Hyperliquid Announces Key Risk Management Updates Following JELLY Market Incident

HyperLiquid has announced a series of risk management improvements following a major incident involving its Hyperliquidity Provider (HLP) vault.

As part of its response, HyperLiquid’s Foundation will refund users who held JELLY long positions at the time of settlement, using a closing price of $0.037555. This move is expected to ensure that all JELLY traders, except those with flagged addresses, receive a settlement price that is beneficial to them.

The decision follows the delisting of JELLY perpetual contracts after validators identified suspicious market activity.

What Happened?

The incident stemmed from a trader allegedly manipulating the price of JELLY, leading to significant unrealized losses for HLP, a market-making vault within HyperLiquid.

The trader, who held $4.85 million worth of JELLY, combined a short position on HyperLiquid with on-chain spot buys, which triggered a liquidation event that transferred the short position to HLP. As the trader aggressively purchased JELLY on decentralized exchanges, its price surged, which temporarily caused HLP’s unrealized losses to reach $13.5 million.

With liquidity on decentralized exchanges being relatively low, the price movement was more pronounced. In response, HyperLiquid force-closed the JELLY market and settled it at $0.0095, which is much lower than the $0.50 price reported by decentralized exchange oracles.

This decision sparked discussions within the crypto community, with some experts questioning its legality.

Meanwhile, Bitget CEO Gracy Chen criticized HyperLiquid’s handling of the JELLY delisting and warned it could follow the path of FTX. The exec argued that the decision, made by a small group of validators, raised concerns about decentralization.

Chen also highlighted structural flaws, such as mixed vault risks and a lack of transparency. Her concerns were echoed by BitMEX co-founder Arthur Hayes, who also questioned HyperLiquid’s decentralization claims.

HyperLiquid’s Risk Management Updates

In light of these events, HyperLiquid has announced several key changes to its risk management systems.

First, the Liquidator vault within HLP will have stricter limits, meaning it will hold a smaller portion of the total HLP account value. It will also be rebalanced less often, and a more advanced system will be used to handle liquidations.

Second, the automatic deleveraging (ADL) process will only activate if the Liquidator vault’s losses exceed a certain limit. This will help prevent funds from being automatically moved from other vaults to cover losses.

Third, the platform will adjust open interest (OI) caps more dynamically based on market size to ensure they better reflect current conditions. Lastly, an on-chain voting system will allow validators to decide whether to remove assets that fall below certain thresholds.

“Yesterday is a good reminder to stay humble, hungry, and focused on what matters: building a better financial system owned by the people. Hyperliquid is not perfect, but it will continue to iterate and grow through the collective efforts of builders, traders, and supporters.”