Hyperliquid Announces $JELLY Bail Out Plan After $4M Trade Crisis

• Hyperliquid compensates JELLY long holders at $0.037555, excluding flagged addresses, while vowing to improve risk management and build a better financial system.
• A trader’s self-trade caused a 4x JELLY price surge, forcing HLP to cover a $4M loss, highlighting a flaw in collateral sharing that disabled ADL.
• Hyperliquid will refine risk controls: tighter Liquidator vault caps, dynamic OI caps based on market cap, and validator-led delisting for low liquidity assets.

After the token fiasco, Hyperliquid (HLP) will compensate JELLY long position holders at a price of 0.037555, except for flagged addresses.

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.

The DEX aims to strengthen risk management by setting limits on the Liquidator vault. If losses exceed the limit, ADL will be triggered; the open interest cap (risk control) will be dynamically adjusted in relation to market capitalization; validators will be able to decide via on-chain voting whether to delist assets with liquidity or market capitalization below the standard.

To recall, an anonymous trader executed a “self-trade” by opening a 4 million USDC JELLY position at 0.0095. JELLY’s price surged over 4x, raising a huge red flag and indicating potential manipulation. HLP’s liquidity pool has to backstop the 4 million USDC position as the trader cannot cover the loss. This short position of the trader and the subsequent price surge led to a loss in HLP’s account value.

Hyperliquid utilizes a dynamic open interest (OI) cap formula, which adjusts the maximum amount of open positions allowed for an asset. This calculation is based on the global liquidity and OI on other venues, including major CEXs. The DEX claimed that the 4 million USDC position fell within those limits and defended its move to halt any additional OI from being opened beyond the threshold.

Why ADL Failed? Hyperliquid’s Collateral Issue Explained

However, the key issue was that once HLP took over the liquidated position, it shared collateral with the other component vaults in the strategy and therefore did not trigger the platform’s Auto-Deleveraging (ADL) mechanism.

In a scenario like this, ADL automatically reduces profitable positions to cover losses. The shared collateral prevented the system from recognizing the full extent of the HLP’s losses, and therefore, ADL did not activate.

“The Liquidator vault will have a tight cap representing a small percentage of total HLP account value, rebalanced less frequently, and more sophisticated logic around taking backstop liquidations. Note that ADL is not expected to trigger during organic market activity,” it added.