| The decentralized derivatives exchange Hyperliquid, the largest of its kind by trading volume, had a not-so-decentralized moment last week that has caught the attention of the wider market. An unidentified trader opened a short position worth more than $4.8 million in perpetual swaps tracking a Solana-based memecoin called JELLY on Hyperliquid, while also artificially inflating JELLY's price by buying the token on other platforms. As the token's price rose, the trader removed collateral backing the short position, triggering a liquidation process that forced the project's Hyperliquid Provider (HLP) Vault to take over the trader's short position, according to crypto risk manager Gauntlet.
While the trader continued buying JELLY, the Binance and OKX exchanges announced they would start supporting perpetual swaps for the token, driving its price even higher. The HLP Vault faced unrealized losses exceeding $10 million from the short position, according to Gauntlet. To prevent further losses, centralized intervention was implemented: The platform delisted JELLY's perpetual swaps and forcibly closed all positions at a set price of $0.037555 following a vote by its validators who run software to verify transactions and help secure the network Others in the market criticized this decision because Hyperliquid only has 16 validators, making decisions less decentralized than they appear. The agreed-upon closing price also raised questions about whether the Hyperliquid team favored the HLP Vault, as this price ultimately allowed HLP to be profitable instead of losing more than $10 million. "Delisting and settling the positions makes sense," Kevin Zhou, the founder of now-shuttered crypto hedge fund Galois Capital that famously shorted Terra Luna before that project's algorithmic stablecoin collapsed in 2022, said on X. "What price to use for the forced settlement is arguable."
The JELLY incident was an "exceptional situation" that required immediate action by validators to protect the protect and its users, said Jeff Yan, cofounder of the Hyperliquid Labs.
"Validators collectively voted and unanimously reached consensus to delist the contract and settle at the price before the malicious activity began," he said. "Users with JELLY long positions at the time of settlement will be refunded by the Hyper Foundation as if their position settled at the closing price of 0.037555. This results in all JELLY traders being settled at a price advantageous to them, except for the two flagged addresses."
Yan added that while there are 16 validators currently, the number will continue to grow. Hyperliquid quickly rose to become one of the top trading venues by volume, currently accounting for more than 50% of the decentralized perpetual swap market by weekly volume, according to data compiled by user uwusanauwu on Dune Analytics. Compared with many competitors, Hyperliquid also has faced more criticism for its relatively centralized design, including its mostly closed-source code in addition to its limited validator set. However, traders had largely ignored these concerns given the platform's success. Perhaps that's why Hyperliquid's intervention in the JELLY incident has received so much attention, though the episode also exposed several other issues with Hyperliquid's risk management – including the listing process for illiquid tokens like JELLY, which are more susceptible to market manipulation. The market is finally asking a question that was previously overlooked: "Is it really DeFi?"
"The point of DeFi is you need to constrain the actions users can do ahead of time because you can't hit the metaphorical 'stop button,'" said Tarun Chitra, CEO and co-founder of Gauntlet. As of now, Hyperliquid's decision to save HLP has not been well received by the market, as the total value of cryptocurrencies locked on HLP is down by 40% to $178.8 million from a week ago, according to tracker DeFiLlama. It's certainly not news to anyone who's followed DeFi that some projects are not as decentralized as they seem. Still, the incident shows that DeFi still has a long way to go before it can effectively compete with its centralized counterparts. | 
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