also creating diversified sources of income.

Risk Management Challenges of DEX

The Hyperliquid incident revealed potential issues in risk management within the DEX treasury. In this incident, a trader converted 10 million USDC into a 271 million USD long position in ETH using high leverage, and then withdrew collateral, forcing HLP to take over the trade. This operation exploited a loophole in the liquidation strategy, forcing HLP to bear a significant risk exposure.

To address similar risks, some DEXs have adopted stricter risk management measures. For example, a certain trading platform has introduced a dynamic risk management mechanism that categorizes risk levels based on user trading volume and dynamically adjusts the maximum leverage and maintenance margin ratio. This mechanism not only ensures the security and stability of the platform but also retains user trading enthusiasm as much as possible.

Directions for Improvement and Future Outlook

The design and risk management of the DEX vault need to seek a balance between security, returns, and user experience. Future improvement directions may include:

1. Optimize the clearing mechanism: design smarter clearing strategies to prevent large-scale liquidations from causing severe impacts on the market.

2. Dynamic Risk Management: Introduce a dynamic risk management system based on market volatility to adjust trading parameters in real time.

3. Multi-layered Liquidity Pool: Design a tiered liquidity pool structure to allocate assets based on risk preferences and capital scale.

4. Cross-chain Risk Hedging: Utilizing cross-chain technology to diversify risks across multiple blockchain networks.

5. Strengthening Smart Contract Audits: Increase the frequency and depth of audits on the treasury smart contracts to timely identify and fix potential vulnerabilities.

As the DeFi ecosystem continues to evolve, the design and Risk Management of DEX vaults will also progress. Through continuous optimization and innovation, DEX is expected to provide more efficient and flexible financial services while ensuring the security of user assets.