A New Round of Competition in the Crypto Market: Reflections on the Hyperliquid Incident

In 2021, individual investors in the US had an intense showdown with Wall Street short sellers over GameStop. Now, a similar scenario is playing out in the crypto market. A single whale nearly caused decentralized exchange Hyperliquid to lose nearly $230 million.

This is not just a simple "pulling the plug" incident; it also involves a crisis of decentralization, compromises of ideals, and intense clashes of interests in the encryption trading ecosystem. Let's review this event and discuss whether retail investors really won, and who the ultimate winner is.

Retail investors force a short squeeze, platforms cut losses.

JellyJelly encountered a short squeeze, surging 429% in just one hour. Subsequently, Hyperliquid Vault took over a trader's short position after their self-explosion, which at one point had an unrealized loss exceeding 12 million USD.

The situation is critical: If JellyJelly rises to 0.15374 again, the $230 million funds in the Hyperliquid Vault will be completely wiped out. As funds continue to flow out, the liquidation price of JellyJelly will further decrease, creating a vicious cycle.

The attacker precisely exploited the four major vulnerabilities of the system:

1. Illiquid assets lack real position constraints
2. Weak oracle manipulation resistance mechanism
3. Automatic Position Inheritance System
4. Lack of circuit breaker mechanism

This is not just a trading operation, but a precise strike against the system's weaknesses, pushing the platform into a dilemma: either watch helplessly as massive funds face liquidation risks, or abandon the "decentralization" principle and take emergency intervention measures.

Market sentiment has reached a boiling point, with numerous individual investors joining the siege, and some influential opinion leaders calling for major exchanges to intervene. These actions have triggered further fluctuations in the price of JellyJelly.

Just when retail investors thought victory was in sight, Hyperliquid initiated an emergency validator vote and quickly delisted the JellyJelly token. This decision reached "consensus" in just two minutes. The platform then issued a statement announcing that the governance committee had urgently intervened and delisted the involved assets, demonstrating the platform's determination to stabilize the market and forcibly quell this short squeeze.

This historically intense encirclement operation ultimately ended with institutions being the first to "admit defeat" and withdraw.

The Myth of "Decentralization" in DEX Shattered?

The Hyperliquid event indicates that even in 2025, fully decentralized exchanges will still only exist in theory.

This matter exposes a major flaw in the platform: it allows for the opening of oversized positions in low market capitalization and low liquidity currencies, which the market simply cannot withstand in terms of liquidation scale. In other words, the market depth is insufficient to support such a large trading volume. Once a short squeeze occurs, liquidity collapses directly, rendering the liquidation mechanism virtually non-existent.

The platform was supposed to play a neutral role, but now it has become a participant in the betting game. Ironically, when the situation turns unfavorable, it quickly switches back to the role of regulator and directly shuts down the trading.

The market's confidence in decentralized exchanges has been severely impacted. The "consensus" passed in two minutes allowed the governance committee to arbitrarily change the rules, stating that if a trading pair is to be closed, it will be closed. These actions are even more decisive than many centralized exchanges. People can't help but start to question: is the so-called "decentralization" only effective when the market is stable, and once it spirals out of control, does it become "anything goes"?

If decentralized exchanges can also "force delistings", then what is the real significance of decentralization? Are centralized exchanges more reliable, or are decentralized exchanges more trustworthy?

The Contradiction Between Decentralized Philosophy and Capital Efficiency

From the perspective of "decentralization", DEX seems to be safer because assets are always in the user's wallet, without the need to worry about being misappropriated by centralized institutions. The automated market maker mechanism ensures the feasibility of decentralized trading, but the drawbacks are also obvious: poor liquidity, high slippage, and the existence of impermanent loss, resulting in an average user experience. Most people use DEX either for long-term holding or for participating in airdrops, with a poor daily trading experience.

In contrast, centralized exchanges (CEX) are user-friendly, provide ample liquidity, and have powerful functionalities, making both contract trading and spot trading very smooth. However, this convenience comes at a cost: once funds are deposited into the exchange, users lose direct control over their funds. There have been too many historical incidents of exchanges being hacked or going bankrupt, and no one can guarantee that they won't become the next victim.

The Hyperliquid event is a typical embodiment of this dilemma: there is a natural conflict between the concept of decentralization and capital efficiency. Pursuing absolute decentralization will inevitably affect capital efficiency; whereas pursuing the highest capital efficiency often requires a certain degree of centralized control.

This is a classic ethical dilemma: should one adhere to the principle of decentralization, accepting potential systemic risks and losses in capital efficiency, or should one sacrifice some decentralization when necessary to ensure system security and capital efficiency? Hyperliquid chose the latter, taking emergency measures to protect the protocol in the face of massive losses, but this also attracted severe criticism.

Interestingly, many critics have faced similar dilemmas themselves. For instance, certain trading platforms took emergency measures in March 2020 during the market turmoil, directly suspending trading. At that time, failing to take these measures could have resulted in catastrophic consequences for the entire crypto market. This fact highlights the complex relationship between ideals and reality.

The Future Development Direction of the Crypto Market

Looking to the future, DEX may develop in the direction of "partial decentralization + transparent rules + intervention when necessary," rather than pursuing the extremes of "complete decentralization + laissez-faire market" or "complete centralization + black-box operations + frequent intervention."

In the balance between crypto culture and capital efficiency, the new generation of DEX will seek a certain equilibrium that retains sufficient on-chain transparency and user control while effectively protecting system security and user assets in times of crisis. This balance is not a betrayal of ideals, but a pragmatic response to reality.

CEX is also facing pressure to transform. In the face of users' concerns about asset control and competition brought by DEX, CEX is undergoing a strategic transformation centered around Web3 wallets. Whether it is industry-leading exchanges, established exchanges, or emerging exchanges, they are all trying to balance the convenience of centralized trading with the security guarantees of decentralization through the "CEX + Web3 wallet" model:

• A well-known exchange has not only expanded its business scope by actively developing its wallet services but has also successfully consolidated its position in the industry.
• Another large exchange acquired a wallet company as early as 2018, but it was not until the rise of the DEX market posed substantial competitive pressure that it began to truly value its Web3 wallet business, significantly increasing investment in research and development as well as marketing.
• Some established exchanges are also following the trend by building their own Web3 wallets and have specifically set up innovation zones to introduce popular Meme coins and emerging projects, catering to users' trading needs for high-risk, high-return assets.
• Recently established emerging exchanges have also proactively launched fully functional Web3 wallets and have taken the lead in connecting to multi-chain ecosystems, providing users with more flexible asset management options.

This transformation is not only a response to user needs but also an adaptation to the logic of industry development. By integrating Web3 wallet functions, CEX retains the depth and efficiency of centralized trading while providing users with the choice to independently control their assets. Users can decide based on their needs when to place their assets in the exchange for convenience and when to transfer them to their own controlled wallets for security.

As the industry matures, we may see more solutions that coexist with "bounded decentralization" and "transparent centralization." In this new stage of integrated development, participants who can find the best balance between transparency, security, and efficiency will stand out in the increasingly fierce market competition.

Combining the efficiency of CEX and the transparency of DEX, this may be the next development stage of crypto trading - not a contradiction of ideas, but a fusion of advantages.