At the end of March, the Hyperliquid crypto exchange, specializing in derivatives, was subjected to market manipulation with the JELLYJELLY memcoin, which resulted in losses of $12 million.
According to Coindesk, this forced the representatives of the platform to unilaterally close the JELLYJELLY trading market at a favorable non-market price. Cryptocurrency experts point to the shortcomings of the platform's mechanisms, as well as the unethical behavior of the Hyperliquid team.
Hyperliquid is an Ethereum or Solana type blockchain, as well as a decentralized platform that allows users to trade perpetual futures by aggregating liquidity from various sources. It also allows you to trade cryptocurrencies with leverage, borrowing funds to increase your purchasing power.
The Hyperliquid Exchange is the largest application on the Hyperliquid network. Although there are other crypto projects based on the blockchain network, including memcoins, their total number in the Coingecko lists was only 29.
Perpetual futures are a type of settlement futures that differ from traditional futures by the absence of a contract expiration time. Traders working with such futures can hold a position as long as they have enough cash on their balance sheet. Such tools are most widely used in the crypto market due to the peculiarities of the work of crypto exchanges, which are open for trading 24/7 and seven days a week.
The Hyperliquid token (HYPE) is a native token on the Hyperliquid blockchain and has a capitalization of $4.8 billion with a daily trading volume of about $500 million, according to Coingecko on March 27. Launched at the end of November 2024, the token was distributed to early users of the platform through an airdrop, which became the largest in the history of cryptocurrencies. At the peak of the price at the end of December, the project capitalization reached $10.8 billion.
At the end of March, one of the traders on Hyperliquid opened a JELLY short position for $8 million, then deliberately removed the security of the position, which is why it switched to HLP (auto-liquidation), described the situation by the founder of the AP Collective Web3 project under the name Abhi in X.
HLP is an automated mechanism that is linked to the liquidation mechanism of exchanges. When a trader's position is liquidated, it essentially goes to the stock exchange. At the same time, the trader bought JELLY on other exchanges, which led to an increase in the capitalization of the token from $10 million to more than $50 million in less than an hour.
During these events, crypto exchanges such as Binance and OKX added the JELLY token to their futures platforms. And another trader opened a large long position on Hyperliquid, quickly earning $8.2 million on Hyperliquid.
As a result of these actions, the HLP mechanism, and hence the Hyperliquid exchange, received unrealized losses of $12 million at the moment. Around the same time, the Hyperliquid exchange stopped trading JELLY and froze the memcoin trading market at a price of $0.0095 per token.
With a further increase in the price of JELLY JELLY, the exchange would have to record losses. But the team preemptively stopped trading at a price of $0.0095 instead of $0.50 for JELLY on other exchanges. Thus, instead of multimillion-dollar losses, their HLP pool made a profit of about $700 thousand.
"After confirming the suspicious market activity, a group of validators gathered and voted to remove JELLY from the listing," the exchange said in a statement.
Hyperliquid also announced that all funds lost by users, except for those who manipulated prices, will be returned.:
"All users, with the exception of the marked addresses, will have their funds fully refunded from the Hyper Foundation. This will be done automatically in the coming days based on blockchain data. HLP's 24-hour income at the time of writing is approximately $700k in USDC. Technical improvements will be made and the network will become stronger as a result of the lessons learned. More detailed information will be provided soon."
Criticism
Experts believe that the actions of the exchange can be regarded as unethical and unprofessional behavior. The head of the Bitget crypto exchange, Gracie Chen, wrote:
"What they did to JELLY was unethical and unprofessional. This led to user losses and raised serious doubts about the integrity of the exchange. The decision to close the JELLY market and force the settlement of positions at a favorable price sets a dangerous precedent. Trust, not capital, is the foundation of any exchange (both CEX and DEX), and once lost, it is almost impossible to restore it."
Chen added that serious flaws have been identified in the design of the platform, exposing users to systemic risk, and if these problems are not resolved, the situation around Hyperliquid "could lead to the next collapse in the crypto market."
On March 26, the native HYPE token of the Hyperliquid platform collapsed by 20% within a few hours, to $12.4. According to Coingecko on March 27, quotes partially recovered to $14.6, and the daily drop was about 10%.
Be careful and please take care of yourself.
