In 2021, a "retail investors vs. Wall Street" drama was staged between American retail investors and Wall Street short-selling institutions over GameStop. On March 26, the crypto industry staged this drama again. A giant whale, by his own efforts, almost caused a decentralized exchange "Hyperliquid" to lose nearly $230M.
This is not just a simple "pulling the plug" incident, it covers the crisis of decentralization, the forced compromise of an idea, and the fierce competition of interests among all parties in the crypto trading ecosystem.
Next, let’s review this incident together: Did retail investors really win? Who is the ultimate winner of this incident?
Retail investors squeeze out, institutions admit defeat, Hyperliquid cuts its hand to stop the bleeding
JellyJelly suffered a short squeeze, and in just one hour (SGT: 21:00-22:00), it surged 429%! Subsequently, Hyperliquid Vault took over the short position of a trader who blew himself up, and the floating loss once exceeded 12 million US dollars.
The situation at that time could be described as life-threatening: as long as JellyJelly rose to 0.15374, the $230 million in funds in Hyperliquid Vault would be wiped out. As funds in Hyperliquid Vault continued to flow out, the liquidation price of JellyJelly would be further depressed, forming a death spiral.
The attackers precisely exploited four critical vulnerabilities in the Hyperliquid system:
Lack of real position limits for illiquid assets
Weak oracle manipulation protection
Automatic position inheritance system
Lack of circuit breaker mechanism
This is not just a trading operation, but also a surgical strike on a systemic weakness, which puts Hyperliquid in a dilemma: either watch the $230 million treasury face the risk of liquidation, or abandon the principle of "decentralization" and use emergency measures to intervene in the market.
At this time, market sentiment reached its peak, and many individual investors joined the campaign. At the same time, some influential KOLs posted @ major CEX founders "joining the war". Binance co-founder He Yi responded to a tweet from a community member suggesting that Binance list JELLYJELLY, triggering another fluctuation in the price of JELLYJELLY.
Everyone is hunting down casinos together, and retail investors all want Hyperliquid to die on the spot.
Just when retail investors thought victory was in sight, Hyperliquid launched an emergency validator vote to completely delist the JELLYJELLY token. This decision reached a "consensus" within two minutes, and Hyperliquid quickly issued an official statement, announcing that the governance committee had urgently intervened and delisted the assets involved, showing the platform's attitude towards "stabilizing the market" and forcibly calming the short squeeze.
In this most brutal encirclement and suppression campaign in history, it was the institutions that finally "admitted defeat" and withdrew first.
The "decentralization" of DEX is in doubt: Is the free market disillusioned?
The Hyperliquid incident shows that even in 2025, a fully DEX still exists only in fantasy.
This incident also exposed a major loophole of Hyperliquid: it allowed large positions to be opened in small-cap, low-liquidity currencies, and these positions could not find counterparties to take them when they were liquidated. In other words, the market depth could not support such large orders at all. Once a short squeeze occurred, liquidity would collapse directly, and the liquidation mechanism would become a decoration.
Hyperliquid itself should be a dealer, but now it sits at the table. And after taking over the gambling game, when the situation is not favorable to itself, it chooses to turn back into a dealer and directly closes the casino.
The market's faith in DEX has collapsed, and Hyperliquid has made "decentralization" particularly ironic. The "consensus" was passed within 2 minutes; the governance committee changed the rules as it pleased; it closed trading pairs as it pleased; it was even faster than many CEXs. It makes people begin to doubt whether the so-called "decentralization" is only effective when the market is stable, and once the market gets out of control, it will become "whatever you want".
If DEX also has "forced delisting", then what is the meaning of decentralization? Is CEX more stable, or is DEX more trustworthy?
The contradiction between decentralization and capital efficiency, DEX VS CEX, which one is more reliable?
If we only look at the label of "decentralization", DEX seems to be safer, because the assets are always in your wallet, and there is no need to worry about the misappropriation of centralized institutions. With the addition of the AMM mechanism, DEX ensures the feasibility of decentralized transactions, but the disadvantages are also obvious - poor liquidity, large slippage, impermanent loss, and average experience. Most people use DEX either to store coins for long-term or to take advantage of airdrops, and the daily trading experience is very poor.
CEX is easy to use, deep, and powerful. It is very smooth to do contracts and spot trading, but it has its pros and cons: once you deposit money, the power of life and death is no longer in your hands. Mt.Gox was hacked, FTX exploded, and there are too many "zero-reset" accidents. No one can guarantee that the next one will not be their CEX.
The Hyperliquid incident is a typical example of this dilemma: the natural conflict between the concept of decentralization and capital efficiency. If you want to pursue absolute decentralization, capital efficiency will inevitably be affected; and if you want to pursue the highest capital efficiency, you often need a certain degree of centralized control.
This is a classic "trolley problem": adhere to the principle of decentralization and accept possible systemic risks and capital efficiency losses, or sacrifice some decentralization when necessary to ensure system security and capital efficiency? Hyperliquid chose the latter and "pulled the plug" to protect the protocol when facing huge losses, but this also made it subject to severe criticism.
It is interesting to note that many critics have faced similar dilemmas themselves. BitMEX, one of the critics, also "pulled the plug" and went down during the March 12 incident in 2020, and the outside world has mixed opinions on BitMEX's move. Some people said that if emergency measures had not been taken at the time, it might have had catastrophic consequences for the entire crypto industry. This fact highlights the complex relationship between ideas and reality.
The next stage of crypto market development: complementary advantages and blurred boundaries
Looking ahead, DEX may develop in the direction of "partial centralization + transparent rules + intervention when necessary" rather than pursuing the extremes of "100% decentralization + laissez-faire market" or "100% centralization + black box state + constant intervention".
Between crypto culture and capital efficiency, the new generation of DEX will seek a balance point that not only retains sufficient on-chain transparency and user control, but also effectively protects system security and user assets in times of crisis. This balance is not a betrayal of ideas, but a pragmatic response to reality.
CEX is also facing this transformation. Facing users' concerns about asset control and the competitive pressure brought by DEX, CEX is undergoing a strategic transformation with Web3 wallet as the core. Whether it is the leading exchanges, old exchanges, or new exchanges, they are all trying to balance the convenience of centralized transactions and the security of decentralization through the "CEX+Web3 wallet" model:
OKX is the best example of this trend: by actively developing its wallet business, OKX has not only broadened its business scope, but also successfully consolidated its second market position in the industry.
Binance acquired Trust Wallet as early as 2018, but it paid limited attention to it. It was not until the rise of the DEX market posed substantial competitive pressure on it that Binance began to take its Web3 wallet business seriously, significantly increasing its investment in research and development and marketing, trying to make it a core component in the closed loop of the ecosystem.
The old exchange Gate.io also keeps up with the trend, builds its own Web3 wallet, and specially sets up an innovation zone to specifically collect popular Meme coins and emerging projects to meet users' trading needs for high-risk and high-return assets.
Coinstore, a new industry player established in recent years, has also proactively launched a full-featured Web3 wallet and has taken the lead in connecting to the multi-chain ecosystem. This layout not only provides users with more flexible asset management options, but also differentiates Coinstore's positioning in the increasingly fierce exchange competition.
This transformation is not only a response to user needs, but also a response to the logic of industry development. By integrating Web3 wallet functions, CEX not only retains the depth and efficiency of centralized transactions, but also provides users with the option of autonomously controlling their assets - users can decide when to place their assets in exchange custody for convenience, and when to transfer them to their own wallets to ensure security.
As the industry matures, we may see more solutions where "bounded decentralization" and "transparent centralization" coexist. In this new stage of integrated development, only participants who can find the best balance between transparency, security and efficiency can stand out in the increasingly fierce market competition.
Combining the efficiency of CEX and the transparency of DEX, this may be the next stage of development of crypto trading - not a confrontation of concepts, but a fusion of advantages.
