Hyperliquid Turns $12M Loss Into $703K Profit After JELLYJELLY Manipulation

Hyperliquid, a decentralized exchange, recently faced a significant challenge when the price of the meme coin JELLYJELLY surged by 500%. This abrupt price increase was suspected to be the result of market manipulation, putting the exchange at risk of losing $12 million. The situation was swiftly addressed by Hyperliquid's team, who managed to turn the potential loss into a $703,000 profit. To prevent further issues, the exchange halted trading for JELLYJELLY.

The incident began when a trader holding 124.6 million JELLYJELLY tokens, valued at $4.5 million, placed an $8 million short bet on Hyperliquid. This action forced the platform’s liquidity vault to assume the risk. Concurrently, another wallet, likely controlled by the same trader, opened a massive long position, causing JELLYJELLY’s price to skyrocket. This led to widespread liquidations and substantial profits for the trader. Arkham later revealed that this strategy was deliberately designed to exploit leverage and drain funds from Hyperliquid.

The trader's plan went awry when their accounts were restricted to reduce-only orders, preventing them from opening new trades and forcing them to sell off tokens from the first account to recover some funds. Despite having millions in unrealized gains, the trader was unable to withdraw the funds due to the restrictions. As JELLYJELLY’s price continued to rise, Hyperliquid’s liquidity vault faced the risk of a catastrophic loss. If the token’s market cap continued to increase, the vault could have been wiped out entirely. Major exchanges, capitalizing on the hype, listed perpetual futures for JELLYJELLY.

In response to the escalating situation, Hyperliquid validators intervened and reset JELLYJELLY’s price to $0.0095, the level where the whale had originally placed their short position. This allowed the platform to liquidate 392 million JELLYJELLY tokens, converting a potential multi-million-dollar disaster into a manageable $703,000 profit. To prevent further manipulation, Hyperliquid closed all open JELLYJELLY positions and removed the token from its platform. The team also committed to reimbursing affected users, with compensation to be distributed automatically, except for flagged addresses suspected of involvement in the scheme.

Hyperliquid’s handling of the crisis elicited mixed reactions. While some praised the exchange’s quick action, critics like Bitget CEO Gracy Chen argued that Hyperliquid’s response was more akin to that of a centralized exchange. This incident marks Hyperliquid’s second major liquidity scare in just two weeks, following a $200 million Ethereum long liquidation that resulted in a $4 million loss for its liquidity vault. The repeated turmoil has shaken confidence in the exchange, leading to a significant drop in the value of its native token, HYPE, which fell over 12% in a day and over 30% for the month.