What happened to HLP in the JELLY incident?

What actually happened

Late March 2025, on JELLY — a token small enough that its spot market could be moved with modest money.

The sequence, which is agreed across every account:

1. A trader opened a large short on the JELLY perpetual.
2. They withdrew the margin backing it, so the position was liquidated.
3. Liquidated positions go to HLP, the vault that backstops them. HLP inherited the short.
4. The same party bought JELLY on spot markets, where liquidity was thin, pushing the price up and the inherited short further underwater.
5. Hyperliquid delisted the JELLY perpetual and closed open positions at a set price of $0.0095.

That is the mechanism. Everything disputed is about the numbers.

Why the settlement is the real argument

The interesting part is not the money. It is that a market was closed at a price chosen by people rather than by the order book.

The case for it: the position was manufactured, the spot price was manipulated, and letting it run would have drained a vault that ordinary depositors funded. Settling at a price reflecting the token’s real value protected those depositors.

The case against it: a venue that can close your position at a price it picks is a venue with a hand on the scale. Arkham’s write-up put it plainly — it overrode the platform’s autonomous behaviour and demonstrated a point of central control. If that can be done to an attacker, the capability exists for anyone.

Both are true at once. The honest summary is that Hyperliquid chose depositor protection over mechanical purity, and that choice is exactly what the “code is law” argument was about. How decisions like this are actually made covers the governance side.

What changed afterwards

The structural fix was a cap on the liquidator component inside HLP — the part that absorbs liquidated positions can no longer take on an unbounded share of a single one. That directly addresses the mechanism: the problem was not that HLP took a bad position, it was that it took one too large relative to the vault.

What has not changed, and cannot be engineered away:

• Thin markets are still thin, and a small market’s price is still movable.
• A vault that absorbs liquidations will sometimes absorb an unpleasant one. That is the business it is in.
• Listings remain permissionless, so no committee is screening which markets exist.

What this means if you are considering HLP

Read it as information about the risk shape, not as a reason for or against.

HLP earns by taking the other side of liquidations. Most of the time that is a profitable position. Occasionally it means holding something nobody wants at a price that is moving against it. JELLY was the clearest demonstration of the downside case, and the response — delist, settle, cap the component — tells you as much about how the venue behaves under stress as the incident itself does.

If the manual settlement reads to you as prudent risk management, HLP is a more comfortable product than it was before. If it reads as a venue overriding its own rules, that is a reasonable objection and it applies to everything on the platform, not just the vault. What HLP is and how it pays has the mechanics; the risk page ranks this against the other things that can go wrong.

Where the numbers come from

Every figure above is attributed in Sources. Where accounts differ we have said so rather than picking the more dramatic one, which is the opposite of how this episode was mostly covered. If you find a better-sourced figure that contradicts anything here, tell us and it gets corrected with a date in the changelog.