rick

What happened on Hyperliquid with $JELLY is an unfortunate textbook example of how broken current market infrastructure is. Let’s walk through it from a market microstructure lens: A trader forced HLP into accumulating toxic short inventory ($JELLY) by liquidating their own position. The subsequent downward price pressure (from HLP trying to sell these shorts) was amplified by the absence of counterparty liquidity–specifically, a lack of traders willing to absorb short exposure. As a result, HLP was bleeding money while trying to get rid of toxic inventory, losing ~$12M for LPs and continuing to liquidate traders. The HL incident occurred because the maintenance margin levels set was an arbitrary approximation of liquidation cost rather than their true cost. Liquidity in CLOBs is inherently a path-dependent function of time (due to it being the summation of market choices of external parties whose future actions and availability cannot be reliably predicted). Therefore, accurately forecasting market depth to calculate the residual liquidation cost is extremely difficult, if not impossible, under current infrastructure. The current, and traditional way, is to set arbitrary approximations. When these approximations fail–as they inevitably do–the residual losses are transferred to traders and LPs. This may come in the most obvious form (ie. socialized losses, drawdowns, clawbacks, etc.) or in hidden forms. Since HLP is also an MM across other markets, holding toxic inventory restricts its universal balance sheet by increasing spread, slippage and depth across all markets. In this case, HL forcefully set the $JELLY price to be significantly lower (from $0.5 -> $0.01), forcing HLP to come out in profit. Props to them for prioritizing recouping everyone, but the cost paid here is decentralization. As I mentioned before in response to the previous $4M drain on HL, this would never happen on Vest due to it having a market making model that doesn’t rely on external parties for pricing liquidity. By pricing via a transparent and predictable risk engine, it is able to quantify liquidation costs dynamically and incorporate them directly to the trader in the form of margin requirements. This approach ensures that only the trader bears the true economic cost of liquidation.