Another Incident of Manipulation with the HLP Vault Mechanism Occurred on Hyperliquid

On March 26, 2025, another incident of manipulation with the HLP Vault mechanism occurred on Hyperliquid. An anonymous trader triggered the liquidation of a margin short position

On March 26, another incident of manipulation with the HLP Vault mechanism occurred on Hyperliquid. As a result, the platform assumed loss-making obligations.

The incident began with an anonymous trader depositing almost $7.2 million into three separate Hyperliquid accounts, according to experts at Arkham Intelligence. The goal was to exploit the peculiarities of the platform’s liquidation mechanism, which operates through Hyperliquidity Provider (HLP) pools.

The user’s “tool” was a Solana-based memecoin — Jelly-My-Jelly (JELLYJELLY). Due to its relatively small market capitalization of $20 million (at the time the deal was opened), the asset was a convenient target for manipulation, noted the co-founder of the Polynomial.fi project with the nickname gauthamzzz.

The trader created two long positions on JELLYJELLY for $2.15 million and $1.9 million, respectively. Simultaneously, he opened a short position for 400 million JELLYJELLY ($4.1 million at the time of the transaction). The latter was created with 20x leverage and covered almost 40% of the asset’s total supply.

These manipulations led to a sharp jump in the token’s price. Within a short period, the asset’s capitalization jumped from $20 million to $50 million, and the price increased by more than 400%, according to CoinGeckoTerminal data. In essence, the whale created an artificial market movement, balancing his own trades to trigger the liquidation of one of them.

As the price of JELLYJELLY began to rise, this triggered the forced closure of his short position. However, due to its volume, the trade was not processed in the standard way but was sent to the HLP Liquidator vault. This platform mechanism is usually used to close large positions without significantly impacting the market.

In the case of large transactions, there is a risk that the system will not have time to close the position quickly. Essentially, the HLP Liquidator is not the sole liquidator but directs trades to the order book. This creates competition when closing a position and allows users to retain the remaining margin after liquidation.

“The risk with this approach is that if the market moves too fast or there is not enough liquidity on the order book, the HLP Liquidator may not be able to fully liquidate the position at the desired price, leading to unrecoverable losses for the HLP,” explained representatives of Hyperliquid, adding that they notified the community about this scenario in March 2023.

This threat was realized in practice. As a result of the trader’s manipulations with JELLYJELLY and his actions, they led to potential HLP losses of $12 million, according to Lookonchain experts.

As for the long positions, immediately after the price jump, they reached a seven-figure positive Profit and Loss (PnL) figure. The user began actively withdrawing funds and managed to receive $6.26 million before his accounts were restricted to “reduce-only” orders.

According to Arkham, the developers’ prompt intervention nullified the user’s efforts to profit and prevented him from succeeding.

“In the end, Hyperliquid closed the JELLYJELLY market at $0.0095, the price at which the third account entered its short trades. This zeroed out all floating PnL on the trader’s first two accounts,” the analysts concluded.

The Hyperliquid team took several emergency measures. First, the platform limited the ability of the mentioned trader to place orders, allowing only the closing of positions.

As a result, a portion of unrealized profit remained in his account, and the user himself incurred losses. Even in the most optimistic scenario for him, he will lose $4,000.

“Assuming he can withdraw funds at some point in the future, his actions on Hyperliquid cost him a total of $4,000. If he cannot, he faces a loss of almost $1 million,” Arkham noted.

In addition to the restrictions on the trader, in an attempt to stop the manipulations, Hyperliquid announced the immediate delisting of JELLYJELLY. This decision provoked a mixed reaction from the community. On the one hand, it was aimed at preventing further manipulations, but on the other hand, it raised questions about the exchange’s resilience to such attacks and brought up issues of decentralization.

Analysts also noted that simultaneously with the incident on the platform, centralized exchanges Binance and OKX launched perpetual futures for JELLYJELLY. This situation sparked discussions about possible competition between platforms and their approaches to risk management.

Moreover, expert ZachXBT stated that the funds used by the trader came from the Binance exchange.

Hyperliquid, in turn, assured users that the HLP losses would not affect their funds, and that those affected, except for the “exploiter,” would receive