Original source: AZEx Community
1. Historical Review: What Happened?
In the early hours of August 26, XPL experienced a few minutes of "roller coaster" on Hyperliquid:
05:36 A massive buy order swept the order book, with individual transaction sizes ranging from tens of thousands to hundreds of thousands of dollars, rapidly pushing up the XPL price.
05:36–05:55 The marked price was dominated by internal matching, with the jump far exceeding the reference from CEX external markets, causing a large number of short positions to fall below the maintenance margin. The system initiated liquidation: liquidation orders were directly entered into the order book, forming a positive feedback loop of "sweeping the book → liquidation → further sweeping," continuously driving up the XPL price.
05:55 The price skyrocketed to a peak, with an increase of nearly +200% within a few minutes, while a whale account realized profits, making over $16 million in a single minute. Some short accounts were liquidated for millions of dollars within minutes.
05:56 Market depth recovered, and the price quickly fell back, returning the XPL contract market to "normal," but a batch of short accounts had already lost everything. Almost simultaneously, the ETH perpetual price on the Lighter platform also experienced a spike, briefly hitting $5,100.
This indicates that this was not an issue with a single platform, but rather a concentrated exposure of structural risks in the entire DeFi perpetual contract system.
2. What Did These Situations Cause?
Whales made huge profits, while shorts suffered heavy losses. Low-leverage hedgers also got caught.
Many people think that 1x leverage hedging equals "no risk." However, in this incident, even 1x leveraged short positions with substantial collateral were liquidated during the spike, resulting in losses of millions of dollars. This led many users to conclude, "I won't touch this isolated market again." But the truth is far more complex.
3. Core Issue: Structural Defects of the Order Book Model
After the XPL incident, much discussion focused on "single oracle dependency" or "lack of position limits." However, these did not capture the core of the problem.
The Perp protocol itself has multiple implementation paths:
Orderbook (order book driven)
Peer-to-Pool (pool counterparty)
And AMM/Hybrid mixed forms
The issue today lies with the order book implementation. Its structural defect is:
Effective Depth and Chip Distribution
The order book may appear deep, but the actual effective depth it can withstand depends on chip distribution.
When chips are concentrated in the hands of a few large holders, even pushing a few points can trigger a chain reaction.
Price Anchoring Relies on Internal Transactions
In weak markets, order book transactions directly dominate the marked price.
Even with oracles, as long as the external spot anchor point is not strong enough, this dependency becomes a vulnerability.
Liquidation and Order Book Forming Positive Feedback
Liquidation orders themselves need to enter the order book → further pushing the price → triggering more liquidations.
In thinly liquid markets, this is an "inevitable stampede," not an accidental incident.
As for measures like "setting position limits for individual users," they are essentially meaningless. Because positions can easily be split across multiple sub-accounts or wallets, the risk at the market level still exists. Therefore, the spike is not the manipulation of bad actors, but the fate of the order book mechanism under low liquidity conditions.
4. Getting to the Essence: What Do Perpetual Contracts Actually Solve?
When you say, "I want to go long on ETH," what is actually happening behind the scenes?
If it's a spot trade, you spend $1,000 to buy ETH; if it goes up, you make money; if it goes down, you lose money.
If it's a perpetual contract, you spend $1,000 as margin, allowing you to open a 10x long position, leveraging a $10,000 position, which amplifies both profits and risks.
Here, two key questions need to be asked:
Where does the money come from?
Your profits must come from the counterparty (the short sellers) or the liquidity pool provided by LPs.
Who determines the price?
Traditional markets: Order book transactions directly reflect prices; the more you buy, the higher the price goes, which is the market trend feedback mechanism.
On-chain perpetual: Most protocols (like GMX) do not have their own matching book but rely on CEX oracle prices.
5. Problems with the Oracle Model
The prices from oracles usually come from CEX spot transactions, which means on-chain transaction volumes cannot feedback to prices.
Although oracles have delays, the more fundamental issue is:
You opened a $100 million position on-chain, but there is no corresponding transaction volume in the external spot market.
In other words, on-chain trading demand cannot influence prices in return, and risks are "accumulated" within the system.
This is the opposite of the order book model: order book prices feedback too quickly and are easily manipulated; oracle prices feedback too slowly, and risks are easily delayed in release.
6. Basis and Funding Rates
This brings up another key issue: How is the price difference (basis) between spot and contracts corrected?
In traditional markets, if there are far more long positions than short positions, contract prices will be higher than spot prices.
Perpetual contracts introduce a funding rate mechanism to adjust:
Too many long positions → funding rate turns positive, longs have to pay shorts;
Too many short positions → funding rate turns negative, shorts have to pay longs.
In theory, the funding rate can anchor contract prices back to spot prices.
But in on-chain perp, the situation is more complex: if the spot market lacks depth, even a high funding rate may not correct the basis. Especially for less popular assets, on-chain contracts may deviate from spot prices for extended periods, becoming an almost independent "shadow market."
7. The Illusion of On-Chain Depth
Many people think that only less popular assets are easily manipulated, and that top assets won't have issues. But the reality is: the true depth of on-chain spot markets is far less than imagined.
Take the top three tokens from various ecosystems as an example:
In Arbitrum, mainstream tokens other than ETH often have depths of only a few million dollars within a 0.5% price difference range.
On leading DEXs like Uniswap, even "eco-tokens" like UNI do not have sufficient on-chain spot depth to support tens of millions of dollars in instantaneous shocks.
What does this mean?
Effective depth is often far lower than apparent depth, especially when chips are concentrated, making actual resilience even weaker.
In such an environment, the threshold for price manipulation is not high. Even the top three tokens in the ecosystem can be easily pushed up or down in extreme market conditions.
In other words: the structural risks of on-chain perp are not "exceptions" in less popular markets, but the "norm" of the entire ecosystem.
8. Directions for New Generation Protocol Design
From this XPL spike incident, we see more clearly: the problem is not a flaw in a specific platform, but rather the structural contradiction between existing order books and on-chain liquidity.
Therefore, if we are to discuss "new generation Perp protocols," at least three directions are worth exploring:
1. Preemptive Risk Control: Every opening of a position, swap, or liquidity adjustment should first simulate the market health after execution. If the risk exceeds a threshold, it should be restricted or adjusted in advance, rather than waiting for positions to fall below the maintenance margin before being passively liquidated.
2. Spot Pool Linkage: The current main models on-chain either feedback too quickly (order book) or too slowly (oracles). A better direction is to create a linkage between contract positions and spot pools, allowing changes in spot market depth to buffer or dilute risks as they accumulate. This avoids delayed accumulation and reduces instantaneous stampedes.
3. LP Priority Protection: Whether in order books or Peer-to-Pool, LPs are the most vulnerable link. New generation protocols need to embed LP risk control mechanisms at the protocol level, making LP risks transparent and controllable, rather than leaving them as passive backstops.
9. Exploration and Opportunities in Practice
It's easy to talk about directions, but implementing them is challenging.
However, some new attempts are already underway:
Preemptive Risk Control: Simulating market health before executing trades to filter risks in advance.
Linkage Between Contracts and Spot Pools: Creating feedback between positions and spot liquidity to avoid risk accumulation or instantaneous stampedes.
LP Priority Protection: Writing LP risk control into the protocol layer, rather than leaving LPs to passively cover losses.
At the same time, we cannot overlook a larger market fact:
The perpetual contract market generates over $30 billion in fees and profits each year. In the past, this pie was almost exclusively divided among a few centralized exchanges and professional market makers. If the new generation of protocols can combine AMM technology to break down "market making" into pooled liquidity provision, then more ordinary participants can share in this market dividend. This is not just an innovation in risk control, but also a reconstruction of incentive mechanisms.
In these explorations, some new projects are also beginning to try different paths. For example, AZEx is attempting to combine "pre-execution risk control + dynamic funding rates + market freezes in extreme cases" with "LP pooled profits" based on the Uniswap v4 Hook mechanism.
Next week, AZEx will open its testnet, and interested readers can get the latest updates through [https://x.com/azex_io].
10. Conclusion
The XPL spike incident reminds us: risks are not in the charts, but in the protocols.
Today's DeFi perpetual contracts are mostly still order book driven. As long as liquidity is insufficient and chips are concentrated, similar stories will inevitably repeat.
The true competition of the new generation of Perp protocols is not about UI, points, or rebates, but rather: can we design a new Perp protocol that forms a closed loop of "price discovery, risk control, and LP protection," rather than repeatedly experiencing stampedes in extreme market conditions? Can we return the $30 billion market profits from a few hands to more participants?
New generation protocols must not only solve risk issues but also redistribute dividends. Whoever can achieve these two points will have the opportunity to define the next generation of the DeFi perpetual contract market.
This article is from a submission and does not represent the views of Rhythm BlockBeats.
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