The Hyperliquidity Provider (HLP), a market-making vault associated with the derivatives exchange HyperLiquid, encountered a significant setback after a trader reportedly manipulated the pricing of the JELLY token.
As a result, HyperLiquid’s native token (HYPE) experienced a 20% drop in value, while HLP’s unrealized profit and loss temporarily plunged to a staggering negative $13.5 million.
Reports indicate that a trader who possessed $4.85 million worth of JELLY executed a short trade on HyperLiquid while simultaneously making on-chain spot purchases. This action led to the liquidation of the position on HyperLiquid, effectively transferring the short position to HLP.
HLP functions as an automated market-making bot integrated with the exchange’s liquidation engine.
The trader then aggressively purchased JELLY on various spot exchanges, which caused the token’s price to surge and briefly resulted in HLP’s unrealized loss reaching $13.5 million. Given the limited liquidity on decentralized exchanges, moving prices can happen relatively easily compared to HyperLiquid.
In response, and in a bid to limit losses, HyperLiquid decided to force close the JELLY market, capping it at $0.0095, instead of the $0.50 figure being utilized by oracles through decentralized exchanges.
“Following the detection of suspicious market behavior, the validator set convened and voted to remove JELLY perpetual contracts,” HyperLiquid announced on social media. “All users, except those with flagged accounts, will be reimbursed by the Hyper Foundation. This will be automatically processed in the coming days using on-chain data.”
The CEO of Newfound Research, Corey Hoffstein, raised concerns about the legality of HyperLiquid’s decisions as social media fueled outrage. Notably, the trader who manipulated the JELLY market ended up incurring a minor loss.
Following HyperLiquid’s delisting, Binance, the world’s largest cryptocurrency exchange by trading volume, seized the opportunity to step in, announcing it would list JELLY futures, which triggered a staggering 560% increase in spot prices.
This situation bears resemblance to a manipulation incident that unfolded on Mango Markets in 2022, where a trader named Avraham Eisenberg devised a “highly profitable trading strategy” by exploiting oracle pricing to gain an advantage in derivative markets.