Compiled by Waiwai Y.

Top VCs Analyze JellyJelly Incident, Binance vs. Hyperliquid Conflict, and the Future of Stablecoin Regulation.

Host:

Haseeb Qureshi, Managing Partner at Dragonfly

Robert Leshner, CEO & Co-founder of Superstate

Tarun Chitra, Managing Partner at Robot Ventures

Tom Schmidt, General Partner at Dragonfly

Podcast Source: Unchained

Original Title: Exchange War Erupts: Hyperliquid vs. Binance & OKX - The Chopping Block

Air Date: March 30, 2025

Highlights

• Hyperliquid’s JELLYJELLY Debacle – How a DeFi darling nuked its credibility by bailing out its own vault at a fake oracle price

• The Exchange Wars Heat Up – Why Binance and OKX listing JELLYJELLY perps looked like an assassination attempt on Hyperliquid

• Are DEXes Just CEXes in Disguise? – What the Hyperliquid saga reveals about decentralization theater and validator capture

• 23andMe on the Blockchain – SEI Foundation wants to token-gate your DNA; is this privacy-preserving or dystopian?

• The Great DeSci Grift – Tarun revisits his war on DeSci and why putting genetics onchain is worse than memecoins

• Stablecoin Regulation Showdown – The Stable Act vs. The Genius Act and who’s really winning in D.C.

• Stablecoins as Narrow Banks – How crypto may finally force the Fed to accept a 20-year-old idea they’ve long resisted

• Red Bull & Ratio Bets – The hosts make a real-money wager on whether HLP deposits will rise or fall after the meltdown

• Memecoins and the Return of Olympus – Are the robbers now just quietly collecting rent from their broken treasuries?

• Tarun’s Aesthetic Death Rankings – Why JELLYJELLY is a worse way to die than MobileCoin, but at least it’s on brand

Hyperliquid Drama Unfolds

Haseeb:

So one of the biggest stories of the week has been this drama playing out on Hyperliquid. For those of you not familiar, Hyperliquid is the new hot DEX. They're now the No. 1 DEX by overall volume. They're a huge perp exchange. They had a massive airdrop. They've been kind of a darling of crypto retail because of the size of their airdrop and the fact that it was fair-launched.

Now there was a massive attack that took place over the last couple of days against Hyperliquid. It centers around a meme coin called JellyJelly. You don’t need to know the backstory of JellyJelly, but you do need to know that it’s a very low-liquidity meme coin that’s past its prime. JellyJelly was listed as a perp on Hyperliquid.

What happened was that a trader opened an $8 million short on JellyJelly. This was around 50% of the circulating market cap of JellyJelly at the time, meaning it was a massive short position. The trader then went off Hyperliquid and pumped the spot price of JellyJelly, causing themselves to get liquidated.

Why would the trader do this? On Hyperliquid, when a position cannot be liquidated in an orderly way, HLP—Hyperliquid’s crowdfunded market maker—takes on the position and tries to liquidate it in an orderly way. HLP has a bunch of retail deposits and is fundamental to Hyperliquid’s liquidity.

Now, this position was so big that HLP was short JellyJelly with no way to get out of the short. There weren’t enough people willing to take the short position or go long to offload it. What happened next was a short squeeze.

The short squeeze wasn’t just retail traders deciding to exploit Hyperliquid. Two other parties, OKX and Binance, entered the short implicitly. The moment people realized HLP was massively short JellyJelly, OKX and Binance announced they were listing JellyJelly perps within 24 hours.

Almost everyone assumed this was exchange warfare—CZ at Binance and Star at OKX saw an opportunity to take down Hyperliquid.

Instead of Hyperliquid or HLP holders eating the loss, Hyperliquid validators voted to delist JellyJelly and manually close out the position at an oracle price that wasn’t the real price. The oracle price was below even the starting price of this fiasco. Hyperliquid decided that the traders who shorted them were bad actors. So instead of letting HLP holders take the loss, they artificially closed out the price to make HLP users whole.

This caused a lot of conversation. First, it dropped the price of Hyperliquid significantly—down 25% in a single day. Second, it raised debates about what Hyperliquid should have done and whether this incident revealed that Hyperliquid isn’t as decentralized or fair as it claimed to be.

Centralized exchanges like Bitget have called out Hyperliquid, while OKX accused them of being unfair. This feels like a watershed moment in the exchange wars, extending to DeFi.

Tarun:

These types of protocols have certain deficiencies. Similar to AMMs, they can’t reject orders without pulling liquidity. There’s no way to pick and choose orders. HLP has similar issues.

The difference between HLP and predecessors like GOP from GMX or JLP from Jupiter is that Hyperliquid balances market-making across many assets. For example, if you deposit ETH into HLP, Hyperliquid might use 1% of it to market-make on JellyJelly, 90% on ETH, and the rest on BTC. The allocation algorithm is off-chain and managed by a single whitelisted entity.

This means the pool isn’t trustless. You’re trusting Hyperliquid’s team to manage allocations. They’ve acknowledged mistakes in their strategy, such as not having position limits, cap sizes, or open interest (OI) limits. These could have prevented emergency price intervention.

Haseeb:

So the fix they’re implementing is per-open interest limits and concentration limits for HLP positions.

Tarun:

Yes, and they’re also adding constraints on the types of positions HLP will liquidate. Right now, HLP automatically trades against positions like a Uniswap pool. If they had a way for HLP to discriminate between orders, the market could price the value of those positions, and HLP wouldn’t have to eat the loss.

Right now, HLP’s strategy is managed off-chain by Hyperliquid. Most of their code isn’t open source, so there’s no transparency into how it works. HLP depositors don’t know the risk limits or if HLP will devalue the oracle price like it did here.

This incident shows the need for more transparency in strategy. While a private strategy can be more capital-efficient, Hyperliquid clearly made wrong decisions. They’ve learned from this, but it highlights the trade-offs between efficiency and transparency.

Debating the Bailout Decision

Haseeb:

One big question I have is: do you think it made sense to bail out the HLP depositors? Obviously, the HLP would have taken pretty significant losses. Do you think this was a mistake?

Robert:

No, I think this was the core mistake. Resolving a market after messing up the risk parameters of the platform is one thing. But closing it out in such a way that the HLP pool profited after being in a horrific position is confusing. When anybody profits in a perp market, somebody else loses. This is a clear example of the Hyperliquid team or validators choosing an incorrect winner and an incorrect loser.

The HLP liquidity providers backing this platform market maker are entering into a risky proposition. If the liquidations are successful, they make money. If unsuccessful, they lose money. On the other side of this, when closing out the market, you have all the people participating in the perp market—those who happen to be long or short. Somehow, the HLP pool ended up profiting, which means somebody else lost.

In this situation, I think that’s inverted. The whole system would have been better off if they hadn’t done it in a way where they profited, so to speak, while the user base as a whole lost. If you’re going to pick a price and rig it, don’t pick one that favors yourself. Honestly, they picked a crazy price—lower than where the fiasco even started. It’s like they chose to give themselves a winner.

Tom:

I agree. It creates this weird tension between HLP as a product and Hyperliquid as a platform. HLP isn’t the only vault—there are other vaults people deposit into that run off-chain strategies. The perception of HLP is that it’s a first-party vault product, but anyone can run a vault.

People online have compared this saga to loss socialization or auto-deleveraging on other perp exchanges, where markets below margin freeze positions and socialize losses through the insurance fund. But this isn’t that. Here, HLP was in a loss, but Hyperliquid itself wasn’t at risk of default.

This creates a strange perception: why is HLP a favored liquidity provider on this exchange? If they have a bad trade, they get bailed out. What do other market makers or traders think about this?

Tarun:

They were bailed out at a profit through HLP-holder-denominated oracle manipulation. That’s the weird thing—the Hype token holders voted to give the HLP holders this profit.

Robert:

Can you be specific? What’s the exact mechanism by which Hype token holders participate in validating Hyperliquid?

Tom:

You can delegate to a validator, but some of them require KYC. It’s still a little unclear.

Tarun:

They control the oracle. The governance vote chose the oracle price. So Hype token holders effectively voted.

Robert:

Indirectly voted through validators?

Tarun:

Yes, they voted by governance to reduce the market and choose an oracle price.

Haseeb:

There’s a lot of criticism because the foundation itself runs a supermajority of the Hype tokens. Hypothetically, token holders vote through delegation. But this whole thing happened in about two minutes—from the beginning to the end of the vote—so there wasn’t enough time for voters to actually have a say.

Robert:

Let’s go back to the original point—this is an attack scenario where two exchanges not affiliated with Hyperliquid listed perps at the same time. I don’t necessarily agree that other exchanges listing perp markets would impact Hyperliquid directly. The perp markets are just another trading venue detached from the spot market. Excess demand on a new Binance JellyJelly perp, for instance, wouldn’t necessarily change the price on Hyperliquid or the underlying spot market that controls the funding rate on Hyperliquid. What’s the mechanism of transference?

Haseeb:

If you’re Binance, you need actual spot inventory, and it takes longer to source that. It’s faster to launch a perp market than a spot market. For a perp market, you don’t need inventory on your platform. Someone has to figure out how to get inventory to move the spot price and align it with the index. But for perps, all you need is demand for people to trade them.

Robert:

For every long, there’s a short.

Haseeb:

Right. Structurally, it’s simpler. If you want to “kill shot” someone quickly, the fastest way is perps, not spot.

Robert:

But how is it a kill shot?

Haseeb:

It gives more people access to participate in the short squeeze.

Robert:

But for everyone longing on Binance, someone is shorting on Binance too.

Tarun:

That’s not entirely true—it depends on the funding rate dynamics.

Haseeb:

If the funding rate goes to zero, then yes.

Tarun:

But the funding rate blew out—it went up 300% in one hour. The funding rate was extremely out of whack.

Robert:

That’s fine, but that’s less than 1% a day.

OKX & Binance Join

Haseeb:

There’s a crazy short squeeze on JellyJelly, but it’s clear there’s no real demand for it. Markets expect JellyJelly perps to be delisted within a week or two.

Tarun:

No one wants JellyJelly, no matter what Sam says.

Haseeb:

Fundamentally, Hyperliquid got stuck with a toxic position, and Binance and OKX jumped in to bleed out Hyperliquid further, trying to force HLP into insolvency. Some compare this to CZ’s move against FTX, but I don’t think it’s true. During the Bybit hack, Binance and Bitget came to Bybit's defense by lending ETH to cover the shortfall. This behavior is the opposite of what’s happening now with Hyperliquid.

Kevin Zhou pointed out that Hyperliquid has implicitly created a “put” on HLP. If HLP loses too much money, Hyperliquid will defend it. This is reflected in how Hyperliquid’s price moved dramatically in response with HLPs. But I don’t quite understand the connection between HLP and Hyperliquid’s value—maybe there’s something I’m missing about HLP’s tokenomics?

Tarun:

HLP doesn’t have tokenomics. It’s more like an LP. I view HLP pool as like a compnay having debt.

Haseeb:

It’s not debt; it’s equity in the market maker. Pool investors take all the profits, so it’s not debt.

Robert:

The market maker uses users’ USDC to trade across markets.

Tom:

The reason Hype’s price dumped is that it sours the future of the exchange. Why would someone trade on an exchange with a privileged LP that can’t lose? Why provide liquidity there? This is the same issue that comes up with in-house market makers—how far does this privilege extend?

Tarun:

A cynical take is that most of the HLP liquidity comes from the Hyperliquid team itself. They didn’t want to take the loss.

It was closer to $200 million in the pool at the time. When they bootstrapped the pool, over 75% of the liquidity likely came from the team.

Robert:

Wouldn’t their Hype holdings be much larger than the pool?

Tarun:

The HLP pool behaves more like debt. It takes money from depositors and uses it to market-make across different markets, similar to local loans. For protocols like Jupiter and GLP, this is explicit—they charge fees as lending protocols. In HLP’s case, it charges fees plus spread, and depositors have first-right claims if it defaults.

That’s why I see HLP as closer to debt than equity. Hype is the real equity since it controls the system, including oracles. HLP is somewhere in between but behaves more like a debt instrument.

An FTX Moment?

Haseeb:

Hyperliquid is almost like an exchange that's B-booking, but the B-book activity happens through HLP. HLP is the equity in the B-book, and Hype is the equity in the exchange itself.

Robert

I think we should have learned from FTX that an exchange and a proprietary market maker trading on the exchange should be separate.

Tarun:

To be fair, I can see every trade HLP makes, and I can withdraw whenever I want. It’s very different.

Haseeb:

If the exchange guarantees that the market maker cannot lose money, they’re tied together. If you don’t trust the team running the market maker, don’t buy equity in it. But the way it’s presented is misleading, as if HLP is just one of many market makers when it’s actually the primary one.

Tarun:

There’s already adverse selection in these vaults. This event has made it clear that HLP and Hyperliquid are not separate, even though they were supposed to be.

Robert:

Even before this event, the team behind the exchange was also running the primary market maker. The economics may have been owned by users, but it was still the same group managing both.

Haseeb:

Being tied to the liquidation mechanism does give them some privileges, but it also forces them to take on positions other market makers wouldn’t want. That’s the tradeoff.

Robert:

This is similar to how Alameda took on bad positions on FTX, like MobileCoin, which ultimately blew up the exchange.

Haseeb:

The structure should work such that even if HLP goes to zero due to bad liquidations, Hyperliquid can continue operating. If everything is commingled, the structure doesn’t make sense.

Tarun:

Aesthetically, getting "killed" by MobileCoin feels more honorable than by something like JellyJelly, which is just a VC meme coin with no real value.

Haseeb:

In the wake of this, third-party market makers are likely to avoid Hyperliquid because they know they’re not competing on an even playing field with HLP. However, more capital might flow into HLP because people now see it as protected by the protocol.

Robert:

I disagree. The JellyJelly incident has exposed how small-cap assets on Hyperliquid are easily exploited. The risk of a repeat incident has increased significantly.

Haseeb:

I disagree. Now that this has happened, no one will try it again.

Tarun:

This is like debating whether an airline is safer after a plane crash. The risks are clearer now, but changes are being made to mitigate them.

Robert:

This isn’t a one-off event. Similar issues occurred recently with intentional liquidations in the Bitcoin market, which is a large-cap asset.

Future of 23andMe & SEI

Haseeb:

Let’s talk about some positive news in DeSci. SEI Protocol, a high-performance Layer 1 EVM chain, announced plans to acquire 23andMe, the genetics company that recently filed for bankruptcy. SEI aims to protect the genetic privacy of 15 million Americans by deploying 23andMe on SEI, allowing users to control and monetize their data through encrypted transfers.

Tarun:

Prove to me that anyone at SEI understands privacy-preserving technology. If someone serious about privacy was involved, it might make sense, but this feels like blockchain money being wasted without real solutions.

Haseeb:

Would you support it if they did it right?

Tarun:

If they address privacy properly. But most bidders, like AI drug discovery companies, want the data for monetization. Users are upset because 23andMe’s original privacy terms are void after bankruptcy, and now their data might be sold for purposes they didn’t consent to.

Privacy and monetization are the two main concerns. Some bidders, like nonprofits, aim to preserve privacy, but others are purely profit-driven.

Haseeb:

SEI claims blockchain can help with monetization and privacy. Thoughts?

Tarun:

Monetization sounds like a 2017 ICO pitch that’s doomed to fail. Privacy could be useful, but I’ve never seen anyone successfully let users own and monetize their data while preserving privacy. Blockchain projects often mishandle privacy, leading to accidental data leaks.

Robert:

Putting data on-chain doesn’t inherently improve privacy. It depends on encryption and security measures, but it might actually increase exposure.

Haseeb:

So, you’re not bullish?

Tarun:

Not if crypto projects handle it. I’d trust companies like Nvidia, which have incentives to manage data securely, over most blockchain teams.

Haseeb:

What about low-level cryptography teams like zkEVM projects?

Tarun:

They’re skilled but unlikely to productionize this effectively. Most DeSci projects are just meme coins with better branding, targeting demographics that dislike traditional meme coins.

Robert:

So, DeSci is just meme coins with a nonprofit spin?

Tarun:

Exactly. It’s an affinity scam—“a meme coin that does social good.” Most users don’t verify how the “good” is achieved; they just trust a few DAO token holders.

Stablecoin Legislation: Genius Act vs. Stable Act

Haseeb:

There’s a new stablecoin bill now working its way through Congress. Previously, we mentioned the Genius Act, sponsored by Kirsten Gillibrand. Now, we have another one in the House instead of the Senate, called the Stable Act, introduced by French Hill.

Robert:

I think it’s somewhere between "stable" and "genius"—sort of "stable genius".

Haseeb:

The Genius Act came first, and the previous version wasn’t called the Stable Act. It’s probably a coincidence. There’s no way they’d call it "stable genius" because that’s now an insult used to mock Trump.

Regardless of whether "stable genius" is a joke, the new bill is called the Stable Act. Let’s compare the differences between the Stable Act and the Genius Act. These two versions will compete in the House and Senate to be reconciled into one final bill.

The Genius Act is more industry-friendly. It’s flexible, allowing both bank and non-bank stablecoin issuers. State regulators can oversee stablecoin issuance rather than just federal regulators. It focuses on interoperability, allows yields in some situations, and encourages stablecoin growth.

The Stable Act is more restrictive. It requires direct Fed oversight. Only banks or approved bank subsidiaries can issue stablecoins. It imposes a heavier compliance regime and limits creativity in reserve assets. There’s also a two-year moratorium on algorithmic stablecoins, though existing ones are grandfathered in.

Robert, you said you were in DC talking about stablecoin legislation. What’s your sense of how this bill is being received?

Robert:

Coincidentally, I had a trip to DC recently and met with about 15 members of the House. The number one topic was stablecoin legislation.

There’s excitement from both parties to create pro-crypto, non-controversial legislation. Stablecoin legislation seems likely to be the first major crypto law to pass because it’s relatively simple. The differences between the House and Senate versions should be resolved soon.

There was also discussion about what comes after stablecoin legislation. Many expect market structure reforms, but that feels farther out. Most of the focus right now is on stablecoin legislation. Widespread support exists, especially among the members I spoke to, who were generally pro-crypto.

Are Stablecoins the Trojan Horse?

Tarun:

The first time I heard the phrase "narrow bank" was in 2009. Everyone has been talking about narrow bank legislation forever. It’s like, "Oh, you should have these kinds of banks that are very restrictive on the types of yield they can offer."

Haseeb:

Can you explain what a narrow bank is?

Tarun:

Narrow banks originally were proposed to create banks that only handle simple loans and deposits, avoiding complex trading or risky investments. For example, early fintech apps like Square Cash and Venmo act like pseudo-narrow banks. They let users deposit money but don’t allow yield through exotic investments like prop trading desks or bond portfolios.

The Stablecoin bill, particularly the Stable Act, reminds me of narrow banks. It restricts yield and focuses on safety. It’s interesting how this idea took decades to resurface, now through stablecoins, after a long period where no new bank charters were issued in the U.S.

Robert:

My understanding of narrow banks is slightly different. They park 100% of deposits at the Federal Reserve, maintaining full liquidity with zero risk. These banks don’t need analysts or loan officers; they just pass on Fed rates (e.g., 10-25 basis points) to depositors. Essentially, they act as a wrapper around the Fed.

People liked the idea, but the Fed didn’t because it competes with fractional reserve banks, which expand the money supply through loans. Narrow banks could dry up liquidity for mortgages and other "useful" loans.

Haseeb:

The Fed likely rejected narrow banks because they restrict its ability to control the money supply. If mortgages shift to private lenders, the Fed loses influence over monetary expansion. Stablecoins, however, offer geopolitical benefits by increasing the global reach of the U.S. dollar, unlike narrow banks, which are zero-sum competition against commercial banks.

Robert:

Exactly. Stablecoins could act like narrow banks under the Genius Act, which allows yield by holding Treasuries. But the Stable Act prohibits yield, likely to prevent competition with commercial banks.

Haseeb:

So stablecoins might be a backdoor way to reintroduce narrow banks, but with broader benefits. They expand the dollar’s influence internationally, unlike traditional narrow banks that only harm commercial banks without offsetting benefits.

Robert:

I think the final bill will be less restrictive overall, but it’ll likely prohibit yield on stablecoins. The commercial banking sector doesn’t want competition from stablecoins paying yield.

Haseeb:

It’s frustrating how traditional banks profit from consumer inertia. For example, Chase doesn’t automatically sweep cash into money markets, so idle funds don’t earn yield unless users manually move them. Brokers also profit from idle funds by earning interest while users do nothing.

Tom:

There was even an FTC investigation into Citi for offering two savings products with different rates under similar names. Old customers were stuck with lower rates, but the investigation was dropped under the Trump administration.

Haseeb:

Stablecoins could disrupt this by ensuring cash earns yield automatically, even for lazy users. That’s why they might drain deposits from traditional banks.