Hyperliquid’s JELLY Crisis: How a $5M Bet Led to a $240M Nightmare

According to blockchain analytics firm Parsec, Hyperliquid has faced significant outflows in the aftermath of the JELLY liquidation event. Within hours of the controversy, Hyperliquid’s USDC reserves fell from a high of $2.58 billion to $2.02 billion over the past 30 days. This mirrors a previous Bitcoin whale liquidation event that triggered $300 million in outflows. The impact of these losses has put Hyperliquid under intense scrutiny, raising concerns about its risk management strategies.

The $240 Million Risk: How JELLY’s Price Surge Shook Hyperliquid

The controversy began when Hyperliquid’s treasury took a $5 million short position in JELLY. However, an unexpected spike in the token’s price turned this into a major issue. The unrealized loss quickly ballooned to $10.63 million. If JELLY had reached $0.17, Hyperliquid’s treasury could have faced a catastrophic $240 million loss. This price movement appears to have been manipulated, with a wallet identified as 0xde95 opening a 430 million JELLY short position on HyperliquidX and swiftly removing its margin, leading to a cascade of liquidations.

Manipulation Allegations and Forced Settlements

Adding to the chaos, another wallet, 0x20e8, opened a long position in JELLY simultaneously, further driving the price up. In an attempt to control the damage, Hyperliquid’s validator committee delisted JELLY and force-settled it at $0.0095. The platform assured users that short positions were settled at their initial entry price, with the Hyper Foundation stepping in to compensate affected users. However, this approach created many speculations and rumours among inventors regarding platform transparency.

Industry Backlash and Comparisons to FTX

The response to Hyperliquid’s handling of the incident has been far from positive. Gary Chen, Bitget CEO, criticized Hyperliquid’s platform as “immature, unethical, and unprofessional” and even compared it to FTX. She even mentioned that Hyperliquid is operating as an unregulated offshore exchange rather than a DeFi platform. These accusations ruptured the reputation and led to further losses, and boosted investors’ speculations on transparency and risk management.

Market Impact: HYPE Token Drop and TVL Decline

The aftermath of the JELLY event has also been felt in Hyperliquid’s native token, HYPE. In the past 24 hours, HYPE has dropped 10%. However, volume grew 443%, reaching $466 million, as market activity increased. Despite the decline, HYPE is still 284% above its all-time low, yet remains 58% below its all-time high of $34.96. 

Furthermore, the total value locked (TVL) in Hyperliquid’s Hyperliquidity Provider Vault has significantly declined, falling from a peak of $540 million on Feb. 10 to $195 million as of Mar. 27, according to DefiLlama data. This decline reflects a growing lack of confidence in the platform’s ability to manage liquidity effectively.

The JELLY liquidation incident has left a lasting impact on Hyperliquid, with the platform facing financial and reputational damage. As the industry watches closely, Hyperliquid’s next steps will be crucial in determining its long-term stability and credibility.