Gracy Chen Warns: Hyperliquid Sets a Dangerous Precedent

Bitget Gracy Chen reacted to this and stated, “Despite presenting itself as an innovative decentralised exchange with a bold vision, Hyperliquid operates more like an offshore [centralised exchange].”

Hyperliquid, a decentralised exchange, has closed the JELLY futures market and futures futures contracts following an exploit incident on March 26. The exchange stated that this comes after suspicious market activity in this market was recorded. According to the exchange, all the JELLY futures users have been reimbursed. These actions were approved by the small community of Hyperliquid validators, which showed contrast to the network’s supposed decentralisation.

This incident and Hyperliquid’s handling of it has drawn criticism from other industry figures. For instance, Bitget CEO Gracy Chen penned an opinion piece on Monday, in which she expressed her dissatisfaction with Hyperliquid’s handling of the March 26 exploit accident.

Hyperliquid May Be Setting a Dangerous Precedent

In her post, Chen stated, “Despite presenting itself as an innovative decentralised exchange with a bold vision, Hyperliquid operates more like an offshore [centralised exchange]. This impression is further reinforced by the exchange's decision to close the $JELLY futures market and futures futures contracts.” She also added, “Hyperliquid may be on track to become FTX 2.0.”

According to Chen, she does not accuse Hyperliquid of a specific crime but believes its actions damage the crypto space. She stated, “The decision to close the $JELLY market and force settlement of positions at a favorable price sets a dangerous precedent. Moreover, trust, not capital, is the foundation of any exchange, especially in the crypto space, and once lost, it’s almost impossible to recover.”

The incident began with a trader depositing $7,167,000 on three different Hyperliquid accounts within five minutes of each other. He then used these accounts to place leveraged trades on an illiquid token, which was JELLY. The trader's aim was to liquidate as many long positions as possible in order to increase the value of Jelly-My-Jelly.

This setup enabled "build up leverage in an attempt to drain funds from Hyperliquid," according to crypto intelligence firm Arkham, which closely follows blockchain activity. The trader was able to exploit the Hyperliquidity Provider Vault (HLP) by setting up the $4 million short position. This is because the short position was too large to be liquidated immediately, so it passed the system.

However, Arkham noted that the trader was able to withdraw his collateral from the other two accounts, which were longs. This Hyperliquid JELLY exploit was stopped when all the accounts were locked to reduce-only orders. As such, the trader sold the token from the first account to limit his own losses.

When the Jelly-My-Jelly's market was frozen and closed on the Hyperliquid, its value was around 0.0095. This is the same value as when the exploiter opened his short position, turning his profit to 0.

According to Arkham's report, the exploiter was only able to withdraw $6,260,000 of his funds. This leaves $1 million still remaining frozen, in addition to a $4,000 loss on the fees.

This has not been the first time this platform has grappled with exploiters, as recently, a similar incident happened. On March 12, $200 million in long Ether future contracts were liquidated by two whales. The incident caused roughly $4 million in damages for Hyperliquid; as such, the platform has increased the collateral requirement.

However, as Bitget Gracy Chen stated, some community members are worried that this platform might trigger another FTX incident.