HyperLiquid Suffers $230M Loss in JELLY JELLY Meme Coin Short Squeeze

The short squeeze caused the platform to assume liabilities amounting to $230 million.

HyperLiquid, a decentralized exchange (DEX), has found itself in financial turmoil following a significant short squeeze on a meme coin, JELLY JELLY. The incident led to HyperLiquid assuming liabilities of around $230 million.

The incident began with large traders, known as whales, manipulating the price of JELLY JELLY, a new Solana-based meme coin, which HyperLiquid listed on December 7. The price surge, driven by these traders, triggered massive losses for HyperLiquid’s liquidity pool (HLP). Notably, the price of JELLY JELLY went up by nearly 500%, a sudden and dramatic increase that caught traders and the exchange off guard.

In response to the mounting losses, HyperLiquid delisted JELLY JELLY from its platform. This decision came after the platform was forced to absorb a substantial short position that resulted in a $12 million loss. However, this move drew criticism as it came amid a broader market downturn, rendering the exchange a target of speculation and rumors.

The delisting decision also came amid concerns about the stability of HyperLiquid, especially given the scale of the financial damage it had sustained.

The incident unfolded as follows: A whale, holding 124.6 million JELLY JELLY tokens (currently valued at $4.85 million), decided to manipulate the coin’s price by dumping and then buying back the tokens. Initially, the whale sold a large amount of JELLY JELLY, causing the price to crash. This action left HyperLiquid holding a short position, which eventually led to a $12 million loss.

However, the same whale then bought back the tokens, causing the price to surge sharply. As a result, HyperLiquid faced a setback as traders who had bet on a price drop were forced to buy back JELLY JELLY at higher prices, further propelling the token's ascent. Within a few hours, the token's market capitalization jumped from $10 million to $43 million.

The rapid increase in market cap naturally attracted more traders, ultimately worsening HyperLiquid's losses. To worsen matters, Binance and OKX decided to list JELLY JELLY perpetual contracts. These listings contributed to an influx of market liquidity and drove the price up even more rapidly.

This posed a significant challenge for HyperLiquid, which was struggling to manage its growing losses, rendering the situation more complex and intensifying the controversy surrounding the entire matter.

In essence, HyperLiquid found itself in a no-win situation. Its attempts to liquidate the position and minimize losses were hindered by the actions of the whales and the broader market trends that favored a short squeeze scenario.

As a result of this incident, HyperLiquid is now facing scrutiny over its handling of the situation and the potential regulatory implications. The handling of JELLY_LLY liabilities by HyperLiquid also drew comparisons to past crypto collapses. Some commentators pointed out that abrupt liquidation mechanics played a role in FTX's downfall, leading to questions about whether HyperLiquid's actions could set a precedent for other exchanges facing similar crises.

Moreover, there is ongoing speculation about the extent of Binance's involvement in the situation. According to a report by blockchain researcher ZachXBT, the original whale may have been funded through Binance, which went on to list JELLY_LLY perps after HyperLiquid suffered losses. This raises further concerns about whether major exchanges are indirectly influencing market events to benefit from smaller competitors' struggles.

Finally, HLP's 24-hour profit and loss reached 700,000 USDC, showcasing the significant financial strain that HyperLiquid is facing. Despite promising technical improvements and highlighting lessons learned, the exchange is encountering difficulties in recovering from the incident's knock-on effects. It remains unclear what impact this will have on liquidity providers who had engaged with HyperLiquid's platform.