A coordinated manipulation of the thinly traded JELLY token exposed critical vulnerabilities in Hyperliquid, one of DeFi’s fastest-growing perpetuals exchanges. With $20 million drained from its liquidity vaults and the subsequent delisting of JELLY perpetuals, the incident has shaken user confidence. It also reignited the debate around protocol-level risk, governance, and decentralization in crypto derivatives markets.
The Exploit: Leveraged Shorts and Low Liquidity
On March 26, 2025, traders on Hyperliquid opened aggressive short positions on the JELLY token, using up to 50x leverage. According to on-chain data, a key actor opened a $4.08 million short position and subsequently manipulated the token’s price downward. This triggered a cascade of forced liquidations, significantly impacting the Hyperliquid Liquidity Pool (HLP). The result: an estimated $20 million in losses.
The manipulation appears to have exploited the low liquidity and the JELLY token’s relative obscurity, which had recently gained attention following a Binance listing. Thin order books enabled traders to move the price significantly with relatively low capital. This highlights the systemic weaknesses in listing and risk management protocols within DeFi platforms.
Protocol Response: Delisting and Reimbursement
In response to the attack, Hyperliquid’s committee voted to delist JELLY perpetual contracts. It announced that it would reimburse affected users, except for flagged addresses potentially involved in the exploit. The Hyper Foundation promised automatic reimbursements based on on-chain data, attempting to reassure users amid growing concerns over the platform’s resilience.
Centralization Concerns in a Decentralized System
However, the JELLY incident has intensified scrutiny of Hyperliquid’s governance model. Prominent industry figure Arthur Hayes criticized the protocol’s response. He argued that emergency delistings and reimbursements resemble centralized crisis management rather than decentralized decision-making. “Hyperliquid is no longer decentralized,” Hayes remarked, predicting that the platform’s native token, HYPE, could lose significant value as a result.
Market Reaction and Loss of Confidence
Hyperliquid also experienced a reported 20% drop in platform usage and capital deployment following the incident, reflecting shaken user confidence. Critics argue that the protocol failed to implement sufficient safeguards against volatility-induced exploits, especially in cases involving low-liquidity tokens with outsized leverage options.
A Wake-Up Call for DeFi Governance
The exploit has sparked broader concerns across the DeFi ecosystem. As perpetual futures trading becomes a dominant use case in DeFi, the Hyperliquid meltdown is a warning about the risks of allowing synthetic exposure to tokens with fragile liquidity. It also revives the long-standing question: can DeFi platforms truly remain decentralized while ensuring timely responses to emergent threats?
>>> Read more: What’s the HYPE About Hyperliquid’s $1.8B Token Airdrop?
As the dust settles, Hyperliquid faces a critical inflection point. Its future may hinge not only on technical upgrades and governance reform but also on whether it can restore trust among users now wary of decentralized platforms that must act like centralized entities in times of crisis.
Readers’ frequently asked questions
What is a perpetual contract, and how does it work on platforms like Hyperliquid?
A perpetual contract (or “perp”) is a type of derivative in crypto trading that allows users to speculate on the future price of an asset without actually owning it. Unlike traditional futures contracts, perpetuals don’t expire. Traders can go “long” (bet the price will rise) or “short” (bet it will fall), often using leverage to amplify their position. On platforms like Hyperliquid, these trades are settled through smart contracts and supported by a liquidity pool. Prices are typically synced with external market data using price feeds. When traders use high leverage and trade tokens with low liquidity small price movements can lead to large gains or losses. That’s what makes these contracts risky.
Why did the JELLY token’s low liquidity make it easier to manipulate?
Low liquidity means there aren’t many active buy and sell orders in the market. When a token is illiquid, it takes less capital to push its price up or down. In JELLY’s case, a trader opened a large short position and then sold enough JELLY tokens to cause a sharp price drop. This price movement wasn’t due to natural market activity but rather a coordinated strategy to trigger profits from the short position. The lower the liquidity, the easier it is to cause significant price changes. Such types of tokens are more vulnerable to manipulation.
Is Hyperliquid still safe to use after this incident?
Hyperliquid responded quickly by delisting the manipulated token and promising reimbursements to the most affected users. However, the incident revealed gaps in the protocol’s risk management, especially in allowing high-leverage trading on low-liquidity tokens. The platform didn’t fall victim to a hack and nobody stole funds through code vulnerabilities. However, users must realize that similar risks could exist if the exchange doesn’t improve its safeguards. If you consider using Hyperliquid or any DeFi trading platform, trade cautiously. Understand how leverage works, and avoid highly speculative or illiquid tokens unless you’re confident in the risks involved.
What Is In It For You? Action Items You Might Want to Consider
Stick to trading assets with deep liquidity
If you’re trading perpetuals, avoid newly listed or low-volume tokens that can be easily manipulated. Illiquid markets are playgrounds for price attacks. And, you don’t want to be on the wrong side of a sudden 50x leveraged move.
Reconsider using high leverage unless you fully understand the risks
Leverage can boost gains, but in volatile or thinly traded markets, it amplifies losses just as fast. Before opening a leveraged position, assess how easily the price can be moved. If a token’s order book looks suspiciously thin, step back.
Keep an eye on protocol governance and emergency actions.
Even in DeFi, not all decisions are decentralized. Platforms like Hyperliquid may intervene when things go wrong—sometimes at the expense of protocol ideals. If a platform can delist assets or refund users manually, understand how those powers are used and who holds them. It could matter the next time volatility hits.
