Could Hyperliquid’s Actions in the JELLY Controversy Spark Another FTX-Like Collapse?

Hyperliquid (HYPE) is facing heightened scrutiny after a market manipulation incident involving the JELLY token. The platform’s response to the crisis has raised concerns about the effectiveness of its risk control mechanisms.

Some industry leaders are warning that Hyperliquid may be heading down a dangerous path, with comparisons being drawn to the collapse of FTX in 2022. This centralized exchange failed due to mismanagement and a lack of transparency.

Is Hyperliquid Headed for the Same Fate as FTX?

BeInCrypto reported that the controversy began when a trader executed a manipulation scheme, shorting the JELLY token and then pumping its price on-chain. This left the platform’s Hyperliquidity Provider (HLP) vault with an approximate $12 million loss. 

In response, Hyperliquid delisted JELLY to avoid a potential $230 million liability. It also settled positions at $0.0095, overriding the oracle price of $0.50.

While this mitigated the damage, it triggered widespread criticism. Gracy Chen, CEO of cryptocurrency exchange Bitget, called the move “immature, unethical, and unprofessional.”

“Hyperliquid may be on track to become FTX 2.0,” she claimed.

Chen highlighted that the recent incident has raised significant concerns about HyperLiquid’s integrity, with user losses casting doubt on the platform’s reliability. She also noted that Hyperliquid’s move sets a dangerous precedent for user trust.

“Despite presenting itself as an innovative decentralized exchange with a bold vision, Hyperliquid operates more like an offshore CEX with no KYC/AML, enabling illicit flows and bad actors,” Chen added.

She also criticized Hyperliquid’s product design. Chen stressed that flaws like mixed vaults expose users to systemic risk, and unlimited position sizes enable manipulation. If these issues aren’t addressed, the CEO warned, other altcoins could be weaponized against HyperLiquid, putting it at risk of becoming the next major collapse in crypto.

Interestingly, in April 2023, Hyperliquid CEO Jeff Yan raised similar alarms about Bitget.

“Bitget may be the next FTX,” he posted.

In a series of tweets, Yan highlighted his concerns about Bitget’s operations and ethical issues. He criticized the platform for dishonesty in its matching engine. Yan claimed that Bitget masquerades as an order book exchange while secretly using a different structure behind the scenes, which he believed is unethical and possibly illegal. 

The Hyperliquid co-founder detailed how Bitget allegedly profited from retail taker flow and copy trading, particularly by manipulating orders. He stressed that exchanges like Bitget should not receive additional funding, as the crypto industry deserves more transparency and ethical behavior. 

“Even if it’s better now, the ethical concerns still stand. I wouldn’t touch the exchange with a 10 foot pole,” Yan remarked.

Nonetheless, the tides have now turned, with Hyperliquid being the subject of industry criticism. On-chain investigator ZachXBT revealed that Hyperliquid appeared indifferent to North Korean hackers using stolen funds to open positions on the platform. Yet, they acted swiftly in the JELLY incident. 

“When it’s Radiant hack with DPRK funds (thousands of victims) they claim they can’t do anything and were notified in a timely manner. When it’s a low cap PVP meme coin the couple of validators and huge % of stake is controlled by HL rush to close positions at an arbitrary price. Actual decentralization is still rare in this space,” he wrote.

Former BitMEX CEO Arthur Hayes echoed this centralization critique.

“HYPE can’t handle the JELLY. Let’s stop pretending hyperliquid is decentralized,” Hayes stated.

Meanwhile, the incident has also negatively impacted HYPE. It experienced double-digit losses after the incident. BeInCrypto data showed that HYPE’s value declined 7.8% over the past day. At press time, it was trading at $14.4.

Hyperliquid (HYPE) Price Performance. Source: BeInCrypto

Not only the price, but the Total Value Locked (TVL) has also taken a hit. According to the data from DefiLama, HLP’s TVL dropped by approximately 32.3% from $287.8 million on Wednesday to $194.8 million today.