Hyperliquid’s Handling of a March 26 Incident Criticized by Gracy Chen

Hyperliquid, a blockchain network specializing in trading, delisted perpetual futures contracts for the JELLY token and would reimburse users

Gracy Chen, CEO of cryptocurrency exchange Bitget, expressed her concerns regarding Hyperliquid's handling of an incident on its perpetual exchange in March, setting the stage for a potential "FTX 2.0" scenario.

Chen's comments followed a statement by Hyperliquid, a blockchain network specializing in trading, announcing the delisting of perpetual futures contracts for the JELLY token and planned reimbursements to users. This decision was reached by consensus among Hyperliquid's validators.

"Despite presenting itself as an innovative decentralized exchange with a bold vision, Hyperliquid operates more like an offshore [centralized exchange]," Chen remarked, adding that Hyperliquid may be on track to become FTX 2.0.

FTX, the cryptocurrency exchange founded by Sam Bankman-Fried, went bankrupt in 2022, leading to Bankman-Fried's conviction for fraud in the US.

Chen did not directly accuse Hyperliquid of any legal transgressions but highlighted what she considered to be Hyperliquid's immature, unethical, and unprofessional response to the incident.

"The decision to close the $JELLY market and force settlement of positions at a favorable price sets a dangerous precedent," Chen noted. "Trust—not capital—is the foundation of any exchange ... and once lost, it’s almost impossible to recover."

The incident began with the launch of the JELLY token by Venmo co-founder Iqram Magdon-Ismail as part of a Web3 social media project called JellyJelly in January. The token initially reached a market capitalization of around $250 million.

However, in the ensuing weeks, JELLY's price dropped significantly, and by March 26, the token's market cap had fallen to the single-digit millions, according to data from crypto market tracker DexScreener.

On that day, Binance, the world's most popular cryptocurrency exchange, listed perpetual futures tied to the JELLY token.

The same day, a Hyperliquid trader opened a massive $6 billion short position on JellyJelly and then deliberately self-liquidated by pumping JellyJelly's price on-chain, according to Abhi, founder of Web3 company AP Collective.

"This forced Hyperliquid to close out all remaining short positions at the new price," Abhi added in an X post.

The incident sparked initial reactions that overestimated the reputational risks to Hyperliquid.

"Let's stop pretending hyperliquid is decentralized. And then stop pretending traders actually care," BitMEX founder Arthur Hayes said in an X post. "Bet you $HYPE is back where it started in short order cause degens gonna degen."

Hyperliquid is the most popular leveraged perpetuals trading platform, controlling about 70% of the market share, according to a January report by asset manager VanEck.

The platform is known for its relatively small number of validators compared to other major blockchains.

Hyperliquid has two main validator sets, each comprising four validators, according to L2Beat. In contrast, rival chains such as Solana and Ethereum are supported by approximately 1,000 and 1 million validators, respectively.

A higher number of validators generally reduces the risk of a small group of insiders manipulating the blockchain.

The incident also highlighted the unique governance structure of Hyperliquid, which is a hybrid of on-chain and off-chain elements.

This structure allows for rapid decision-making in urgent situations but can lead to a lack of transparency and accountability.

The incident has raised concerns about the potential for market abuse and manipulation on decentralized exchanges. It also underscores the importance of trust and reputation in the cryptocurrency industry.

As the dust settles on the JELLY incident, it remains to be seen what lasting impact it will have on Hyperliquid and the broader cryptocurrency ecosystem. However, one thing is clear: the incident has exposed some of the vulnerabilities of decentralized exchanges and the urgent need for industry best practices to be implemented to mitigate such risks in the future.output: Cryptocurrency exchange Bitget CEO Gracy Chen expressed her concerns regarding Hyperliquid's handling of an incident on its perpetual exchange in March could set the stage for a potential "FTX 2.0" scenario, her post on X reads.

Chen's comments followed a statement by Hyperliquid, a blockchain network specializing in trading, announcing the delisting of perpetual futures contracts for the JELLY token and planned reimbursements to users after identifying "evidence of suspicious market activity" tied to the instruments.

The decision, which was reached by consensus among Hyperliquid's relatively small number of validators, flagged existing concerns about the popular network's perceived centralization.

"Despite presenting itself as an innovative decentralized exchange with a bold vision, Hyperliquid operates more like an offshore [centralized exchange]," Chen said, after saying "Hyperliquid may be on track to become FTX 2.0."

FTX was a cryptocurrency exchange run by Sam Bankman-Fried, who was convicted of fraud in the US after FTX