Hyperliquid Loop: JELLYJELLY Manipulations, $12M Losses, and Decentralization Questions

• Keith tried to capitalize on JELLYJELLY memecoin manipulation.
• Hyperliquid excluded the asset from trading to limit risk.
• Market reaction and accusations of centralization threaten the project's reputation.

On March 26, 2025, another incident involving manipulation of the HLP Vault mechanism occurred on Hyperliquid. An anonymous trader triggered the liquidation of a margin short position on the Jelly-My-Jelly token (JELLYJELLY), forcing the platform to take a loss-making commitment.

In response to the user's suspicious actions, the platform also forcibly closed the JELLYJELLY market, blocking a portion of the trader's unrealized profit. The volume of potential losses of HLP reached $12 mln;

This is the second major Hyperliquid incident in March 2025 involving manipulation of HLP's operating mechanism and resulted in major losses.

Manual dexterity and no fraud?

It all started when a trader deposited almost $7.2 into three separate Hyperliquid accounts. According to Arkham Intelligence experts, his goal was to take advantage of the liquidation mechanics of the platform, which works through Hyperliquidity Provider (HLP) pools.

JELLYJELLY, a Solana-based memecoin, became a kind of ”tool” of the anonymist. Due to the relatively small market capitalization of $20 million (at the exchange rate at the time of the transaction opening), the asset was a convenient target for manipulation, noted the co-founder of the Polynomial.fi project under the nickname gauthamzzz.

The trader created two long positions in JELLYJELLY for $2.15 million and $1.9 million respectively. At the same time he opened a short position for 400 mln JELLYJELLY ($4.1 mln at the exchange rate at the moment of the transaction). The latter was created with a leverage of 20x and covered almost 40% of the total supply of the asset.

These manipulations led to a sharp jump in the price of the token. Within a short period of time, the asset's capitalization jumped from $20 million to $50 million, and the exchange rate increased by more than 400%, according to CoinGeckoTerminal. In essence, the whale created artificial market movement by balancing its own trades in such a way as to trigger the liquidation of one of them.

When the price of JELLYJELLY began to rise, it caused his short position to be forced to close. However, due to its volume, the trade was not processed in the standard way, but went to the HLP Liquidator vault. This platform mechanism is usually used to close large positions without significant market impact.

In the case of large transactions, there is a risk that the system will not have time to close the position quickly. At its core, HLP Liquidator is not a sole liquidator, but directs trades to the order book. This creates competition when closing out a position and allows users to keep the remaining margin after liquidation.

Hyperliquid representatives have noted several times that such a strategy has its drawbacks. The key risk is losing trades in which the system is unable to liquidate quickly enough. This can create price slippage in the course of closing positions.

As a result, the trader's manipulation of JELLYJELLY and his actions resulted in a potential $12 million loss to HLP, according to experts at Lookonchain.

As for long positions, they reached a seven-digit positive Profit and Loss (PnL) immediately after the price spike. The user started actively withdrawing funds and managed to get $6.26 million before his accounts were limited to ”decrease only” orders.

According to Arkham, the developers' prompt intervention nullified the user's earnings efforts and prevented them from succeeding.

Radical methods

Immediately after the Hyperliquid team realized the scale of the problem, they took several emergency measures. First, the platform restricted the ability to place orders for the trader in question, allowing only closing positions.

As a result, a part of the unrealized profit remained in his account, and the user himself suffered losses. Even in an optimistic scenario, he will lose $4000.

”Assuming he can withdraw at some point in the future, his actions at Hyperliquid cost him a total of $4,000. If he fails to do so, he faces a loss of nearly $1 million,” noted in Arkham.

In addition to the trader restrictions, Hyperliquid announced the immediate delisting of JELLYJELLY in an attempt to crack down on manipulation. The decision drew mixed reactions from the community. On the one hand, it was aimed at preventing further manipulations, on the other hand, it questioned the exchange's resistance to such attacks and raised questions about decentralization.

Analysts also noted that simultaneously with the incident on the platform, centralized exchanges Binance and OKX launched open-ended futures on JELLYJELLY. This situation has sparked discussions about possible competition between the platforms and their approaches to risk management.

Moreover, the ZachXBT expert stated that the funds used by the trader came from the Binance exchange.

Hyperliquid, for its part, assured users that the loss of HLP will not affect their funds and those affected, with the exception of ”exploiter,” will be compensated.

Amid a new batch of problems at Hyperliquid, the HYPE cryptocurrency collapsed by 22%, according to TradingView. The asset subsequently partially recovered, but the overall decline amounted to 10%.

At the time of writing HYPE is trading at $13.57. Monthly drawdown amounted to 29.2%.

Next FTX?

The incident sparked widespread outrage in the community. Bitget CEO Gracie Chen said that Hyperliquid is moving towards the model of the failed FTX, where the exchange can make centralized decisions on asset liquidation. She emphasized that freezing JELLYJELLY positions without discussing with users calls into question the principles of decentralization.

BitMEX founder Arthur Hayes also expressed concern, pointing out that Hyperliquid's management is concentrated in the hands of a limited number of validators. According to him, unlike networks like Ethereum or Solana, which have thousands of validators, the said platform can actually change the rules of the game manually.

Against the background of these statements, some users began to doubt the true decentralization of the platform. In their opinion, the developers' actions indicate the concentration of power in the hands of a limited number of people.

Hyperliquid representatives confirm that the measures taken were a last resort and were necessary to protect users and prevent further losses.

Groundhog Day 

Note that this is not the only case with the manipulation of HLP mechanisms. On March 12, 2025, the platform faced a forced liquidation of $306.8 million. This happened after a trader opened a long position for 175,179 ETH, after which he took the collateral and triggered the liquidation.

Due to the inability to instantly close a position via HLP Liquidator and price slippage, Hyperliquid incurred losses of $4 million.

In addition, a similar case occurred in June 2023 when a user artificially inflated the price of Synthetix (SNX). He manipulated the rate of the asset on CEX to trade against Hyperliquid. This allowed him to exploit HLP vulnerabilities and withdraw $37,000 in USDC.

Two recent incidents have caused the amount of blocked funds (TVL) in the HLP Vault to begin rapidly declining. Over the past two weeks, users have withdrawn $293 million in assets.

While HLP Vault had a total TVL of $480 million on March 12, as of March 27, 2025, the figure has dropped to $187 million. Thus a trend of withdrawal of assets from the project has formed, which, according to some experts, raises questions about its future.