Hyperliquid attacks expose the cruelty of CEXs and that traders don't understand how perpetual contracts work

https://img.leopedia.io/DQmZpGXowYw5GJojqqiwUmcjPNqHjHaYPFhe9SEUaBNz4qY/file-KRTDrpnmHwATzuNkkcRaHN.webp

I've always been of the notion that there's very little being invested into crypto education and it shows almost every day in how investors, traders and general users are often lost in the sea of confusions when certain events unfold.

Also, people generally don't bother to individually educate themselves when it comes to these things and you can't really blame them when ideas and systems that relate to finance and investment are often complex and not properly explained for most to understand.

Plus, whenever there's provisions of educative materials, it often looks like a T&C contracts, and the average person definitely does not want to read T&Cs. What they want is to quickly open that 80x leveraged long on the now pumping dog coin.

So why waste time reading what you won't comprehend because it's likely written for SEO first, and not really your understanding, when you could just go right ahead and use the system and whatever happens, happens as you make your way through every feature and kinda just learn in the process?

Sure, it's a costly alternative but it's one most people deal with anyways.

I, personally, am guilty of using such systems without soughting any form of education. I traded Perps before knowing anything about how it works and I made a killing profit that you can guess, got wiped out at some point with initial capital going with it.

If you look on trading feeds, you'll see that most people start up this way too.

The educating oneself part tends to really just come afterwards and recent events on Hyperliquid, an onchain perpetual contracts market based on its own L1 shows that most people are on a boat of confusions and the reason is quiet hilarious.

Before I go ahead to cover what happened, I would like to restate that it's still a common speculation that Binance(and possibly other CEXs) is involved in what seems to be attacks at Hyperliquid in a bid to either crush it's social trust as an onchain perpetual market meant to offer a decentralized trading alternative to the centralized exchanges or to directly wreck or exploit flaws in the system that allows for max value extraction to leave the platform crippled.

Hence the title of the article.

If I'm not mistaken, this is not the first attempt to attack Hyperliquid in the past two weeks, but this one is definitely one to look at and learn from.

Hyperliquid’s unusual trading activities

First off, one thing this events reveal is that Hyperliquid is not decentralized, but decentralization is a process right? It's a new project, we can give it time right?

I would cut them some slack to be honest because decentralized or not, they've deliver a product that's going to challenge more developers to build better alternatives and this just helps the ecosystem achieve fully on-chain trading experiences where risks can be spread out.

But of course, this is not a promotion for Hyperliquid, I have never used the platform and also have never done any real reading into how it all works, so, DYOR if you need to use it.

Moving on.

A trader deposited $7.167M on 3 separate Hyperliquid accounts within 5 minutes of each other. He then made leveraged trades on an illiquid coin, JELLYJELLY.

Two of his accounts took $2.15M and $1.9M long positions on JELLYJELLY:

0x20e8fD36dcdEF8DfbB983B0bc06c658105b9a808 [Gain: $900K]

0x67fe6F372c2Bd7ce0AA660144568F80A7cD85CA2 [Loss: $167K]

While one of the accounts took an opposing $4.1M short position on JELLYJELLY, to cancel this out:

0xde9593Fe5cDC5Cb0917f5d5618A111F1174f5c91 [Loss: $767K]

This allowed him to build up leverage in an attempt to drain funds from Hyperliquid.

When the price of JELLYJELLY increased, the $4M short position swiftly entered liquidation - but the size was far too large to be liquidated normally.

This open short was passed to the Hyperliquidity Provider Vault (HLP) which is supposed to attempt to liquidate the massive position.

Meanwhile - the exploiter was withdrawing collateral from 0x20e and 0x67f while having 7-figure positive PnL to withdraw from, as the price of JELLYJELLY had pumped by over 400%. — full summary by Arkham Intelligence on X

What appears to be the general confusion from users and traders is why Hyperliquid could not just close the position after the trader had been liquidated.

Most of crypto traders don't really understand that “liquidation” isn't some magic clearing of orderbooks and that perpetual contracts are really just spot markets with leverage and without ownership of underlying assets, meaning that it still requires counterparties to trade with even though you don't really acquire an asset in the process.

The position could not be liquidated under normal conditions because this was a lowcap shitcoin with little perpetual traders. Liquidation means selling, and to sell, you need someone willing to buy at the price. People seem to think that Hyperliquid could have just turned off the switch, not understanding that they literally had to inherit the bad debt because the market lacked the liquidity to buy up the poorly positioned short order.

At the end of the day, they protocol managed to close the position in profits of about $700k and I believe they've delisted the perpetual contract based on the concensus of their small validator network and promise to make affected users not involved in the exploit whole.

It's most people's understanding that Binance, Wintermute(as always) and other CEXs are potentially responsible for these attacks because we have them on X flooding the timeline with “opinions and analysis” on how this is bad for crypto and the very use of certain terms makes me believe there's an intention to trigger a legal response from regulators.

Bitget CEO specifically called Hyperliquid an offshore CEX with no KYC/AML enabling illicit flows and bad actors and claiming that it's FTX 2.0. It's funny she would say that when Bitget has had questionable designs to its matching engine and I've personally analyzed some of their order books and found that they print IOUs for assets they don't hold anywhere on-chain. Certainly not the person that should be talking about unethicality when it comes to exchange operations.

It's also too obvious that all the CEXs want to kill Hyperliquid. Fun fact: in the midst of all of this, guess who announced the listing of the crap coin in a bid to liquidate Hyperliquid?

Binance and OKX.

It's pathetic and to that I say fuck @binance and every CEXs. DEXs have to fight these wannabe Wallstreet.

Posted Using INLEO