HyperLiquid Suffers Yet Another Market Manipulation Incident

HyperLiquid, a decentralized trading platform, has recently faced a severe market manipulation incident that has raised concerns regarding its security protocols and risk management. This comes shortly after a similar event involving a massive liquidation a few weeks ago. 

According to Lookonchain, the latest issue centers around a sudden surge in the price of $JELLY, a token on the platform, which led to a significant loss and exposed vulnerabilities in HyperLiquid’s system.

HyperLiquid’s treasury was automatically set to assume a short position of $5 million in $JELLY. When the price of the token unexpectedly surged by 230%, the Hyperliquidity Provider (HLP) faced an unrealized loss of approximately $12 million, per Lookonchain. 

The token’s price skyrocketed to $0.16004 in just an hour, and had the price reached $0.17, the treasury would have faced liquidation, leading to an estimated $240 million loss. This rapid price fluctuation is suspected to be the result of market manipulation, an issue that has become all too familiar for HyperLiquid.

Market Manipulation Scheme Exposed

Blockchain analytics firm Arkham Intelligence revealed the details of the manipulation scheme. According to their analysis, an address identified as 0xde95 opened a substantial short position of 430 million $JELLY tokens on the HyperLiquidX platform.

The trader then initiated a series of trades to exploit the system’s vulnerabilities. The trader opened three accounts in quick succession: two long positions valued at $2.15 million and $1.9 million, and one short position worth $4.1 million. The purpose behind these trades was to leverage the system and artificially manipulate the market. 

Arkham reported that the trader attempted to withdraw collateral from these accounts before the platform’s liquidation system could respond. This was done to lock in profits from the manipulated price movements. 

As the price of $JELLY surged by over 400%, the short position entered liquidation. However, because the position was too large, it didn’t immediately trigger liquidation. Instead, it passed to the Hyperliquidity Provider Vault (HLP), which is responsible for handling such positions.

At the same time, the trader withdrew funds from the long positions while managing to secure a “7-figure positive PnL” from the manipulated market. Arkham noted that while the trader managed to withdraw $6.26 million, they still have a remaining balance of around $1 million. If the trader cannot withdraw this remaining balance, they stand to lose nearly $1 million.

A Pattern of Problems for HyperLiquid

This incident is not an isolated event for HyperLiquid. Back in March, the platform faced a major loss of $4 million due to a liquidation event involving Ethereum. A whale trader intentionally liquidated a $200 million long position in Ether, causing HyperLiquid’s liquidity pool to suffer. The same trader later manipulated the market again by dumping and then buying back tokens, leading to another significant loss of nearly $12 million.

Such events have led to growing concerns regarding the platform’s security and governance mechanisms. HyperLiquid has since made efforts to address the situation. Following the $JELLY incident, the platform announced that it would delist the token to avoid further damage, preventing what could have turned into a $230 million loss. 

HyperLiquid has also assured its users that their funds remain secure and has pledged to compensate affected users. 

The Centralization Debate

The $JELLY manipulation incident has ignited a broader debate about HyperLiquid’s decentralization. Prominent figures in the cryptocurrency community have expressed concerns about the platform's ability to effectively handle market manipulations. 

Arthur Hayes, a well-known cryptocurrency figure, argued that HyperLiquid is not truly decentralized, stating, “Let’s stop pretending that Hyperliquid is decentralized.” 

Similarly, Gracy, CEO of Bitget, criticized the platform’s handling of the incident, calling it “immature, unethical, and unprofessional.” She also warned that HyperLiquid may be on the path to becoming “FTX 2.0,” referring to the infamous collapse of the FTX exchange.

The platform’s failure to prevent or quickly react to the $JELLY manipulation, combined with its apparent reliance on centralized decision-making, has raised alarms among users and analysts alike. 

ZachXBT, a blockchain investigator, highlighted the inconsistencies in HyperLiquid’s approach to market manipulation, pointing out that the platform claimed to be “powerless” during the Radiant hack but actively intervened in the $JELLY incident. This contradiction has led to further questions about the platform’s governance model and its ability to protect users from malicious actors.