Hyperliquid Pauses Arbitrum After $5M Vault Loss

A community-owned vault on Hyperliquid suffered a devastating $4.9 million loss on Wednesday, according to the exchange’s own website. The losses were directly linked to positions being liquidated by an individual using the handle MLM on X. This trader revealed that using $3 million in stablecoins, they had entered into $20 million worth of long positions across 19 separate wallets, all betting on the price of meme coin Popcat to increase.

The massive leveraged positions ultimately faced liquidation as Popcat’s price declined, forcing the community-owned vault to step in and cover the losses. MLM claimed that Hyperliquid eventually “manually closed the position,” but not before the meme coin’s falling price caused substantial damage to the vault. This incident marks another significant setback for the community vault, which has faced temporary losses from user liquidations in recent months.

Blockchain researcher Conor Grogan was among the observers on X who noted that withdrawals resumed processing normally less than two hours after users began flooding Hyperliquid’s Discord server with questions about a potential attack. The rapid response and manual intervention, however, have sparked concerns about the platform’s claims of decentralization.

Hyperliquid’s response to the crisis involved temporarily pausing USDC deposits and withdrawals from the Arbitrum bridge, citing maintenance needs according to notices shared by Discord users. An admin for Hyperliquid’s Discord server using the name iliensinc clarified that “The blockchain is not under maintenance. The Arbitrum bridge is temporarily paused. Other deposits and withdrawals should be unaffected.”

The manual intervention by Hyperliquid to close positions and pause bridge functionality has drawn criticism regarding the platform’s decentralization claims. This incident follows previous volatility issues that led Hyperliquid to delist Solana-based meme coin JELLYJELLY, further fueling skepticism about how decentralized the exchange truly operates. MLM characterized the Popcat-linked activity as “clearly a deliberate attempt to mess” with Hyperliquid and the community-owned vault.

Evidence from the blockchain shows an “EmergencyLock” function was triggered on Ethereum layer-2 scaling solution Arbitrum during the incident, though Hyperliquid’s official status page details no recent incidents. As of the original reporting, the decentralized exchange had not formally acknowledged the situation, despite reaching out from media outlets like Decrypt.

The Popcat token at the center of this controversy has a market capitalization of $136 million according to crypto data provider CoinGecko. While the Solana-based meme coin had risen 5.6% to $0.13 over the past day, the token remains down 91% over the past year, highlighting the extreme volatility characteristic of such assets.

This incident underscores the persistent vulnerabilities in decentralized finance protocols, particularly when dealing with highly volatile assets like meme coins. The community vault model, while innovative, faces significant risks when leveraged positions in unstable assets require intervention. The pattern of manual intervention by Hyperliquid management suggests a tension between operational security and true decentralization principles.

The $4.9 million loss represents one of the more substantial recent incidents in the DeFi space and serves as a cautionary tale about the risks inherent in community-backed trading vaults. As decentralized exchanges continue to navigate the challenges of market manipulation and volatile assets, incidents like Hyperliquid’s Popcat crisis highlight the ongoing evolution—and limitations—of decentralized financial infrastructure.