Hyperliquid escapes liquidity crisis following JELLYJELLY short-squeeze, delists token

• The Solana-based meme coin JELLYJELLY was delisted by Hyperliquid due to questionable market manipulation surrounding the token.
• JELLYJELLY saw a nearly 500% increase after a user initiated a short sale while simultaneously taking a long position on the token.
• This resulted in initial losses for the HLP vault, but validators intervened to convert the position into a $700K profit.

On Wednesday, Hyperliquid, a decentralized perpetual exchange, encountered a liquidity crisis after the Solana-based meme coin JELLYJELLY experienced a nearly 500% surge, attributed to potential whale manipulation. This surge caused a temporary $12 million loss for the Hyperliquidity Provider (HLP) vault, yet validators managed to turn the situation around to achieve a $700K profit.

Hyperliquid removes JELLYJELLY token following signs of market manipulation

The team behind Hyperliquid decided to halt perpetual futures trading for JELLYJELLY following a liquidation scare that almost resulted in the HLP vault losing its entire balance.

This decision came in the wake of a whale trader, who possessed 124.6 million JELLYJELLY tokens (valued at $4.5 million at the time) across multiple wallets. The trader withdrew his margin after shorting $8 million worth of JELLYJELLY on Hyperliquid, compelling the HLP vault to take on the short position.

At the same time, another wallet—likely belonging to the same trader—opened a substantial long position on JELLYJELLY, resulting in a near 500% price spike due to the token’s small market cap, effectively squeezing those shorting the token. As a result, the whale quickly realized an unrealized profit of $8.2 million, while the HLP vault faced a prospective loss of $12 million. Concerns grew that the vault might lose its entire balance if JELLYJELLY’s market capitalization reached $150 million.

In light of the substantial activity surrounding JELLYJELLY, other crypto exchanges like Binance and OKX swiftly began listing perpetual contracts for the token.

However, validators at Hyperliquid took action by adjusting the oracle price for JELLYJELLY to $0.0095—the price at which the whale initially shorted—to allow the HLP to liquidate its holdings of 392 million JELLYJELLY tokens for a $703K profit. They also closed all existing positions related to the token and delisted it.

“Following evidence of dubious market behavior, the validators convened and voted to remove JELLY perpetuals,” the Hyperliquid team noted in a post on social media.

The team assured that users affected by the JELLYJELLY situation would be reimbursed for their losses.

“All users, with the exception of flagged addresses, will be compensated by the Hyper Foundation. This will be done automatically in the upcoming days using onchain data,” they added.

Sources indicate that the whale is currently facing a $1 million loss due to withdrawal restrictions imposed on his account.

This incident marks Hyperliquid’s second market turmoil within a fortnight, eliciting mixed responses from various members of the crypto community. Earlier on March 12, a whale liquidated a $200 million long position on Ethereum on Hyperliquid, leading to a $4 million loss for the HLP vault while netting the trader a profit of $1.8 million.

Gracy Chen, CEO of Bitget, remarked that the resolution of the JELLYJELLY incident might cast “serious doubts about its integrity.”

He said, “Despite portraying itself as an innovative decentralized exchange with a bold vision, Hyperliquid functions more like an offshore centralized exchange without KYC/AML, inviting illicit flows and bad actors,” via social media.

Arthur Hayes, co-founder of BitMEX, also expressed skepticism about how Hyperliquid managed this liquidity crisis.

In contrast, some individuals praised Hyperliquid for taking prompt action to avert a situation that could have resulted in millions of dollars in losses for liquidity providers.

Following these developments, HYPE has declined by over 12%, reflecting a more than 30% loss over the past month.