Only two months ago, the total value of the blocked funds (TVL) in hyperlichid, an exchange of decentralized derivatives (DEX) that allows merchants to generate yields by reference to a shared vault, sat down to a record of $ 540 million.
Now, users are fleeing, TVL has collapsed to $ 150 million and the yield has fallen to a miserable 1%, in many cases, less than they would get if they hid their cash in a bank account.
The problem is a feat that saw a user manipulate the price of a token called gelatin and force the vault, known as hyperliquidity supplier, in a loss. But the negative NLP was not the reason for the exodus. Rather, it was Hyperliquid’s response, which led to concerns about how decentralized the protocol was really, and if he was acting exactly like the centralized exchange model from which he tried to distance himself.
For manipulation, the user shortened the gelatin in hyperlichid, which are sold tokens that do not possess. They also bought tokens in Illicid decentralized exchanges. The lack of liquidity cheated the price oracle to transmit an inflated price to the hyperlichid, which forced the hyperlichid vault to inherit a toxic position through liquidation.
As the price of the gelatin increased even more due to the purchase pressure at the point, the NLP for the Hyperliquid vault sank more into red. Finally, the exchange force closed the gelatin market, solving it at $ 0.0095 instead of the $ 0.50 that fed on oracles through decentralized exchanges.
This meant that the negative NLP was cleaned and, on paper, the vault served well throughout the saga. But the action raised concerns about the control of what is intended to be a decentralized process. At that time, Newfound Research CEO, Corey Hoffstein, questioned the legality of Hyperliquid’s actions and social networks descended to indignation.
Some believe that exploit was a mistake by Hyperliquid.
“The gelatin exploit in Hyperliquid was not a coincidence,” Jan Philipp Fritsche, Oak Security managing director, told Coindesk. “It was a case of risk textbook vega inaccuantly: when trade leveraged in volatile assets is allowed without properly taking into account how this volatility can exhaust the risk background. The attacker opened mass opposition positions in the gelatin, knowing that one side would collapse and the other would withdraw.
“This is not theoretical. It happened. And it will happen again. We mark this exact risk vector in audits before, but economic defects are often ignored because they are not technical. That is a mistake,” Fritsche added.
In this case, the manipulator ended with a small loss.
It is worth noting that hyperlichid tried to remedy centralization concerns, updating its system to a validator in the chain voting for the elimination of assets, which means that the exchange cannot eliminate as a jelly in the future without consensus of validator.
The volume remains stable as the hype falls
While the vault suffered a great blow in terms of trust and brand, the exchange itself continues to mark well in terms of commercial volume. More than $ 70 billion have been obtained in volume so far this month and seems to be on their way to break their January 197 billion record.
Even so, the native token of the exchange (HYPE), which was distributed to users in December, has not been able to imitate the positive performance of the exchange, losing 60% of its value in the last four months with its market capitalization decreasing from $ 9.7 billion to $ 4.6 billion.
