On March 26, 2025, another incident of manipulation with the HLP Vault mechanism occurred on Hyperliquid. An anonymous trader triggered the liquidation of a margin short position on the Jelly-My-Jelly (JELLYJELLY) token, forcing the platform to assume loss-making obligations.

In response to the user’s suspicious actions, the platform also forcibly closed the JELLYJELLY market, blocking part of the trader’s unrealized profit. The volume of potential HLP losses reached $12 million.

This is the second major incident with Hyperliquid in March 2025 involving manipulations of the HLP mechanism and leading to significant losses. The Incrypted editorial team investigated the details of the “attack” and analyzed the market’s reaction to the situation. 

Sleight of Hand and No Fraud?

It all started with the trader depositing almost $7.2 million into three separate Hyperliquid accounts. According to experts at Arkham Intelligence, his goal was to exploit the peculiarities of the platform’s liquidation mechanism, which operates through Hyperliquidity Provider (HLP) pools.

The anonymous user’s peculiar “tool” was a Solana-based memecoin — JELLYJELLY. Due to its relatively small market capitalization of $20 million (at the time the deal was opened), the asset was a convenient target for manipulation, noted the co-founder of the Polynomial.fi project with the nickname gauthamzzz. 

The trader created two long positions on JELLYJELLY for $2.15 million and $1.9 million, respectively. Simultaneously, he opened a short position for 400 million JELLYJELLY ($4.1 million at the time of the transaction). The latter was created with 20x leverage and covered almost 40% of the asset’s total supply.

These manipulations led to a sharp jump in the token’s price. Within a short period, the asset’s capitalization jumped from $20 million to $50 million, and the price increased by more than 400%, according to CoinGeckoTerminal data. In essence, the whale created an artificial market movement, balancing his own trades to trigger the liquidation of one of them.

When the price of JELLYJELLY began to rise, this triggered the forced closure of his short position. However, due to its volume, the trade was not processed in the standard way but was sent to the HLP Liquidator vault. This platform mechanism is usually used to close large positions without significantly impacting the market.

In the case of large transactions, there is a risk that the system will not have time to close the position quickly. Essentially, the HLP Liquidator is not the sole liquidator but directs trades to the order book. This creates competition when closing a position and allows users to retain the remaining margin after liquidation.

Representatives of Hyperliquid have repeatedly noted that this strategy has its drawbacks. The key risk is unprofitable trades where the system is unable to liquidate quickly enough. This can create price slippage during the closing of positions.

As a result, the trader’s manipulations with JELLYJELLY and his actions led to potential HLP losses of $12 million, according to Lookonchain experts.

As for the long positions, immediately after the price jump, they reached a seven-figure positive Profit and Loss (PnL) figure. The user began actively withdrawing funds and managed to receive $6.26 million before his accounts were restricted to “reduce-only” orders.

According to Arkham, the developers’ prompt intervention nullified the user’s efforts to profit and prevented him from succeeding.

“In the end, Hyperliquid closed the JELLYJELLY market at $0.0095, the price at which the third account entered its short trades. This zeroed out all floating PnL on the trader’s first two accounts,” the analysts concluded. 

Radical Methods

Immediately after the Hyperliquid team realized the scale of the problem, it took several emergency measures. First, the platform limited the ability of the mentioned trader to place orders, allowing only the closing of positions.

As a result, a portion of unrealized profit remained in his account, and the user himself incurred losses. Even in the most optimistic scenario for him, he will lose $4,000.

“Assuming he can withdraw funds at some point in the future, his actions on Hyperliquid cost him a total of $4,000. If he cannot, he faces a loss of almost $1 million,” Arkham noted. 

In addition to the restrictions on the trader, in an attempt to stop the manipulations, Hyperliquid announced the immediate delisting of JELLYJELLY. This decision provoked a mixed reaction from the community. On the one hand, it was aimed at preventing further manipulations, but on the other hand, it raised questions about the exchange’s resilience to such attacks and brought up issues of decentralization. 

Analysts also noted that simultaneously with the incident on the platform, centralized exchanges Binance and OKX launched perpetual futures for JELLYJELLY. This situation sparked discussions about possible competition between platforms and their approaches to risk management. 

Moreover, expert ZachXBT stated that the funds used by the trader came from the Binance exchange.

Hyperliquid, in turn, assured users that the HLP losses would not affect their funds, and that those affected, except for the “exploiter,” would receive compensation.

“Technical improvements will be made, and the network will become stronger as a result of the lessons learned. More detailed information will be provided soon,” the developers stated. 

Amid the new wave of problems at Hyperliquid, the cryptocurrency HYPE collapsed by 22%, according to TradingView data. Subsequently, the asset partially recovered, but the overall decline amounted to 10%.

At the time of writing, HYPE is trading at $14.12. The monthly drawdown amounted to 29.2%.

The Next FTX?

The incident caused a wide resonance in the community. Bitget CEO Gracy Chen stated that Hyperliquid is moving towards the model of the collapsed FTX, where the exchange can centrally make decisions about the liquidation of assets. She emphasized that freezing JELLYJELLY positions without discussion with users casts doubt on the principles of decentralization.

BitMEX founder Arthur Hayes also expressed concern, pointing out that Hyperliquid’s governance is concentrated in the hands of a limited circle of validators. According to him, unlike networks like Ethereum or Solana, where their number reaches thousands, the mentioned platform can actually change the rules of the game manually.

“Let’s stop pretending Hyperliquid is decentralized. And then, let’s stop pretending traders actually [care]. Bet HYPE is back where it was recently soon enough because degens gonna degen,” Hayes wrote. 

Against the backdrop of these statements, some users began to doubt the platform’s true decentralization. In their opinion, the developers’ actions indicate a concentration of power in the hands of a limited circle of individuals.

Representatives of Hyperliquid claim that the measures taken were a last resort and were necessary to protect users and prevent further losses. 

Groundhog Day

It is worth noting that this is not the only case of manipulation with HLP mechanisms. On March 12, 2025, the platform faced a forced liquidation of $306.8 million. This happened after a trader opened a long position for 175,179 ETH, then withdrew the collateral and triggered the liquidation.

Due to the inability to instantly close the position through HLP Liquidator and price slippage, Hyperliquid incurred losses of $4 million.

In addition to this, in June 2023, a similar case occurred when one of the users artificially inflated the price of Synthetix (SNX). He manipulated the asset’s price on a CEX to trade against Hyperliquid. This allowed him to exploit HLP vulnerabilities and withdraw $37,000 in USDC. 

The two recent incidents with total losses of $16 million led to a rapid decrease in the Total Value Locked (TVL) in the HLP Vault. Over the past two weeks, users have withdrawn $293 million in assets.

If on March 12, the HLP Vault had a total TVL of $480 million, then as of March 27, 2025, the figure had decreased to $187 million. Thus, a trend of asset withdrawal from the project has formed, which, according to some experts, raises questions about its future.