429% surge with $23 million crisis: JELLYJELLY short squeeze reveals Hyperliquid fatal loophole again

Editor | Wu Shuo Blockchain

On the evening of March 26, Beijing time, JELLYJELLY was squeezed by short positions, and once rose 429% from 21:00-22:00 UTC+8. Hyperliquid Valut took over JELLYJELLY short positions after a trader settled on his own, and once had a floating loss of more than US$10.5 million. The situation at that time was that if JELLYJELLY reaches 0.15374, Hyperliquid Vault would lose all US$230 million of funds; and with the outflow of Hyperliquid Vault funds, JELLYJELLY's liquidation price will be further reduced.

JELLYJELLY is a memecoin token released on pumpfun by former Facebook vice president of product sam lessin. Hyperliquid launched the contract on January 30 and said "this perpetual contract uses on-chain AMM to obtain the underlying oracle price."

22:48, Binance co-founder He Yi replied to a tweet from a community member suggesting Binance launch JELLYJELLY, which triggered another fluctuation in JELLYJELLY prices.

Then OKX and Binance announced the launch of the JELLYJELLY perpetual contract, with the highest price of JELLYJELLY reaching US$0.62, up more than 380% from 4 hours ago. Then the price fell rapidly to around US$0.25. Hyperliquid removed JELLYJELLY after Binance and OKX launched the futures contract, and JELLYJELLY's huge loss short orders in Hyperliquid Vault have also been settled.

According to historical data on Hyperliquid's official website, the JELLYJELLY short order taken over by Hyperliquid Vault settled at 23:15 UTC+8 at 0.0095 US dollars, which was slightly earlier than the Binance launch contract announcement, and the price was about US$0.045 at that time. But Hyperliquid Vault settled at $0.0095, and HLP Vault also made a profit of $703,000 on the position.

Hyperliquid issued a statement saying that after discovering evidence of suspicious market activity, validators gathered to hold a meeting and voted to remove the JELLY perpetual contract. All users will receive full compensation from the Hyper Foundation except for the tagged address. HLP's 24-hour profit and loss was approximately USDC.

It is understood that this closing method is automatic deleveraging defined in the official document. This is the last option for liquidators to avoid causing major retracement. Automatic deleveraging strictly ensures that the platform maintains solvency. If the user's account value or independent position value becomes negative, the counterparty's user will rank based on unrealized profit and loss and the leverage used. These traders' positions will be closed at previous oracle prices for users who are now in a loss state to ensure that the platform has no bad debts. However, Hyperliquid has officially announced that it will compensate affected users (except for the illegal users marked).

Regarding this incident, OKX CEO Star said: Can Hyperliquid provide derivative trading through decentralized models and smart contracts? Can it be exempt from derivative supervision?

Bitget CEO Gracy said Hyperliquid may be expected to become FTX 2.0. It handles JELLY incidents immature, immoral, and unprofessional, resulting in churn and serious doubts about its integrity. It works more like an offshore CEX without KYC/AML, thus facilitating illegal mobility and bad actors. The decision to close the JELLY market and force settlement of positions at preferential prices sets a dangerous precedent. In addition, the platform’s product design exposes worrying flaws: hybrid vaults put users at systemic risks, and the unrestricted position size opens the door to manipulation. Unless these issues are addressed, there may be more altcoins being used against Hyperliquid, which makes it possible to be the next catastrophic failure of cryptocurrencies.

According to Parsec panel data, the net outflow of USDC on the Hyperliquid platform reached as high as $140 million in the hours of this Jelly liquidation incident. Previously, within four days before and after the ETH giant whale long liquidation incident on March 12, Hyperliquid's total net outflow of USDC was close to US$300 million. Hyperliquid's USDC balance has dropped from approximately US$2.5 billion to US$2.07 billion in the past 30 days.

This is not the first time Hyperliquid has encountered similar problems. Earlier, a giant whale that used 50 times leverage, opened an ETH long order worth about $300 million on Hyperliquid, with a maximum floating profit of $8 million. However, the user then withdraws most of the principal and profits, causing the liquidation price to be pushed up, and the final position is liquidated, with a net profit of about USDC of about 1.8 million. However, the platform's insurance fund (HLP Vault) suffered a loss of about US$4 million.

Hyperliquid uses the marked price provided by the oracle rather than the order book depth to determine the contract price, which under normal circumstances improves transaction efficiency. However, when market fluctuations are severe, this mechanism may not be able to effectively buffer the impact of large-scale transactions. For example, when the giant whale uses high leverage to quickly build positions, the oracle price may not be able to reflect the market depth in time, resulting in the disconnection of the liquidation price from the actual market price. This design was amplified during multiple giant whale operations in March 2025, ultimately ending the HLP with additional losses.

Hyperliquid's HLP (Hyperliquid Liquidity Provider) mechanism provides liquidity through active market making and plays an important role in liquidation. However, when the market experiences extreme volatility or the single account holds too large, the liquidity of HLP may not be able to respond in time. For example, in the above-mentioned ETH long list liquidation event, HLP had to fill the huge losses. This situation shows that HLP design may have loopholes in the face of extremely large positions, especially in the absence of sufficient external liquidity support, the platform has to pay out of its own pocket to make up for the shortcomings.

In response, on March 13, Hyperliquid also issued a statement saying that due to a recent incident that exposed the margin system to be further strengthened under extreme conditions, it announced that the network will be upgraded after 08:00 UTC+8 on March 15, adjusting the margin transfer requirements, setting the margin ratio to 20%, involving the transfer of funds from cross-margin wallets and independent margin positions.

Hyperliquid is a high-performance decentralized derivatives trading platform developed by the Hyper Foundation, focusing on providing a low-latency, high-throughput perpetual contract trading experience, supporting up to 50x leverage. It integrates liquidity through the innovative HLP (Hyperliquid Liquidity Provider) mechanism and uses oracle prices to optimize trading efficiency, attracting a large number of giant whales and high-frequency traders.

The platform was co-founded by founders Jeff Yan and iliensinc, both of whom are Harvard alumni. Jeff Yan worked as a quantitative analyst for high-frequency trading company Hudson River Trading, and then entered the cryptocurrency space to create Chameleon Trading, one of the industry's largest market makers. After the 2022 FTX crash, he turned his energy to Hyperliquid. Iliensinc also has a deep technical background and co-led the team with Jeff, including elites from Caltech and MIT, who have worked for well-known companies such as Airtable, Citadel and Nuro. The Hyperliquid team raised its own funds and did not accept external investment.