Hyperliquid Delists JELLYJELLY to Save Itself Amid Token Manipulation, But Faces Centralization Backlash

Decentralized Perps Exchange Faces Scrutiny After Coordinated Attack

A market manipulation scheme targeting the JELLYJELLY token has triggered one of the largest losses for a decentralized perpetuals exchange to date, leaving Hyperliquid scrambling to recover amid mounting industry criticism.

The orchestrated attack on March 26 exploited weaknesses in the platform’s liquidity management, resulting in risks of losses estimated between $12 million and $20 million from its Hyperliquidity Provider (HLP) vault and sending its HYPE token plummeting 22% at the peak of the crisis.

The incident was traced to a still-unidentified trader connected to wallets “0xde96” and “0x20e8,” who executed a calculated series of trades designed to manipulate JELLYJELLY’s price. After opening a massive $6–8 million short position on JELLYJELLY perpetual futures via Hyperliquid, the trader then aggressively purchased the low-liquidity token across decentralized exchanges. 

Within an hour, JELLYJELLY’s market capitalization soared from $10 million to over $50 million, triggering forced liquidations and offloading losses directly onto Hyperliquid’s HLP vault. The attacker then opened a long position from a new wallet and once saw unrealized profits exceeding $8 million, while Hyperliquid and its users were left to absorb the damage.

Hyperliquid, which operates on its own high-throughput Layer 1 blockchain, halted all JELLYJELLY trading and swiftly delisted the token’s perpetuals following a validator vote. In an official response, the platform announced that all affected users—excluding those linked to the manipulation—would be reimbursed automatically by the Hyper Foundation using on-chain data. 

Still, controversy erupted after Hyperliquid revealed it had settled 392 million JELLY tokens at a fixed rate of $0.0095, citing a $703,000 profit. The profit claim was met with widespread skepticism, given the much larger vault losses and the perceived inconsistency in accounting methods.

According to blockchain analytics firm Arkham Intelligence, the trader has incurred potential losses. Arkham reports that the trader withdrew $6.26 million, but approximately $1 million remains trapped in the accounts due to restrictions. Ultimately, the trader's actions could lead to a total loss of nearly $1 million, depending on the future withdrawal of the remaining funds.

The JELLYJELLY token itself had launched just two months earlier in January 2025, created by Venmo co-founder Iqram Magdon-Ismail as part of a Web3 social platform. It quickly rose to a $250 million market cap before collapsing to $25 million by the day of the exploit. Known for extreme volatility and low liquidity, the token had become a high-risk bet in the fast-growing world of decentralized derivatives trading, a space now drawing increased scrutiny following a string of high-profile exploits.

As news of the exploit spread, competitors Binance and OKX listed JELLYJELLY perpetuals within hours, further inflaming price volatility. Binance’s move in particular drew attention after crypto investigator ZachXBT linked deposit addresses used in the manipulation to the exchange. 

The listings sent the token’s spot price soaring 560%, adding fuel to accusations that centralized exchanges were profiting from, or at least enabling, market chaos in decentralized markets. The timing of these listings raised alarms over whether Binance’s move was opportunistic or complicit, further complicating an already murky situation.

Fallout from the exploit rippled through the industry, prompting comparisons to the FTX collapse and drawing fierce criticism from rivals. Bitget CEO Gracy Chen called Hyperliquid’s response “immature, unethical, and unprofessional,” pointing to deeper issues such as its mixed asset vault structure and lack of position size controls. 

Hyperliquid has pledged technical upgrades and is considering restricting position sizes and overhauling its HLP vault management, though no detailed plans have been disclosed.

Traditionally, centralized exchanges (CEXs) have faced legal consequences when handling funds linked to OFAC-sanctioned addresses or money laundering activities. Hyperliquid, while operating under the label of decentralization, has similarly seen questionable funds flow through its platform—yet may avoid repercussions due to its "decentralized" status.

However, the latest incident—particularly the forced liquidation of a user’s position at an arbitrary price—has exposed just how centralized the platform's operations can be. Despite branding itself as a decentralized perpetuals exchange, Hyperliquid acted in ways more aligned with a CEX. In light of this, regulators may start viewing Hyperliquid through a very different lens going forward.

In response to this significant market incident, HyperLiquid has implemented key risk management updates to enhance its operational integrity: 

• The Liquidator vault within the Hyperliquidity Provider (HLP) will now hold a reduced portion of total account value and will be rebalanced less frequently, incorporating a more sophisticated liquidation handling system.
• The automatic deleveraging (ADL) process will only trigger if the Liquidator vault incurs losses beyond a specified threshold, preventing undesired fund transfers from other vaults. 
• HyperLiquid will adjust open interest (OI) caps dynamically to align with market conditions, ensuring accurate reflection of the trading environment.
• An on-chain voting mechanism will empower validators to choose whether to delist assets that fall below predetermined thresholds. 

The attack has reignited a broader debate about the stability and transparency of decentralized finance platforms, especially those offering perpetual futures. While Hyperliquid’s validator-governed design was intended to foster decentralized governance, its reliance on reactive measures and opaque settlement practices has raised concerns over its resilience and user protection standards. 

The industry’s growing appetite for high-leverage products continues to outpace security innovation, leaving DeFi platforms increasingly vulnerable to sophisticated manipulation tactics.

This article has been refined and enhanced by ChatGPT.