A perp too far: Hyperliquid’s ‘validator put’
A memecoin short squeeze pushed Hyperliquid to the brink — and revealed decentralization limits
CryptoFX/Shutterstock and Adobe modified by Blockworks
This is a segment from the 0xResearch newsletter. To read full editions, subscribe.
Yesterday, Hyperliquid — the onchain perps DEX standard-bearer — faced an arguably existential stress test.
A trader opened an $8 million short on JELLYJELLY, a low-cap memecoin, then pumped its onchain price, triggering a liquidation cascade that dumped the position onto Hyperliquid’s communal risk vault, HLP. As JELLYJELLY soared, the vault bled: At peak, onchain watchers tracked over $10 million in unrealized losses.
Then, Hyperliquid made its move. Validators delisted the market and forcibly settled all JELLYJELLY perp positions at $0.0095 — the entry price of the attacker’s short. The vault was magically spared. In fact, it booked a $700k profit.
But in the process of of breaking the glass in an emergency, the protocol seems to have shattered any illusions about one of Hyperliquid’s core aspirations: decentralization.
The key takeaway wasn’t that Hyperliquid acted — it’s what that action revealed. The validator set not only delisted the asset but set the price at which all open positions were forcibly closed. This was more than an oracle tweak — it was an override of the market. And one that benefited the protocol’s own balance sheet.
In effect, Hyperliquid demonstrated what Galois Capital dubbed a “validator put”: an implicit backstop where, if losses to the HLP vault grow too large, the protocol will intervene to cap them.
That changes the nature of the game. HLP becomes an asymmetric bet: full upside during normal operation, downside protection when markets go wild. It’s attractive for stakers, but dangerous for everyone else — including external market makers, who now know they’re competing with an entity that doesn’t always play by known rules.
And that’s the second break: the illusion of neutrality. While Hyperliquid claims the delisting was a validator vote — and some validators did confirm quorum was reached — the governance set is top-heavy. More than half the stake belongs to five “Hyper Foundation” validators. Whether it’s Jeff or the foundation, the practical result is the same: Core protocol actors made a discretionary call to save protocol capital.
Critics like Hasu, ZachXBT and Wintermute’s Evgeny Gaevoy weren’t subtle: You can’t claim to be a DEX and then override prices when it suits you. Others drew parallels to FTX and Alameda, pointing out that Hyperliquid’s internal liquidity engine (HLP) now acts as both market participant and protocol beneficiary — with all the risk of favoritism and opaque intervention implied.
Managing director of Bitget Gracy Chen was quick to denounce Hyperliquid’s handling of the incident — calling it “immature, unethical and unprofessional.” But the critique rang hollow for those who remembered that just last year, Hyperliquid founder Jeff Yan publicly accused Bitget of dishonest matching — alleging it didn’t route user trades to the open market, but rather through an internal trading desk.
This practice, known as B-booking — or profiting when users lose — is “unequivocally unethical,” Jeff wrote in 2023, and “probably illegal in any jurisdiction.” So we have a Bitget exec framing that exchange as a paragon of transparency while calling out a rival for discretionary intervention. The pot may be calling the kettle opaque.
Meanwhile, Binance and OKX were listing JELLYJELLY perps mid-crisis, pouring fuel on the fire and capitalizing on the volatility in a way that may have forced Hyperliquid’s hand.
There’s no question the system held up. Hyperliquid users weren’t rugged, but rather were defended from loss. The cost was clarity: Is Hyperliquid a rules-based DEX, or a discretionary platform with validator-administered emergency powers?
Decentralization doesn’t fail in moments like this — it’s revealed. And what Hyperliquid has shown is that it can, and will, act to protect itself first. That may be rational — maybe even necessary. But let’s not pretend it’s neutral.
Get the news in your inbox. Explore Blockworks newsletters:
- Blockworks Daily: The newsletter that helps thousands of investors understand crypto and the markets, by Byron Gilliam.
- Empire: Start your morning with the top news and analysis to inform your day in crypto.
- Forward Guidance: Reporting and analysis on the growing intersection of crypto and macroeconomics, policy and finance.
- 0xResearch: Alpha directly in your inbox. Market highlights, data, degen trade ideas, governance updates, token performance and more.
- Lightspeed: Built for Solana investors, developers and community members. The latest from one of crypto’s hottest networks.
- The Drop: For crypto collectors and traders, covering apps, games, memes and more.
- Supply Shock: Tracking Bitcoin’s rise from internet plaything worth less than a penny to global phenomenon disrupting money as we know it.
