Hyperliquid Faces $340M Outflow After JELLY Token Dispute

Hyperliquid, a decentralized exchange, has experienced a significant outflow of USDC, totaling over $340 million, following a dispute involving the JELLY token. The controversy began when Hyperliquid's treasury took a $5 million short position in JELLY, which saw a dramatic price surge of 429% before being delisted. This unexpected price spike led to an unrealized loss of $10.63 million for Hyperliquid's treasury, with the potential for a $240 million loss if JELLY had reached $0.17.

The price manipulation of JELLY appears to have been orchestrated by two addresses. The first address, identified as 0xde95, opened a massive 430 million JELLY short position on HyperliquidX and then removed its margin shortly after. This action triggered a series of liquidations, with the losses being absorbed by Hyperliquid’s treasury. Simultaneously, another wallet, 0x20e8, opened a long position in JELLY, further driving up the price.

In response to the escalating situation, Hyperliquid's validator committee decided to delist JELLY and force-settled it at $0.0095. The platform assured users that short positions were settled at their initial entry price and that the Hyper Foundation would fully compensate impacted users. However, the handling of the incident has drawn criticism from industry figures. The CEO of a prominent exchange called Hyperliquid’s actions “immature, unethical and unprofessional,” drawing comparisons to the controversial collapse of FTX. The CEO suggested that Hyperliquid operates more like an unregulated offshore exchange than a decentralized platform.

The controversy has had a notable impact on Hyperliquid’s native token, HYPE, which has seen a 10% decrease in value over the past 24 hours. Despite this drop, HYPE remains significantly above its lowest price, although it is still well below its all-time high. The total value locked in Hyperliquid’s Hyperliquidity Provider Vault, which handles market making and liquidations, has also declined, falling from a peak of $540 million to $195 million.

The JELLY dispute and the subsequent outflows highlight the challenges faced by decentralized exchanges in managing risk and maintaining user trust. The incident serves as a reminder of the importance of transparency and ethical practices in the rapidly evolving world of decentralized finance. As the industry continues to grow, platforms like Hyperliquid will need to navigate these challenges carefully to ensure long-term sustainability and user confidence.