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

Hyperliquid (HYPE), a decentralized perpetual exchange, faced a liquidity crisis on Wednesday after Solana-based meme coin JELLYJELLY pumped nearly 500% due to a potential whale manipulation. The pump triggered a temporary $12 million loss for the Hyperliquidity Provider (HLP) vault, but validators stepped in to flip the position to a $700K profit.

Hyperliquid delists JELLYJELLY token following market manipulation

The Hyperliquid team delisted perpetual futures trading for JELLYJELLY following a liquidation scare that saw the HLP vault almost suffering a loss of its entire balance.

The move follows a whale trader who held 124.6 million JELLYJELLY tokens (worth $4.5 million at the time) across different wallets, withdrawing his margin after opening an $8 million JELLYJELLY short position on Hyperliquid. This forced the HLP vault to inherit the short position. 

Simultaneously, another wallet — potentially the same trader — opened a huge JELLYJELLY long position on Hyperliquid, triggering nearly a 500% price rally due to its small market capitalization and squeezing short traders. The whale quickly saw an unrealized $8.2 million profit, leaving the HLP vault with a potential $12 million loss. Users speculated that the vault risked losing its entire balance if JELLYJELLY rose to a $150 million market capitalization.

After noticing the significant activity surrounding the token, crypto exchanges Binance and OKX quickly listed JELLYJELLY perpetuals.

However, Hyperliquid validators stepped in and readjusted its oracle price for JELLYJELLY to $0.0095 — the price at which one of the whale's accounts initially opened its short position — for the HLP to liquidate its 392 million JELLYJELLY tokens at a $703K profit. It also closed all users' open positions on the token and delisted it.

"After evidence of suspicious market activity, the validator set convened and voted to delist JELLY perps," the Hyperliquid team stated in a Wednesday X post.

The team said it would reimburse affected users for any losses incurred from the JELLYJELLY fiasco.

"All users apart from flagged addresses will be made whole from the Hyper Foundation. This will be done automatically in the coming days based on onchain data," they added.

According to Arkham, the whale is currently experiencing a loss of $1 million due to withdrawal restrictions on his account.

The event marks Hyperliquid's second market scare in two weeks, causing mixed reactions from several crypto community members. On March 12, a whale liquidated a $200 million Hyperliquid long position on Ethereum (ETH). The liquidation resulted in a $4 million loss for the HLP vault, while the trader profited $1.8 million.

Bitget CEO Gracy Chen stated that the DEX's resolution of the event surrounding JELLYJELLY could stir "serious doubts over its integrity."

"Despite presenting itself as an innovative decentralized exchange with a bold vision, Hyperliquid operates more like an offshore CEX with no KYC/AML, enabling illicit flows and bad actors," Chen stated on X.

BitMEX co-founder Arthur Hayes also questioned Hyperliquid's method of resolving the liquidity crisis.

However, others commended Hyperliquid for stepping in to prevent a situation that could have caused losses in millions of dollars for liquidity providers.

HYPE is down over 12% following the event, with over a 30% loss on the monthly timeframe.