Perhaps this is the article with the most meme graphics among all the articles that explain things clearly.
By Alex Liu, Foresight News
Background Overview
Hyperliquid is a decentralized exchange built on its own Layer1 blockchain. Its core business is perpetual contract trading, and the platform governance is managed by a group of validators. The community's liquidity pool constitutes the so-called HLP Treasury (this part of liquidity acts as the counterparty of the contract). The platform manages and guarantees the liquidity and risk exposure of the entire system through the HLP Treasury.
However, the top HYPE stakers and Hyperliquid validators are shown in the figure below. The Hyper Foundation can completely dominate the platform's decision-making.
The incident originated from a memecoin called JELLYJELLY (JELLY for short). The token was launched on the Solana chain by Venmo co-founder Iqram Magdon-Ismail. It once reached a market value of US$250 million, but later fell to tens of millions of dollars. It was about US$10 million before the incident.
JELLYJELLY's market value is extremely unstable, and its low liquidity makes it easy for prices to be manipulated by large funds. It was in this context that on the evening of March 26, traders used market mechanisms to launch a carefully planned operation, causing Hyperliquid's system to suffer an unprecedented impact.
What happened: manipulation, forced liquidation and platform response
Trader Operations and Market Manipulation
On March 26, a trader established a short position of JELLY worth about $6 million on the Hyperliquid platform. He then adopted a series of market manipulation strategies: First, he purchased a large number of JELLY tokens to deliberately push up the spot price. At the same time, he triggered the platform's automatic liquidation mechanism through the "removal of margin" operation, transferring his short position to the HLP vault. It is worth noting that during this process, another address (0x20e8fD36dcdEF8DfbB983B0bc06c658105b9a808) also established a long position and made a floating profit of more than $8 million in the rapid rise in prices.
A certain address bought a large amount of jellyjelly spot, causing the price to rise more than 4 times
This series of operations is a typical market manipulation. According to CoinDesk data, after the HLP vault took over this part of the position, as the price of JELLY continued to rise, it faced an unrealized loss of up to $13.5 million. If the price of JELLY continues to climb to a higher level, Hyperliquid's HLP vault will face greater pressure, and may even trigger chain liquidation, causing a large amount of user assets in HLP to be damaged. If the worst result really happens, Hyperliquid may directly declare failure.
The platform’s emergency response and delisting decisions
Hyperliquid released an announcement: "After discovering evidence of suspicious market activities, we voted through a validator assembly to delist the JELLY contract. Except for the addresses marked as violating, all users will be fully compensated by the Hyper Foundation. The compensation will be automatically executed based on the on-chain data, without submitting a work order. The specific method will be detailed in a subsequent announcement." In short, we can't afford to lose, so we pulled the plug. The decision to delist is actually a very centralized process.
The degree of centralization of Hyperliquid validators has been mentioned before, so let’s bring up the famous meme again:
Well-known meme: Hyperliquid validators, with different images of Hyperliquid founder Jeff
The announcement also mentioned that in the 24 hours before the incident, the HLP treasury had a profit of approximately 700,000 USDC, indicating that the overall financial situation remained at a relatively stable level. Where did the previously mentioned HLP loss of more than 10 million US dollars go?
It turned out that although the price of the external oracle was $0.05 at the time, Hyperliquid finally closed its position on JellyJelly at $0.0095 , and the platform actually made an "unexpected profit" of about 700,000 USDC.
The picture above shows the community satirizing Hyperliquid’s centralized pricing of JELLY, which is like manipulating Oracle prices like modifying Excel.
Controversy and industry reflection
Questions about decentralized and neutral decision-making
The most striking point of this incident is the controversy over the platform governance method. As a self-proclaimed "decentralized" trading platform, Hyperliquid quickly made the decision to delist through the so-called validator assembly and voting mechanism in this incident, which was regarded by some community members as a "centralized decision" and contrary to the decentralized spirit advocated by DeFi. And the rude disregard of the oracle's custom liquidation price is full of centralized color.
Arthur Hayes said bluntly on X: "Let's stop pretending that Hyperliquid is decentralized and that traders really care about it. I bet HYPE will soon be back to where it started because speculators will never stop their operations." This view has triggered widespread discussion in the market about the platform's actual governance structure and decision-making transparency.
The Role of Binance and Other Centralized Platforms
In addition, another controversial focus in the incident is the involvement of centralized exchanges. Before and after the incident, centralized platforms such as Binance and OKX launched JELLY derivative contracts, which made some market participants doubt whether there was a coordinated attack or competitive strategy. Some people believe that centralized platforms use their more complete risk control mechanisms and liquidity advantages to form a strong squeeze on DeFi platforms, and even take this opportunity to suppress competitors, thus having a long-term impact on the entire market structure. Although this point is still inconclusive, the logic behind it has triggered in-depth thinking about the future boundaries and competitive strategies of DeFi and CeFi.
Influence
Short-term impact: financial losses and reputational risks
This incident dealt a double blow to Hyperliquid in the short term: on the one hand, the platform was forced to take over huge loss-making positions due to the automatic liquidation mechanism. Although it eventually achieved partial profits by closing positions at low prices, the systemic risks were clearly exposed; on the other hand, the platform's "centralized decision-making" method also caused users to question its commitment to decentralization, resulting in the rapid withdrawal of funds by some users. Data showed that within hours of the incident, the net outflow of the platform's stablecoin USDC had reached US$140 million.
Long-term Outlook: An Inevitable Issue of Risk Management on DeFi Platforms
In the long run, the Hyperliquid-JELLY incident reveals the severe challenges faced by DeFi platforms in managing low-liquidity assets, dealing with market manipulation, and designing automated liquidation mechanisms. The incident exposed that even in a "permissionless" decentralized system, there is still a risk of being exploited due to defects in algorithmic rules. In the future, the DeFi ecosystem needs to build a stronger risk warning and governance framework to ensure efficient operation of technology and protect user interests in extreme market environments. At the same time, how to introduce human intervention in moderation to prevent systemic risks while maintaining the principle of decentralization may become a key issue that the industry needs to solve urgently.
