This episode unpacks the controversial Hyperliquid intervention during the Jelly Jelly short squeeze, revealing deep tensions between decentralized finance ideals and centralized decision-making in high-stakes trading environments.
Hyperliquid's Jelly Jelly Market Intervention
- The core drama centers around Hyperliquid, currently the leading decentralized exchange (DEX) by volume, known for its perpetual futures (perps) market and popular airdrop. Haseeb explains a complex attack involving Jelly Jelly, a low-liquidity memecoin listed on Hyperliquid.
- A trader initiated a massive $8 million short position on Jelly Jelly (reportedly ~50% of its circulating market cap at the time). Subsequently, this trader intentionally pumped the spot price of Jelly Jelly on other venues, forcing their own large short position on Hyperliquid into liquidation.
- On Hyperliquid, when liquidations become disorderly, HLP (Hyperliquid Liquidity Provider) steps in. HLP is essentially a crowdfunded market-making pool, primarily composed of retail deposits, designed to absorb liquidation flows and maintain market liquidity. In this case, HLP was forced to take on the massive, toxic Jelly Jelly short position with limited avenues to exit.
Analyzing the Hyperliquid Response and HLP Bailout
- Instead of allowing HLP depositors to absorb the significant losses from the toxic short position, Hyperliquid validators intervened. They voted to delist the Jelly Jelly market and manually settle outstanding positions using an oracle price far below the market price at the time—even below the price before the incident began. This action effectively made the HLP pool profitable on the position.
- Tarun points out that HLP's strategy management is already somewhat centralized and opaque, run off-chain by the Hyperliquid team without full transparency or trustless guarantees. He notes, "there's a sense in which the pool is not really trustless already." He adds that Hyperliquid acknowledged mistakes in risk management (lack of position/OI limits) and plans to implement fixes.
- Robert views the decision to make HLP profitable as the "cardinal mistake," arguing it represented the Hyperliquid team/validators unfairly choosing winners (HLP depositors) and losers (other market participants) rather than letting the market and risk parameters play out. Tom concurs, calling the chosen settlement price "crazy." The intervention caused a significant drop (~25%) in the price of Hype, Hyperliquid's native token.
Exchange Dynamics and the "Kill Shot" Theory
- Adding fuel to the fire, major centralized exchanges (CEXs) OKX and Binance rapidly listed Jelly Jelly perpetual futures shortly after HLP inherited the short position. Haseeb interprets this as potential "exchange warfare," an opportunistic move by CEXs to exacerbate the short squeeze and potentially "bleed out" HLP, thereby damaging a key DEX competitor.
- Robert expresses skepticism about the direct impact mechanism, noting that perp markets are distinct from spot and every long has a short. However, Haseeb counters that listing perps is faster than spot (no need to source inventory) and allows broader participation in the squeeze, potentially driving funding rates (which did blow out) and increasing pressure on the short side held by HLP. This contrasts sharply with recent CEX behavior during the Bybit hack, where competitors offered support.
HLP, Hype Tokens, and Systemic Risk
- The intervention created a perception, highlighted by Haseeb (citing Kevin Zhou), that there is now an implicit "Hyperliquid put" on HLP – meaning the platform will step in to prevent catastrophic losses for HLP depositors. This perceived guarantee links HLP's financial health directly to Hyperliquid's reputation and the Hype token's value.
- Tarun offers a nuanced view, framing HLP depositors as quasi-debt holders with claims, while Hype token holders represent the true equity, controlling the protocol and, crucially, the oracle mechanism. Tom draws a stark parallel to FTX/Alameda, stating, "I feel like we should have learned after FTX that an exchange and a hedge fund like thing or a proprietary market maker trading on the exchange should be separated," especially if the exchange implicitly guarantees the market maker's solvency. The speakers debate whether HLP was ever truly independent, given the team runs its strategy and it's integrated into the liquidation process.
Future Implications for Hyperliquid and HLP
- The incident sparks debate about HLP's future. Haseeb suggests the perceived safety net might attract more capital to HLP. Robert strongly disagrees, arguing the event exposed critical vulnerabilities, increasing perceived risk and likely driving capital away. Tarun acknowledges both forces could be at play.
- A bet is made: Haseeb believes the ratio of HLP deposits to total exchange Open Interest (OI) will be higher by year-end; Robert believes it will be lower. The market's immediate reaction was a significant drop in HLP's Total Value Locked (TVL), from roughly $300M to $185M, indicating an initial loss of confidence.
- Actionable Insight: Investors should closely monitor HLP TVL, the HLP/OI ratio, and third-party market maker activity on Hyperliquid as key indicators of market confidence and the perceived risks following this intervention.
Sei Foundation Explores 23andMe Acquisition: A DeSci Play?
- Haseeb introduces news that the Sei Foundation is exploring an acquisition of the bankrupt genetics company 23andMe. Sei pitches this as a Decentralized Science (DeSci) initiative to protect user data privacy using blockchain, returning data ownership and potential monetization control to users.
- Tarun expresses extreme skepticism, questioning Sei's expertise in the complex field of privacy-preserving technologies required for such an undertaking. He dismisses the blockchain-based data monetization aspect as a recycled "2017 ICO pitch" and contrasts Sei's proposal with the likely motives of other bidders (computational biology firms seeking training data). He worries about the high risk of accidental data exposure if handled improperly.
- Actionable Insight: While representing ambition in the DeSci space, this potential acquisition highlights the significant technical, ethical, and execution risks involved. Investors should critically assess the technical feasibility and privacy implications of such ventures, especially when proposed by teams without proven expertise in sensitive data handling and advanced cryptography.
Reflecting on the State of DeSci
- Expanding on his skepticism, Tarun characterizes much of the DeSci space as akin to "memecoins with better branding" or "affinity scams." He argues they often appeal to users wanting to feel they are contributing to social good but lack verifiable mechanisms or transparent impact tracking, comparing the dynamic to past projects like KlimaDAO.
- The discussion briefly touches on the surprising resilience of OlympusDAO (OHM), which has seen price appreciation likely due to active treasury management and yield distribution, demonstrating a different model of post-hype survival.
- Actionable Insight: Crypto AI researchers and investors evaluating DeSci projects should demand rigorous technical validation, clear privacy safeguards, and transparent, verifiable impact metrics, distinguishing genuine innovation from purely narrative-driven token projects.
US Stablecoin Legislation Update: Stable Act vs. Genius Act
- Haseeb outlines the emergence of a new stablecoin bill in the US House of Representatives, the "Stable Act," sponsored by French Hill. This is contrasted with the previously discussed Senate bill, the "Genius Act," sponsored by Kirsten Gillibrand (leading to some amusement over the potential "Stable Genius" combination).
- The Stable Act is presented as significantly more restrictive: it mandates Federal Reserve oversight only, permits only banks or approved subsidiaries to issue stablecoins, imposes a heavier compliance burden, prohibits yield payments on stablecoins, and includes a two-year moratorium on new algorithmic stablecoins (grandfathering existing ones).
- The Genius Act is comparatively more industry-friendly: it allows for both bank and non-bank issuers, permits state-level regulation alongside federal, potentially allows yield payments, and emphasizes interoperability.
The "Narrow Bank" Debate and Stablecoin Implications
- Tarun connects the restrictive aspects of the Stable Act (especially the yield prohibition) to historical debates around "narrow banks." A narrow bank is conceptually a bank engaging in very limited activities, often envisioned as holding 100% reserves (e.g., at the Fed) and passing interest back to depositors, posing minimal credit risk but potentially competing directly with traditional fractional reserve banks.
- The speakers discuss why regulators, particularly the Fed, historically resisted narrow banking – primarily due to competition with the existing banking sector and potential impacts on monetary policy transmission. Haseeb suggests that stablecoins, particularly under a Genius Act framework allowing yield, could function as a form of narrow bank, competing for deposits but potentially offering the US geopolitical advantages via dollar internationalization that traditional narrow bank proposals lacked.
- Actionable Insight: The regulatory treatment of stablecoin yield is a critical point. Prohibiting yield (Stable Act approach) would likely protect incumbent banks from deposit competition, while allowing it (Genius Act potential) could position stablecoins as highly competitive savings vehicles, fundamentally altering parts of the financial landscape.
Political Outlook and Final Bill Predictions
- Robert shares insights from recent meetings in Washington D.C., reporting strong bipartisan consensus that stablecoin legislation is achievable and likely the first major piece of crypto regulation to pass, being viewed as less controversial than broader market structure reform.
- His prediction for the final reconciled bill: it will likely lean towards the less restrictive Genius Act framework in most aspects (e.g., issuer types, state involvement) but will ultimately prohibit the payment of yield on stablecoins, reflecting successful lobbying by the traditional banking sector.
- Actionable Insight: Expect US stablecoin legislation to materialize relatively soon. While the exact structure is debated, the prohibition of direct yield payments by issuers appears probable, influencing stablecoin design and their role relative to traditional banking products.
Hyperliquid's intervention highlights DEX governance risks versus centralized control. Stablecoin legislation progresses, shaping market structure. Investors/researchers must track DEX integrity debates and anticipate regulatory impacts on stablecoins and banking competition.
