In 2021, a "retail vs. Wall Street" drama unfolded around GameStop in the United States. On March 26, the crypto industry witnessed a similar scenario. A single whale almost caused a decentralized exchange, "Hyperliquid," to incur a loss of nearly $230 million.
This was not just a simple "pulling the plug" incident; it encompassed a decentralized crisis, a forced compromise of an ideology, and fierce competition among various interests in the crypto trading ecosystem.
Next, let’s review this event together: Did the retail investors really win? Who is the ultimate winner of this incident?
Retail Investors Squeeze Shorts, Institutions Admit Defeat, Hyperliquid Cuts Losses
JellyJelly faced a short squeeze, skyrocketing 429% in just one hour (SGT: 21:00-22:00)! Subsequently, Hyperliquid Vault took over a trader's exploded short position, which at one point had an unrealized loss exceeding $12 million.
The situation was precarious: if JellyJelly rose to 0.15374, Hyperliquid Vault's $230 million in funds would be completely wiped out. As funds continued to flow out of Hyperliquid Vault, the liquidation price of JellyJelly would be further depressed, creating a death spiral.
The attacker precisely exploited four major vulnerabilities in the Hyperliquid system:
Lack of real position limits on illiquid assets
Weak oracle manipulation prevention mechanisms
Automatic position inheritance system
Absence of a circuit breaker mechanism
This was not just a trading operation; it was a surgical strike against systemic weaknesses, pushing Hyperliquid into a dilemma: either watch $230 million in the treasury face liquidation risk or abandon the principle of "decentralization" and intervene in the market with emergency measures.
At this point, market sentiment peaked, with many individual investors joining the hunt, while some influential KOLs posted to @ major CEX founders to "join the battle." Binance co-founder He Yi responded to a community member's suggestion to list JELLYJELLY in a tweet, causing another fluctuation in JELLYJELLY's price.
Everyone was hunting together, and retail investors wanted Hyperliquid to die on the spot.
Just when retail investors thought victory was in sight, Hyperliquid initiated an emergency validator vote and completely delisted the JELLYJELLY token. This decision reached "consensus" within two minutes, and Hyperliquid quickly issued an official statement announcing that the governance committee had intervened urgently and delisted the involved assets, demonstrating the platform's attitude to "stabilize the market," forcibly calming the short squeeze storm.
In this historically fierce hunt, it turned out that institutions were the first to "admit defeat" and exit.
Doubts About DEX's "Decentralization": The Disillusionment of the Free Market?
The Hyperliquid incident illustrates that even in 2025, a fully decentralized exchange (DEX) still exists only in fantasy.
This incident also exposed a significant flaw in Hyperliquid: it allowed for the opening of oversized positions on low market cap, illiquid tokens, and these positions could not find counterparties during liquidation. In other words, the market depth could not support such large orders; once a short squeeze occurred, liquidity would collapse, rendering the liquidation mechanism useless.
Hyperliquid was supposed to act as a dealer, but it ended up sitting at the poker table itself. After the subsequent gambling session, when the situation turned against it, it chose to revert to being the dealer and simply shut down the casino.
The market's faith in DEX collapsed, and Hyperliquid made "decentralization" particularly ironic. The "consensus" reached in two minutes; the governance committee could change rules at will; they could shut down trading pairs at will; and they acted even faster than many CEXs. This inevitably led people to start questioning: Is the so-called "decentralization" only effective when the market is stable? Once the market is out of control, does it become "whatever goes"?
If DEX can also have "forced delistings," then what is the meaning of decentralization? Is CEX more stable, or is DEX more trustworthy?
The Conflict Between Decentralized Ideals and Capital Efficiency: Who is More Reliable, DEX or CEX?
If we only look at the label of "decentralization," DEX seems safer because assets are always in your wallet, and you don't have to worry about centralized institutions misappropriating them. Coupled with the AMM mechanism, DEX ensures the feasibility of decentralized trading, but the drawbacks are also evident—poor liquidity, high slippage, impermanent loss, and a generally subpar experience. Most people use DEX for long-term holding or to grab airdrops; the daily trading experience is quite poor.
CEX is user-friendly, has deep liquidity, and offers powerful features, making contract trading and spot trading very smooth. However, there are pros and cons: once money is deposited, you lose control over it. Incidents like the Mt. Gox hack and the FTX collapse have occurred too frequently, and no one can guarantee that the next one won't be their own CEX.
The Hyperliquid incident is a typical manifestation of this dilemma: the inherent conflict between decentralized ideals and capital efficiency. Pursuing absolute decentralization inevitably affects capital efficiency; conversely, striving for the highest capital efficiency often requires some degree of centralized control.
This is a classic "trolley problem": Should one adhere to the principle of decentralization, accepting potential systemic risks and capital efficiency losses, or sacrifice some decentralization when necessary to ensure system safety and capital efficiency? Hyperliquid chose the latter, "pulling the plug" to protect the protocol in the face of massive losses, but this also subjected it to severe criticism.
Interestingly, many critics have faced similar dilemmas themselves. BitMEX, among the critics, also "pulled the plug" during the March 12 incident in 2020, directly going offline, and external opinions on BitMEX's actions were mixed. Some argued that if emergency measures had not been taken at that time, it could have led to catastrophic consequences for the entire crypto industry. This fact highlights the complex relationship between ideals and reality.
The Next Stage of Crypto Market Development: Complementary Advantages and Blurred Boundaries
Looking ahead, DEX may evolve towards a model of "partial centralization + transparent rules + intervention when necessary," rather than pursuing extremes of "100% decentralization + laissez-faire market" or "100% centralization + black box state + constant intervention."
In the balance between crypto culture and capital efficiency, the next generation of DEX will seek a point of equilibrium that retains sufficient on-chain transparency and user control while effectively protecting system security and user assets during crises. This balance is not a betrayal of ideals but a pragmatic response to reality.
CEX is also undergoing this transformation. In response to users' concerns about asset control and the competitive pressure from DEX, CEX is undergoing a strategic transformation centered around Web3 wallets. Whether it’s 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 a "CEX + Web3 wallet" model:
OKX is the best example of this trend: by actively developing its wallet business, OKX not only broadened its business scope but also successfully solidified its position as the second-largest player in the industry.
Binance acquired Trust Wallet back in 2018, but it was not given much attention. It wasn't until the rise of the DEX market posed substantial competitive pressure that Binance began to take its Web3 wallet business seriously, significantly increasing R&D and marketing investments, attempting to make it a core component of its ecosystem.
Established exchange Gate.io is also keeping pace with the trend, building its own Web3 wallet and specifically setting up an innovation zone to attract popular meme coins and emerging projects to meet users' trading needs for high-risk, high-reward assets.
The newly established industry player Coinstore has also proactively launched a fully functional Web3 wallet and was among the first to integrate into a multi-chain ecosystem. This layout not only provides users with more flexible asset management options but also differentiates Coinstore in the increasingly competitive exchange landscape.
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 control their assets—users can decide when to place their assets in the exchange for convenience and when to transfer them to their own wallets for security.
As the industry matures, we may see more solutions coexisting 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 with the transparency of DEX may very well be the next stage of crypto trading development—not a confrontation of ideals, but a fusion of advantages.
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