Hyperliquid (HYPE) is under scrutiny following a market manipulation incident involving the JELLY token. The platform's response to the crisis raised concerns about the effectiveness of its risk control mechanisms.

Some industry leaders warn that Hyperliquid may be following a dangerous path, with comparisons being made to the collapse of FTX in 2022. This centralized exchange failed due to poor management and lack of transparency.

Is Hyperliquid heading for the same fate as FTX?

BeInCrypto reported that the controversy began when a trader executed a manipulation scheme, short-selling the JELLY token and then inflating its price on-chain. This left the Hyperliquidity Provider (HLP) vault of the platform with an approximate loss of $12 million.

In response, Hyperliquid removed JELLY to avoid potential liability of $230 million. It also liquidated positions at $0.0095, replacing the oracle price of $0.50.

Although this has mitigated the damage, it generated widespread criticism. Gracy Chen, CEO of the cryptocurrency exchange Bitget, called the action "immature, unethical, and unprofessional."

Hyperliquid may be on its way to becoming FTX 2.0, she stated.

Chen highlighted that the recent incident raised significant concerns about Hyperliquid's integrity, with user losses casting doubt on the platform's reliability. She also noted that her actions set a dangerous precedent for user trust.

Despite presenting itself as an innovative decentralized exchange with a bold vision, Hyperliquid operates more like an offshore CEX without KYC/AML, allowing illicit flows and bad actors, Chen added.

She also criticized Hyperliquid's product design. Chen emphasized that flaws like mixed vaults expose users to systemic risks, and unlimited position sizes allow for manipulation. If these issues are not addressed, the CEO warned, other altcoins could be used against Hyperliquid, putting it at risk of becoming the next major collapse in crypto.

Interestingly, in April 2023, Hyperliquid CEO Jeff Yan raised similar alarms about Bitget.

Bitget may be the next FTX, it posted.

Criticism of Hyperliquid reveals challenges in the crypto market.

In a series of tweets, Yan highlighted his concerns about Bitget's operations and ethical issues. He criticized the platform for dishonesty in its matching mechanism. Yan stated that Bitget disguises itself as an order book exchange while secretly using a different structure behind the scenes, which he believed to be unethical and possibly illegal.

The co-founder of Hyperliquid detailed how Bitget allegedly profited from the flow of retail takers and copy trading, particularly by manipulating orders. He emphasized that exchanges like Bitget should not receive additional funding, as the crypto industry deserves more transparency and ethical behavior.

Even though it is better now, ethical concerns still remain. I wouldn't touch the exchange even with a 3-meter pole, commented Yan.

However, the tides have now turned, with Hyperliquid facing industry criticism. On-chain investigator ZachXBT revealed that HYPE seemed indifferent to North Korean hackers using stolen funds to open positions on the platform. However, they acted quickly in the JELLY incident.

When is the hack of Radiant with DPRK funds (thousands of victims) they claim they can do nothing and were notified in a timely manner. When it's a low market cap memecoin, the couple of validators and large % of stake controlled by HL rush to close positions at an arbitrary price. Real decentralization is still rare in this space, he wrote.

Former BitMEX CEO Arthur Hayes echoed this criticism of centralization.

HYPE cannot handle JELLY. Let's stop pretending that Hyperliquid is decentralized, Hayes stated.

Meanwhile, the incident also negatively impacted HYPE. It experienced double-digit losses following the incident. Data from BeInCrypto showed that the value of HYPE fell 7.8% in the last day. As of the publication of this text, it was trading at $14.4.

Hyperliquid (HYPE) price performance. Source: BeInCrypto

Not only the price, but the Total Value Locked (TVL) also suffered a decline. Additionally, according to DefiLama data, the HLP's TVL fell approximately 32.3%, from $287.8 million yesterday (26) to $194.8 million today (27).

The article Hyperliquid (HYPE) Actions with JELLY may cause a collapse? was first seen on BeInCrypto Brazil.