Hyperliquid Token Tanks as Another Vault Attack Sparks Controversy

Hyperliquid, the leading decentralized perpetual exchange (DEX) by volume, is under scrutiny again as its token plunges after yet another vault attack, leaving the community split.

The saga began as a Hyperliquid trader took a large short position on the JELLYJELLY token before withdrawing their collateral, essentially ‘self-liquidating’ and passing the risky position onto the Hyperliquidity Provider Vault (HLP). HLP acts as the counterparty for all trades on the platform.

When traders caught wind of the situation, they began to bid JELLYJELLY, a small-cap token worth just $9 million before today’s events, in an attempt to engineer a short squeeze, knowing the Hyperliquid vault would be forced to buy in order to close the outstanding short position.

JELLYJELLY surged more than 3x to a $35 million valuation in just an hour as the situation escalated, which resulted in HLP briefly carrying a $10 million loss, more than double the $4 million loss it suffered following the last vault attack just two weeks ago.

The attack sent the HYPE token tumbling, falling as low as $12.5, a 23% decrease from $16.2, where it was trading earlier today. HYPE has bounced back to $14 since.

However, the position suddenly disappeared from the HLP vault as Hyperliquid delisted the JELLYJELLY token and settled its previously negative $10 million position for a $700,000 profit.

Following a validator consensus vote, the protocol closed all JELLYJELLY positions at the previous oracle price of 0.0095, as opposed to the oracle price at the time of .05. This means traders that were long JELLYJELLY had their positions reset to losses and were forcibly closed.

The Hyperliquid Foundation posted an update in the community Discord and said, “After evidence of suspicious market activity, the validator set convened and voted to delist JELLY perps.”

The announcement went on to say that “all users apart from flagged addresses will be made whole from the Hyper Foundation.” This likely refers to those that were trading JELLYJELLY perps and suddenly had their positions closed without permission, but the team has not clarified.

While HYPE rebounded on the resolution, the situation has sparked a debate across the DeFi community, as the forced position settlement shines a light on how centralized Hyperliquid actually is.

Some users are crediting the position settlement as part of Hyperliquid’s auto-deleveraging (ADL) mechanism, which is a fail-safe to ensure protocol solvency.

Per the Hyperliquid documents, “If a user's account value or isolated position value becomes negative, the users on the opposite side of the position are ranked by unrealized pnl and leverage used. Those traders' positions are closed at the previous oracle price against the now underwater user, ensuring that the platform has no bad debt.”

Despite the protocol following the guidelines of positions closing at the previous oracle price, many traders have expressed doubts over the system and if the JELLYJELLY settlement was actually via ADL or not.

Meanwhile, others speculate that centralized exchanges such as Binance engineered the attack to destroy Hyperliquid.

Centralized vs Decentralized

Market participants are pointing their fingers at Binance, considering that the wallets that self-liquidated in the predatory JELLYJELLY position were both freshly funded from the exchange.

Speculation is also being fueled by Binance’s out-of-the-blue decision to list JELLYJELLY perpetuals in the middle of the attack.

Crypto trader Byzantine General said, “It's very, very hard to interpret this as anything else than 2 of the biggest CEXs trying to bury a DEX competitor.”

JELLYJELLY’s perpetual listing on Binance was particularly peculiar. A user known as YueYue tagged Binance Co-founder Yi He in the middle of the attack and said (translated), “Sister Yi @heyibinance please quickly go online to check the spot of $JELLYJELLY. If $JELLYJELLY is launched, hyperliquid will probably be over.”

Another user, who works at Sidekick, which was funded by Binance’s YZi Labs, quoted this post to tag Yi He again, where she simply responded (translated) “OK received”.

JELLYJELLY was listed on Binance perpetuals alongside MAVIA less than 30 minutes later, allowing Binance traders to also leverage trade JELLYJELLY and fan the flames by pushing the token higher.

“Interesting that Binance publicly supports Bybit after the $1B hack but actively sought to wreck Hyperliquid via Jelly listing,” said Jason Choi of Tangent.

While that scenario is far from proven, others have taken the viewpoint that regardless of malicious intent, Hyperliquid’s choice to settle the position at a profit exposes the protocol’s centralization.

The foundation update stated that the validator set voted for the action to delist JELLYJELLY and settle the position at a profit, but in Hyperliquid’s case, it can be heavily influenced by the Hyper Foundation’s five validators, which manage roughly 330 million, or 78%, of the 422 million total staked HYPE.

Onchain sleuth ZachXBT called out Hyperliquid for intervening in this scenario but not freezing the North Korean accounts that were funded from the Radiant hack.

Hasu of Steakhouse Financial tailed Zach’s thoughts, saying, “I'm all for neutrality and think it's fine not to freeze DPRK accounts if you're aspiring to be a DEX. But then don't go ahead and do it three weeks later to save yourself $10m from *checks notes* bad risk management on your JellyJelly market.”