Overview

In recent years, the rapid growth of decentralized finance (DeFi) has given crypto users unprecedented freedom and financial control. Hyperliquid, a leading decentralized exchange (DEX) launched in 2023, quickly gained prominence with its efficient perpetual contract trading and innovative user experience.

However, the “JELLY Crisis” at the end of March 2025 cast a shadow over this once-celebrated DeFi star, leading to a trust crisis and sparking industry-wide reflection on decentralized exchanges’ essence and risk management.

Crisis Event

Hyperliquid’s Rise and Success

Hyperliquid operates as a decentralized perpetual contract trading platform on Arbitrum (an Ethereum Layer-2 network), attracting many users with its high performance, low costs, and native BTC trading support.

Market data shows that by April 3, 2025, Hyperliquid’s total trading volume surpassed $1.19 trillion, with daily volumes reaching $8 billion, capturing nearly 56.8% of the decentralized perpetual contract market. The HYPE token airdrop in November 2024 further boosted its user base, making it a standout in the competitive DEX landscape.

Source: https://defillama.com/perps/hyperliquid

Hyperliquid’s success is closely linked to its technological innovations. Integrating HyperCore and HyperEVM enabled efficient on-chain trading and seamless connectivity with the Ethereum ecosystem. The platform also supports leverage trading up to 50 times, attracting many high-risk “degen” traders. However, this mix of high leverage and liquidity set the stage for the subsequent crisis.

Source: https://dune.com/uwusanauwu/perps

The JELLY Crisis Unfolds

On March 26, 2025, Hyperliquid faced a major crisis triggered by JELLY (Jelly-my-Jelly, a meme coin based on Solana). A mysterious “whale” trader opened a $6 million short position on JELLY perpetual contracts, then aggressively drove up JELLY’s price in the on-chain spot market, increasing it from $0.0095 to $0.06, a surge of over 400%.

This maneuver led to a forced liquidation of the short position, and due to insufficient market liquidity, Hyperliquid’s Hyperliquidity Provider Vault (HLP), an automated market maker pool for large position liquidations, had to absorb this “toxic” position.

As JELLY’s price rose, HLP’s unrealized losses soared to $13.5 million. Facing potential systemic risks, the Hyperliquid team swiftly acted by freezing JELLY trading on March 27 and delisting it from the platform, while forcibly liquidating all related positions at a settlement price of $0.0095 instead of the market price of $0.50. Although this decision prevented larger losses (reportedly saving about $230 million from a potential liquidation crisis), it provoked a strong backlash from the community.

Source: https://www.ccn.com/news/crypto/hyperliquid-losing-230m-vault-6m-jelly-short/

Crisis Response

Following the JELLY crisis, Hyperliquid implemented several strategies to mitigate financial and reputational damage and to rebuild user trust. Here’s a summary of their key responses:

Compensation Plan for Users

Hyperliquid promptly announced compensation for users affected by the JELLY incident. The Hyper Foundation is committed to using its funds to compensate users holding JELLY long positions, ensuring settlements at favorable prices, excluding suspicious addresses. This move aimed to reduce losses for regular users and address community dissatisfaction.

For instance, Hyperliquid stated in their post-crisis announcement that the compensation process would be automated based on blockchain data and completed within days.

Removal of JELLY Perpetual Contracts

To avoid further market manipulation and liquidity issues, Hyperliquid’s validator committee voted to remove JELLY perpetual contracts, settling all positions at $0.0095—the initial whale entry price—allowing the liquidity provider vault (HLP Vault) to turn a profit, netting about $700,000.

While this decisive action prevented larger losses, it raised concerns about the platform’s decentralization and intervention policies.

Source: https://x.com/HyperliquidX/status/1904923137684496784

Enhancing Security and Risk Management

The JELLY incident revealed weaknesses in Hyperliquid’s token listing standards and liquidity management. In response, the platform pledged to review and improve its risk management strategies, including reassessing leverage levels for ETH and BTC to limit high-risk trading.

The incident also sparked industry-wide discussions on balancing user experience and security in decentralized exchanges (DEX), possibly leading Hyperliquid to adopt stricter token review processes or hybrid order book models.

Efforts in Community Communication and Transparency

Hyperliquid issued statements through official channels post-crisis to soothe community concerns. They emphasized: “Yesterday’s events remind us to stay humble and focused, dedicated to creating a better, user-owned financial system.” This was intended to reinforce their decentralized vision and ease concerns about centralized interventions.

However, community responses were mixed; some appreciated the quick action, while critics like ZachXBT highlighted previous inaction during similar incidents, questioning their consistency.

Handling Market and Capital Flow

The JELLY crisis resulted in significant capital outflows for Hyperliquid, with USDC reserves dropping from $2.58 billion to $2.02 billion. To stabilize, the platform used its community insurance vault (HLP Vault) profits (over $60 million) to absorb losses and swiftly adjusted positions to avoid bankruptcy. Despite these efforts, the HYPE token price fell over 22%, indicating shaken market confidence.

Source: https://www.gate.io/trade/HYPE_USDT

Analysis of Potential Causes

The Hyperliquid crisis led to a trust and capital crisis and prompted deeper industry discussions about underlying issues. Here’s an analysis of potential causes, spanning technology, governance, market, and user behavior.

Risky Mix of High Leverage Trading and Low Liquidity Assets

Hyperliquid’s appeal lies in its support for high leverage (up to 50x) perpetual contract trading, which can enhance gains in stable markets, attracting many speculators. However, combining leverage trading with low liquidity assets like JELLY meme coins greatly increases risk.

Analysis: As a small-cap token, JELLY’s market depth and liquidity are much lower than mainstream assets. A “whale” manipulation caused its price to surge 400% rapidly, triggering widespread forced liquidations. Hyperliquid’s Hyperliquidity Provider Vault (HLP) couldn’t quickly clear these positions, leading to substantial unrealized losses.

Potential Issue: The platform lacked strict leverage limits or risk assessments for low liquidity assets, overwhelming the system under extreme market conditions.

Source: https://www.gate.io/trade/JELLYJELLY_USDT

Shortcomings in the Liquidation Mechanism

Hyperliquid’s liquidation system, which depends on the HLP pool and on-chain automated market makers, is supposed to manage large position liquidations. However, the JELLY crisis highlighted its weaknesses in dealing with market manipulation and irregularities.

Analysis: The HLP pool is limited in size and designed for normal market fluctuations, not extreme price manipulations. When JELLY’s price was artificially driven up, the HLP couldn’t liquidate positions at fair prices, leading to greater losses.

Issue: The platform lacks dynamic margin adjustments and external liquidators, like off-chain bots, which impacted its performance under stress. The manual liquidation price change (from $0.50 to $0.0095) also showed the system’s rigidity and lack of transparency.

Centralized Governance Concerns

Despite Hyperliquid’s decentralized claims, its crisis actions revealed a centralized approach. The core team decided to freeze trades, delist JELLY, and manually set settlement prices.

Analysis: Hyperliquid’s code isn’t fully open-source, and its validator network lacks transparency, allowing for centralized decisions during critical times instead of community-driven or automated actions.

Issue: This governance style conflicts with DeFi’s “trustless” ethos. Users trust the platform based on decentralization promises, and frequent centralized actions could undermine trust in its long-term reliability.

Source: https://github.com/hyperliquid-dex

User Behavior and Speculative Culture

Many of Hyperliquid’s users are “degens” or high-risk speculators who chase high returns and leverage without fully understanding the risks.

Analysis: The JELLY crisis was triggered by a “whale” trader’s manipulation, but it was facilitated by users’ enthusiasm for meme coins and excessive leverage use. This speculative culture increased market volatility, making the system more attack-prone.

Issue: Hyperliquid didn’t promote rational trading through education or limitations, and instead, encouraged speculation with high leverage and airdrops, setting the stage for the crisis.

Technical Architecture Limitations

Running on Arbitrum and using HyperCore and HyperEVM, Hyperliquid is efficient generally but struggles with performance and scalability under extreme conditions.

Analysis: Arbitrum’s Layer-2 reduces costs but can delay during high-volume liquidation and data processing. During the JELLY crisis, transaction congestion stressed the HLP pool, reducing liquidation efficiency.

Issue: The platform’s reliance on the blockchain and lack of optimized on-chain/off-chain coordination made its architecture a bottleneck during crises.

Source: https://hyperliquid.gitbook.io/hyperliquid-docs/risks

Risk Management and Transparency Deficiencies

Before the crisis, Hyperliquid’s risk management was inadequate for market anomalies. Its asset listing, leverage limits, and emergency plans lacked foresight and professionalism.

Analysis: Easy listing of low-liquidity assets like JELLY and high leverage suggests lax review processes. Post-crisis, the team’s decision-making and fund movements weren’t transparently communicated, leading to user dissatisfaction.

Issue: Without a solid risk assessment and transparent communication, the platform seemed passive and untrustworthy during emergencies.

Risks Facing DEXs

Beyond the specific issues noted, DEXs encounter a range of broader and more complex risks. As the industry grows and the market environment diversifies, these challenges span technology implementation, governance structure enhancement, market risk management, and increasingly stringent regulatory compliance.

Technical Performance and Scalability Challenges

DEXs rely on blockchain technology, and the inherent performance limitations directly affect their trading speed and user experience.

Challenge: DEXs generally offer slower transaction speeds and lower throughput than centralized exchanges (CEXs). Ethereum’s mainnet processes only about 15-30 transactions per second, and even Layer-2 solutions like Arbitrum or Optimism struggle to match the millisecond response times of CEXs.

Impact: High-frequency trading or volatile market conditions can lead to transaction delays and increased gas fees, resulting in user loss. The JELLY crisis highlighted how Hyperliquid faced increased liquidation pressure due to on-chain congestion.

Solution: Technologies like cross-chain interoperability and zero-knowledge proofs (ZK-Rollups) could help, but they are still developing.

Security and Smart Contract Vulnerabilities

DEXs depend on smart contracts, with code vulnerabilities posing significant security risks.

Challenge: Hacks, flash loan attacks, and contract bugs have led to billions in losses. Reentrancy attacks in 2023 affected multiple DEXs.

Impact: Security breaches harm user assets and erode trust in DEXs.

Solution: While code audits, multi-signature mechanisms, and bug bounty programs can help, they can’t fully eliminate risks.

Source: https://zokyo.io/blog/read-only-reentrancy-attacks/

Regulatory Challenges

As DeFi grows, DEXs face increasing scrutiny from global regulators.

Challenge: DEXs’ anonymity and decentralization make meeting traditional KYC and AML standards hard. Countries like the US have started imposing regulatory pressures, exemplified by the SEC’s investigation into Uniswap.

Impact: Regulatory tightening could limit DEX growth or force them to adopt centralized features for compliance.

Solution: Developing compliance frameworks with regulators or balancing privacy and compliance through zero-knowledge proofs, though potentially raising costs.

Source: https://blog.uniswap.org/a-win-for-defi

Market Competition and Saturation

The DEX market is fiercely competitive, with new platforms continually emerging.

Challenge: Established DEXs like Uniswap, PancakeSwap, and dYdX dominate the market, pushing newcomers like Hyperliquid to innovate or use aggressive tactics, which can be risky.

Impact: Over-competition might cause resource dilution or unhealthy incentives like excessive airdrops, undermining industry stability.

Solution: Targeting niche areas like perpetual contracts or cross-chain trading, while balancing innovation and risk.

Source: https://dune.com/hagaetc/dex-metrics

Comparative Analysis of DEXs

Different DEXs have strengths and weaknesses in security management, listing standards, decentralization, and trading efficiency. Hyperliquid offers high performance (200,000 TPS) but lacks in decentralization and security management.

Uniswap is fully decentralized but less efficient, PancakeSwap is efficient and user-friendly but faces centralization risks, and dYdX excels in security and professionalism but is still working towards full decentralization. Each platform must balance security, efficiency, and decentralization effectively.

Future Prospects

Decentralized exchanges (DEXs) stand as a cornerstone of the DeFi ecosystem, positioned at the forefront of technological innovation and market evolution. Despite facing significant challenges such as technical limitations, governance issues, and regulatory pressures, their decentralized and trustless nature continues to provide unique value to the crypto economy.

Looking forward, technological advancements, industry collaboration, and user demand will drive the evolution of DEXs, paving the way for new opportunities. Here’s a look at their future trajectory.

Technological Advancements Fueling Performance Improvements

Ongoing technological evolution will be a key driver for the future of DEXs, particularly in enhancing performance and scalability.

Advancement of Layer-2 and Cross-chain Technologies: With improvements in Layer-2 solutions like Arbitrum, Optimism, and zkSync, DEXs are expected to achieve transaction speeds and costs closer to those of centralized exchanges (CEXs). Additionally, cross-chain protocols such as Polkadot, Cosmos, and Chainlink CCIP will facilitate seamless multi-chain asset trading, overcoming the current ecosystem silos.

Use of Zero-Knowledge Proofs: Zero-knowledge rollups (ZK-Rollups) boost throughput and address privacy protection and regulatory compliance needs. Future DEXs might allow users to trade anonymously while still proving transaction legitimacy to regulators.

Projection: By 2030, DEXs could see daily trading volumes surpassing $100 billion, potentially rivaling or exceeding some small to medium-sized CEXs, thus becoming mainstream trading platforms.

Source: https://chain.link/cross-chain

Enhancing Liquidity and Market Depth

Historically, liquidity has been a challenge for DEXs, but future innovations and ecosystem integration are expected to mitigate this issue.

Concentrated Liquidity and Dynamic AMM: Following Uniswap V3’s lead, more DEXs will adopt concentrated liquidity models to enhance capital efficiency. AI-driven dynamic market maker (AMM) algorithms could automatically adjust parameters based on market conditions, improving market depth.

Institutional Involvement: As DeFi matures, traditional financial institutions and crypto funds may begin providing liquidity to DEXs through compliant channels. Hyperliquid, for example, might partner with off-chain liquidity providers to bring in substantial capital pools.

Projection: DEX liquidity will increasingly align with CEXs, improving the trading depth of low-market-cap assets and reducing crises similar to the JELLY incident.

Improving Risk Management and Security

Future DEXs will focus more on risk management and system resilience to handle market volatility and malicious attacks.

Smart Clearing Mechanisms: By deploying off-chain clearing bots or multi-layer insurance funds, DEXs can swiftly manage positions during extreme market conditions to prevent systemic risks. Lessons from Hyperliquid could spur the industry to develop more dynamic leverage and margin systems.

Enhanced Security Standards: Multi-signature, smart contract audits, and formal verification will become standard practices. DAO-driven bug bounty programs will encourage white hat hackers to identify vulnerabilities, lowering the risk of security breaches.

Projection: DEXs could reduce their annual fund loss from hundreds of millions to tens of millions of dollars, significantly boosting user confidence.

Advancing Decentralized Governance

Developing governance models will be crucial for DEXs to achieve “decentralization truly.”

Widespread Adoption and Optimization of DAOs: Future DEXs will increasingly rely on decentralized autonomous organizations (DAOs) for decision-making, minimizing centralized control. Hyperliquid could restore community trust through open validator networks and transparent governance token distribution.

On-chain Voting and Incentive Systems: Gas subsidies or token rewards could encourage user participation in governance, ensuring decisions reflect the community’s intentions. Quadratic voting and similar mechanisms might reduce the dominance of “whales” in governance.

Projection: By 2028, most leading DEXs could achieve over 80% decentralized governance, making centralized intervention obsolete.

Source: https://www.axelar.network/blog/quadratic-voting-daos-dpos-and-decentralization

Regulatory Compliance and Global Adoption

The evolving regulatory landscape will significantly influence the trajectory of DEXs, potentially serving as a gateway for integration into mainstream finance.

Innovative Compliance: DEXs might leverage zero-knowledge proofs or selective disclosure to fulfill KYC/AML requirements while preserving user privacy. This means users could verify the legitimacy of asset origins without disclosing their identities.

Localized Approaches: In response to varying national regulations, DEXs could introduce localized versions, supporting frameworks like MiCA in the EU and adhering to SEC regulations in the US.

Projection: By 2035, DEXs might emerge as regulated financial instruments, catering to hundreds of millions of users worldwide and fostering widespread crypto adoption.

Source: https://news.bit2me.com/en/SEC-reconsiders-controversial-dex-regulation

Coexistence of Competition and Collaboration

The DEX market will experience heightened competition, yet collaboration will emerge as a key trend.

Focused Growth: Leading DEXs will target specific niches, with Uniswap concentrating on spot trading, dYdX and Hyperliquid on derivatives, and SushiSwap fostering community-driven innovation.

Cross-Protocol Cooperation: Through open APIs and shared liquidity pools, DEXs could establish alliance ecosystems to boost competitiveness. For instance, several DEXs might collaborate to launch cross-platform insurance funds, collectively guarding against black swan events.

Projection: Over the next 5-10 years, the DEX ecosystem might evolve into a “decentralized exchange network,” akin to the internet’s distributed architecture, revolutionizing the financial transaction landscape.

Conclusion

Hyperliquid’s JELLY crisis highlighted the technical and governance deficiencies within DeFi during its rapid expansion phase. Despite significant technological innovation and user empowerment strides, the ecosystem remains nascent, grappling with challenges like high leverage, low liquidity, flawed clearing mechanisms, and disputes over centralized intervention.

This crisis underscored both Hyperliquid’s shortcomings in risk management and governance, and the broader DeFi industry’s oversight of security and transparency amid the pursuit of performance and innovation. If unsupported by robust risk management and governance structures, the vision of decentralization and freedom risks triggering systemic failures.

For Hyperliquid, rebuilding user trust hinges on optimizing technical frameworks, refining clearing mechanisms, and advancing decentralized governance and user education. For the DeFi ecosystem at large, this crisis offers a crucial moment of introspection—decentralization should not equate to disorder, and practical innovation must align with comprehensive risk management.

Looking ahead, platforms that strike the right balance between security, performance, and decentralized governance will earn user trust and thrive in the competitive landscape. Hyperliquid’s JELLY crisis serves as a snapshot of industry growth, and learning from it will be pivotal in fulfilling the promise of “empowering users and transforming traditional finance.”