Gracy Chen, the CEO of cryptocurrency trading platform Bitget, criticized Hyperliquid’s management of an incident on March 26 involving its perpetual exchange, asserting that it endangered the network’s stability by potentially becoming “FTX 2.0.”
On March 26, Hyperliquid, a blockchain network focused on trading, announced it had removed perpetual futures contracts for the JELLY token and would compensate users after uncovering “evidence of questionable market activity” linked to those instruments.
This resolution, agreed upon by the limited number of validators within Hyperliquid, raised existing issues regarding the network’s perceived centralization.
“Despite branding itself as an innovative decentralized exchange with an ambitious vision, Hyperliquid functions more like an offshore [centralized exchange],” Chen remarked, expressing concerns that “Hyperliquid might be heading towards becoming FTX 2.0.”
FTX was a cryptocurrency exchange operated by Sam Bankman-Fried, who was found guilty of fraud in the US after the sudden collapse of FTX in 2022.
Chen did not specifically accuse Hyperliquid of legal violations, but instead highlighted what she viewed as Hyperliquid’s “immature, unethical, and unprofessional” handling of the situation.
“The action to shut down the $JELLY market and enforce settlement of positions at an advantageous price establishes a perilous precedent,” Chen stated. “Trust—not capital—is the cornerstone of any exchange […] and once it’s lost, regaining it is nearly impossible.”
Related: Hyperliquid removes JELLY token perps, citing ‘questionable’ activity
JELLY token incident
The JELLY token debuted in January, created by Venmo co-founder Iqram Magdon-Ismail as part of a Web3 social media initiative named JellyJelly.
It initially achieved a market valuation of around $250 million before dropping to single-digit millions in the following weeks, as per DexScreener.
On March 26, JELLY token market cap surged to approximately $25 million after Binance, the leading global cryptocurrency exchange, introduced its own perpetual futures linked to the token.
On the same day, a trader on Hyperliquid “opened a substantial $6M short position on JellyJelly” and subsequently “intentionally self-liquidated by inflating JellyJelly’s price on-chain,” stated Abhi, founder of the Web3 organization AP Collective, in an X post.
Arthur Hayes, the founder of BitMEX, mentioned that initial responses to the Hyperliquid’s JELLY incident overestimated the network’s potential reputation threats.
“Let’s cease pretending hyperliquid is decentralized. And let’s also stop acting like traders genuinely [care],” Hayes articulated in an X post. “I bet you $HYPE will revert to its original state shortly because degens gonna degen.”
Growing pains
On March 12, Hyperliquid faced a similar dilemma attributed to a whale who deliberately liquidated a long Ether (ETH) position valued at around $200 million.
This transaction resulted in a loss of approximately $4 million for depositors in Hyperliquid’s liquidity pool, HLP, as it compelled the pool to unwind the trade at unfavorable prices. Following this, Hyperliquid enhanced collateral requirements for open positions to “mitigate the systemic impact of substantial positions that could hypothetically affect the market upon closure.”
Hyperliquid hosts the most favored leveraged perpetual trading platform, commanding roughly 70% of market share, according to a January report by asset management firm VanEck.
Perpetual futures, or “perps,” are leveraged futures contracts that do not have an expiration date. Traders deposit margin collateral, like USDC, to secure their open positions.
According to L2Beat, Hyperliquid maintains two primary validator sets, each consisting of four validators. In contrast, competing chains like Solana and Ethereum are backed by about 1,000 and 1 million validators, respectively.
A greater number of validators generally decreases the risk of a small clique of insiders manipulating a blockchain.
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