HyperLiquid has introduced a range of risk management enhancements after a significant event concerning its Hyperliquidity Provider (HLP) vault. As part of the response, the HyperLiquid Foundation plans to compensate users who held JELLY long positions at the time of settlement, using a closing price of $0.037555. This initiative aims to ensure that all JELLY traders, except those with flagged addresses, receive a favorable settlement price. This move comes after JELLY perpetual contracts were delisted when validators detected suspicious market activity.
What Happened?
The incident originated from a trader allegedly manipulating JELLY’s price, resulting in substantial unrealized losses for HLP, a market-making vault within HyperLiquid. The trader, who possessed $4.85 million worth of JELLY, combined a short position on HyperLiquid with on-chain spot purchases, triggering a liquidation event that transferred the short position to HLP. As the trader aggressively bought JELLY on decentralized exchanges, its price surged, temporarily causing HLP’s unrealized losses to hit $13.5 million. With low liquidity on decentralized exchanges, the price movement was exaggerated. In response, HyperLiquid force-closed the JELLY market and settled it at $0.0095, much lower than the $0.50 price reported by decentralized exchange oracles. This decision sparked debate within the crypto community, with some experts questioning its legality.
Meanwhile, Bitget CEO Gracy Chen criticized HyperLiquid’s handling of the JELLY delisting, warning it could follow the path of FTX. The executive argued that the decision by a small group of validators raised concerns about decentralization. Chen also pointed out structural flaws, such as mixed vault risks and a lack of transparency. BitMEX co-founder Arthur Hayes echoed these concerns, questioning HyperLiquid’s decentralization claims.
HyperLiquid’s Risk Management Updates
In response to these developments, HyperLiquid has announced several significant changes to its risk management systems. First, the Liquidator vault within HLP will have stricter limits, holding a smaller portion of the total HLP account value, rebalancing less frequently, and using a more advanced system for handling liquidations. Second, the automatic deleveraging (ADL) process will only activate if the Liquidator vault’s losses exceed a specific limit, preventing automatic fund transfers from other vaults to cover losses. Third, the platform will dynamically adjust open interest (OI) caps based on market size to ensure they align with current conditions. Lastly, an on-chain voting system will enable validators to decide whether to remove assets that fall below certain thresholds.
“Yesterday is a good reminder to stay humble, hungry, and focused on what matters: building a better financial system owned by the people. HyperLiquid is not perfect, but it will continue to iterate and grow through the collective efforts of builders, traders, and supporters.”
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