What Went Down with the Hyperliquid Exploit?

In March 2025, the decentralized exchange (DEX) Hyperliquid faced a wild exploit that sent shockwaves through the crypto community. A trader, using some serious galaxy-brain tactics, manipulated the price of an obscure token called JELLYJELLY, putting Hyperliquid in a tough spot. The incident, detailed in a thread by Arkham on X, exposed vulnerabilities in DEX systems and sparked debates about their reliability compared to centralized exchanges (CEXs). Let’s break it down.

The Setup: A Trader’s Big Bet on JELLYJELLY

The trader started by depositing $7.167 million across three Hyperliquid accounts within a tight five-minute window. These accounts then made leveraged trades on JELLYJELLY, a low-liquidity token with a market cap of around $20 million at the time. Here’s how the accounts played their roles:

• Account 1 (0x20e8…)​: Took a $2.15 million long position, eventually gaining $900K.
• Account 2 (0x67fe…)​: Took a $1.9 million long position but lost $167K.
• Account 3 (0xde95…)​: Took a massive $4.1 million short position, losing $767K.

The trader’s strategy? Use the long positions to pump JELLYJELLY’s price while the short position was meant to exploit Hyperliquid’s liquidation system. By creating opposing trades, the trader aimed to drain funds from Hyperliquid’s Hyperliquidity Provider Vault (HLP), which handles liquidations when positions go south.

The Price Pump and Liquidation Chaos

JELLYJELLY’s price skyrocketed by over 400%, jumping from a $10 million market cap to over $50 million in under an hour. This rapid pump caused the $4.1 million short position to enter liquidation. Normally, Hyperliquid’s HLP would liquidate such a position by selling off the assets, but the size of this short was too large for a smooth liquidation. The HLP absorbed the position, facing a potential $12 million loss if the price kept climbing.

Meanwhile, the trader tried to withdraw funds from the long-position accounts, which were sitting on millions in unrealized profits. They managed a withdrawal at 12:43 UTC, but Hyperliquid caught on and restricted the accounts to “reduce-only” orders by 12:50 UTC, halting further withdrawals. The trader then started selling off their JELLYJELLY holdings on the market, trying to cash out their gains.

Hyperliquid’s Response: Shutting Down the Market

Hyperliquid eventually stepped in and closed the JELLYJELLY market, setting the price at $0.0095—the level where the short position had been opened. This move zeroed out the floating profits on the trader’s long-position accounts, effectively neutralizing the exploit. According to Arkham’s thread, the trader deposited $7.17 million and withdrew $6.26 million, leaving a $900K balance on Hyperliquid. If they can’t withdraw that, they’re looking at a $1 million loss. If they can, they’re only down $4K—a small price for such a bold move.

Hyperliquid later announced on X that they delisted JELLYJELLY perps after their validator set voted on the decision. They promised to make all users (except flagged accounts) whole using funds from the Hyper Foundation, with more details to follow.

Why This Matters: DEX Vulnerabilities Exposed

This exploit wasn’t just a one-off drama—it highlighted some serious issues with decentralized exchanges like Hyperliquid. Let’s unpack the bigger picture.

Liquidation Mechanisms Under Scrutiny

Hyperliquid operates on its own Layer-1 blockchain, HyperEVM, using a fully on-chain order book and a proof-of-stake consensus called HyperBFT. This setup is designed for speed and transparency, but the JELLYJELLY incident showed how illiquid tokens can be weaponized. The HLP vault, meant to handle liquidations, couldn’t manage the massive short position, putting the entire platform at risk. As Crypto Briefing reported, if JELLYJELLY’s market cap had hit $150 million, Hyperliquid’s liquidator vault could have faced full liquidation.

Centralized Control in a Decentralized System?

The incident also raised questions about Hyperliquid’s decentralization. When the platform closed the JELLYJELLY market and manually set the price, it revealed a level of centralized control that doesn’t align with the ethos of a DEX. As GracyBitget pointed out on X, this “immature and unprofessional” handling cast doubts on Hyperliquid’s integrity. Some even compared it to the infamous FTX collapse, warning that Hyperliquid could be on a similar path if it doesn’t address these flaws.

The Broader Impact on DEX Reliability

The JELLYJELLY exploit fueled a trending discussion on X about DEX reliability. A summary of the trend noted that the trader’s actions forced Hyperliquid to choose between a $12 million loss or exposing its centralized controls, sparking debates about whether DEXs can truly compete with CEXs in terms of stability. Unlike centralized exchanges, DEXs like Hyperliquid don’t have intermediaries, which reduces some risks (like hacking) but introduces others, such as price manipulation and liquidation failures. This incident showed how a single bad actor can exploit these vulnerabilities, potentially eroding trust in decentralized platforms.

What’s Next for Hyperliquid and DEXs?

Hyperliquid managed to avoid a catastrophic loss, and their HLP vault even ended up with a $700K profit after the dust settled. But the incident left a mark. The platform promised to make technical improvements and enhance transparency in its validator voting system, as noted in their official statement. They also committed to compensating affected users, which might help rebuild trust.

For the broader DEX space, this event is a wake-up call. Platforms need to rethink their liquidation mechanisms, especially for low-liquidity tokens, and ensure their systems can handle extreme market manipulation. As DeFi continues to grow, incidents like this highlight the need for better governance, more robust oracle systems (to prevent price manipulation), and clearer boundaries between centralized and decentralized control.

The JELLYJELLY exploit might go down as one of the most audacious DeFi plays of 2025, but it’s also a reminder that with great innovation comes great risk. If you’re trading on a DEX, stay sharp—because the wild west of crypto is still very much alive.