Hyperliquid, a decentralised perpetuals exchange, is under fire after a major controversy involving the JELLYJELLY meme coin. A complex short squeeze triggered millions of dollars in losses, market intervention, and widespread criticism.
The platform’s decision to halt trading and delist the token has raised serious concerns about its decentralisation claims. The episode has prompted comparisons to past failures in the crypto space and left users questioning the platform’s integrity.
How The Jelly Meltdown Unfolded and Exposed A Dangerous Loophole
The JELLYJELLY issue began when a trader took a significant short position on the token, which at the time had a market cap of around $20 million. According to on-chain data, this trader held 124.6 million JELLY worth roughly $4.85 million.
By suddenly dumping these tokens, they intentionally pushed the price down. This triggered Hyperliquid’s liquidation system, passing a short position worth $4.5 million to the platform’s liquidity pool, known as the Hyperliquidity Provider or HLP.
Soon after, a newly created wallet, 0x20e8, began buying large amounts of JELLY, raising the price.
This sharp upward movement led to what is called a short squeeze, where rising prices force those with short positions to buy back tokens at higher prices, locking in losses. JELLY’s price rose over 400% within an hour.
This put Hyperliquid in a dangerous position, as it was now carrying a short worth more than $10 million. Analysts warned that if JELLY’s market cap reached $150 million, the platform could suffer a $230 million loss and complete liquidation.
It did not end there. According to Arkham Intelligence, the trader opened three accounts within five minutes.
Two of the accounts opened long positions worth $2.15 million and $1.9 million, while the third opened a $4.1 million short.
After triggering the squeeze, the trader withdrew collateral from the long accounts while price momentum continued upwards. The short was too large to liquidate immediately, so the position was passed to HLP. The vault became the unwilling counterparty to a manipulated market.
As the situation escalated, Hyperliquid paused trading on JELLY and then settled 392 million JELLY at a fixed price of $0.0095. This allowed the platform to avoid further losses and record a $700,000 profit.
However, the damage had been done. Arkham noted that the trader likely withdrew over $6.2 million during the process, although $1 million remains stuck on the platform.
What unfolded was not just volatility but deliberate price manipulation, taking advantage of structural weaknesses in the exchange’s liquidation system.
This event closely followed another issue just weeks earlier, when a whale liquidated a $200 million long position on Ethereum, causing a $4 million loss to HLP.
In both cases, traders appeared to design positions specifically to trigger liquidations and extract value from the platform’s design.
Why Users Say Hyperliquid Is Starting To Look Like FTX
Although Hyperliquid avoided complete disaster, its handling of the situation has damaged its reputation.
By unilaterally freezing trading, liquidating positions, and delisting the token, the platform raised questions about its claim of being decentralised. A validator vote was conducted to delist JELLY, but critics argue that the decision was rushed and lacked transparency.
Hyperliquid stated that users would be reimbursed through the Hyper Foundation, except for flagged addresses involved in the manipulation.
Reimbursement will be automatic and based on on-chain data. Still, for many users, the damage was not just financial. It was a matter of trust. The incident showed that Hyperliquid could step in and control outcomes much like any centralised platform, undermining its core premise.
Gracy Chen, CEO of Bitget, described Hyperliquid’s response as immature and unethical. She argued that the platform’s design flaws enabled the manipulation and that its actions set a worrying precedent.
According to Chen, once trust is lost in a trading platform, whether centralised or decentralised, it is nearly impossible to regain.
Arthur Hayes, co-founder of BitMEX, echoed the sentiment. He mocked the platform’s decentralisation narrative, saying, “$HYPE can’t handle the $JELLY.”
He argued that most traders do not care whether a platform is decentralised. What matters to them is fair execution and reliability. He predicted that Hyperliquid’s native token $HYPE would soon return to its original price as confidence eroded.
Adding to the tension, Binance and OKX, two major centralised exchanges, announced listings for JELLY perpetuals at the height of the chaos. This sparked accusations that the incident was part of a broader campaign to damage Hyperliquid.
Blockchain researcher ZachXBT pointed out that the trader wallets involved in the JELLY attack were freshly funded from Binance. Yi He, co-founder of Binance, even responded to a public post urging Binance to list JELLY and apply pressure to Hyperliquid, writing, “Message received.”
With this level of coordination, some in the community have started to call the event a futures war, claiming that large exchanges are now using token listings and liquidity to squeeze competitors.
This comparison becomes even more unsettling when some users recall the tactics that surrounded the downfall of FTX.
Following the JELLY squeeze, Hyperliquid’s native token $HYPE dropped more than 14%, and its market cap fell below $5 billion. The platform saw a net outflow of $140 million in USDC within hours.
While it made a small profit on paper, the platform’s losses in user confidence and market trust could take far longer to recover.
Conclusion
The JELLYJELLY incident revealed vulnerabilities in Hyperliquid’s design and raised uncomfortable questions about whether it truly operates as a decentralised exchange. By intervening to freeze and delist the market, it behaved in ways that resemble centralised platforms.
As traders and observers look back on this event, many are left wondering whether decentralisation is just a label or something more meaningful. For Hyperliquid, the challenge now is not just technical but reputational.