DEX and CEX may not lead to a "winner takes all" scenario, but rather coexist and evolve within their respective ecological niches, jointly driving the maturity of the crypto industry.
Written by: Liu Honglin, Zheng Hongde
Recently, the decentralized exchange (DEX) Hyperliquid became a hot topic in the crypto community again due to the "JELLY shorting incident." This crisis not only plunged Hyperliquid's credibility to an all-time low but also prompted a reevaluation of an age-old question: Can decentralized exchanges (DEX) truly surpass centralized exchanges (CEX)?
Industry leaders have differing opinions on this matter. Arthur Hayes predicted in a blog post that Hyperliquid would decline, while CZ reiterated the irreplaceability of CEX. Meanwhile, supporters of DEX remain convinced that "decentralization is the future." This article will analyze the current state and future trends of DEX and CEX, providing insights into this debate based on a review of the incident.
Crisis Review: The "Disguise" of Decentralization Exposed
Let's first understand the background and consequences of the Hyperliquid incident.
Hyperliquid is a decentralized exchange focused on perpetual contract trading, providing counterparty support through platform liquidity pools, and boasting efficiency, low costs, and high leverage. By early 2025, Hyperliquid had captured about 70% of the decentralized perpetual contract market, becoming a significant player competing with centralized exchanges.
The incident began when an attacker exploited the platform's high leverage trading mechanism. On the evening of March 26, 2025, they bought a large amount of JELLY spot on-chain and across other exchanges, pushing the JELLY price up nearly 10 times in a short period before quickly selling off, precisely targeting the platform's liquidity pool. Due to the oversized JELLY position and insufficient liquidity, the platform's liquidity pool was forced to take over about 398 million JELLY shorts, with unrealized losses peaking at 12 million dollars. If the price continued to rise, the 240 million dollars in reserves could be fully liquidated, leading to massive losses for the platform.
That evening, Hyperliquid took two emergency measures:
- Announced a forced liquidation of affected positions at discounted prices.
- Utilized foundation reserve funds to partially compensate users.
By enforcing forced liquidation at discounted prices, Hyperliquid not only incurred no losses but even made a profit of 703,000 dollars. While claiming to be a decentralized exchange, Hyperliquid had the authority to make such centralized decisions, which raised widespread doubts in the community about its commitment to decentralization. Statistics show that after the incident, Hyperliquid's TVL (Total Value Locked) plummeted by 30% within 48 hours, from 800 million dollars to 560 million dollars, and trading volume shrank to 50% of pre-crisis levels.
Hyperliquid applied the brakes just before the market was about to enter a liquidation spiral. Although the response seemed decisive and preserved funds and core liquidity, it can be said that they exchanged trust for survival time, exposing many flaws in the platform's mechanism design and governance:
Highly Centralized Decision-Making
The decision to enforce forced liquidation at discounted prices, although an emergency measure during the crisis, bore a strong centralized character, akin to "government bailouts" in traditional finance. Hyperliquid's official claim that this decision was passed through "validator voting" was met with widespread skepticism regarding the transparency and participation of the vote, perceived more as a unilateral push by the team rather than a true community consensus. This approach contradicts the platform's proclaimed principle of "decentralized governance."
Shortcomings in Mechanism Design
Hyperliquid allows for leverage trading of up to 50 times but lacks dynamic risk control mechanisms to address market manipulation. The attacker exploited this vulnerability, triggering liquidations through short-term price manipulation, precisely targeting the HLP liquidity pool, highlighting the platform's deficiencies in risk management. The subsequent measures of lowering leverage limits and utilizing foundation funds, while alleviating short-term pressure, do not address the deeper issues of trading mechanisms and power structures, resembling a "band-aid solution."
Escalating Trust Crisis
The handling of the incident weakened Hyperliquid's credibility, significantly diminishing user trust in its level of decentralization. According to Dune Analytics data, within a week after the incident, Hyperliquid's daily active user count dropped by 25%, with some funds flowing to other DEXs or CEXs like Binance. On community forums, statements like "Hyperliquid is dead" proliferated.
For a DEX aiming to challenge centralized exchanges, such an incident is undoubtedly a dangerous signal. This crisis is not only a Waterloo for Hyperliquid itself but also serves as a wake-up call for the entire DEX industry: decentralization cannot remain just a slogan; it must be supported by matching technical architecture and governance mechanisms. Otherwise, the ideals of DEX will struggle to withstand the shocks of reality.
Arthur Hayes' Prediction of Decline: Is There Hope for Hyperliquid?
In the Old Testament of the Bible, the story of "David vs. Goliath" is a well-known parable, where Goliath is a tall, well-equipped warrior representing strength and invincibility, while David is a small boy armed only with a slingshot and a few stones.
* Image source: from the internet
Notable figure in the crypto space, Arthur Hayes, referenced this parable in a recent tweet, likening Hyperliquid to David, the shepherd, who is at a significant disadvantage against powerful competitors like Binance and dYdX. He pointed out that the handling of the JELLY incident exposed the falsehood of Hyperliquid's decentralization and its vulnerability in a crisis, bluntly stating, "Stop pretending Hyperliquid is decentralized," predicting that it would follow the path of FTX's decline and ultimately be eliminated by the market.
Hayes' "prediction of decline" is not unfounded; Hyperliquid's handling of the situation indeed revealed issues in risk management and product design, making a trust crisis inevitable in the short term. However, I believe Hyperliquid's fate is not irretrievable; the key lies in the team's subsequent actions.
In 2016, Ethereum experienced TheDAO incident, where 50 million dollars worth of ETH was stolen, leading to community division and even triggering a controversial hard fork to roll back transactions. Yet, Ethereum did not decline; instead, it seized the opportunity to improve smart contract security standards, laying a foundation for future development.
Hyperliquid also has a similar opportunity. The vulnerabilities exposed by the JELLY incident could serve as stepping stones for development. The platform should implement corrective measures, such as:
Transparent Audits to Rebuild Credibility: Publicly disclose audit reports of the liquidity pool and details of the liquidation decisions to demonstrate sincerity to the community.
Optimize Mechanisms to Mitigate Risks: Improve the liquidation mechanism and introduce dynamic risk controls, such as real-time adjustments to leverage ratios, to prevent similar price manipulation. dYdX's perpetual contracts have effectively reduced systemic risk through oracles and dynamic margin requirements, which Hyperliquid could consider for technical upgrades.
Decentralized Governance to Rebuild Consensus: Transform "validator voting" from formalism into true governance, expanding community participation.
If they can achieve transparent audits, optimize the liquidation mechanism, and rebuild trust, there may still be a chance for a turnaround. Hayes' view of "David vs. Goliath" may be overly pessimistic. It is worth noting that in the Old Testament story, David ultimately defeats the seemingly invincible giant Goliath through wisdom and courage.
Even if Hyperliquid faces a life-and-death test, the demand in the DEX space remains solid. By 2024, the number of global DeFi users is expected to exceed 150 million, with DEX daily trading volume peaking at 2 billion dollars, supported by a robust demand base. Users' desire for "self-custody of assets" and "decentralization" has never waned. Hyperliquid's users are unlikely to abandon this model entirely due to a single crisis—they expect a safer and fairer platform.
Of course, if Hyperliquid cannot improve its mechanisms and plug the vulnerabilities, decline is inevitable. The market is very realistic; once trust is lost, funds and users will immediately shift to CEXs like Binance or other DEXs. Even if Hyperliquid falls, the DEX space will not disappear. New players will continue to emerge, and only those who can establish effective mechanisms will become the ultimate winners. The road for DEX is still long. Hyperliquid may face decline, but DEX will never perish.
Who Will Be the Future: DEX or CEX?
Since the last bull market, many have believed that DEX will eventually surpass CEX; however, recent voices of doubt have emerged, including Zhao Changpeng reiterating that DEX is inferior to CEX. Who will be the future: DEX or CEX?
In fact, at the current stage, DEX and CEX are not in a zero-sum game or a "you die, I live" competitive relationship, but rather complementary and coexisting, each occupying an indispensable ecological niche, meeting different user needs, and facing their own issues. DEX has experienced incidents like the Hyperliquid event, while CEX has also faced issues, such as the recent theft of a major cryptocurrency from Bybit. It is evident that both CEX and DEX have their advantages, and user needs are divided, leading to ongoing trade-offs.
CEX's Advantages: "Centralized Convenience" is Hard to Replace in the Short Term
Currently, CEX still largely serves as the first stop for newcomers and is the main venue for large traders.
CEX provides convenient fiat recharge channels, becoming the primary bridge for new users entering the crypto world.
Mature infrastructure and the ability to connect with traditional finance. For example, CEX offers higher trading depth, lower latency, and professional customer service. Large traders need platforms that can quickly handle large orders, and CEX's deep liquidity can easily absorb them.
CEX has compliance guarantees, connecting with traditional finance through identity verification and anti-money laundering checks. For instance, centralized exchange Coinbase is very popular in the U.S. because institutional funds find it reliable.
Core Characteristics: Low Barriers to Entry, Deep Liquidity, Strong Compliance
The Appeal of DEX: The Core Value of Transparency and Freedom is Precious
With DEX platforms like Uniswap and GMGN becoming increasingly user-friendly in terms of ecosystem and operations, trading speed and liquidity are also gradually improving, bringing more advantages that CEXs do not possess due to their centralized nature:
DEXs use wallets as interfaces, completing transactions directly through smart contracts, ensuring that assets are always under the user's control, which naturally aligns with the blockchain's principle of "decentralization."
Unlike the "black box" of CEXs, DEXs operate entirely through smart contracts, with rules that are publicly verifiable on-chain, providing greater assurance of fairness.
The decentralized nature brings flexibility and opportunities. For instance, in the case of token launches like TRUMP, new tokens often go live on DEXs first, while CEXs, due to centralized review and listing processes, may lag behind or even miss the window. DEXs allow players to seize early opportunities without being constrained by the pace of CEXs.
The open-source and community-driven characteristics enable faster innovation, allowing for the rapid incubation of novel mechanisms and providing trading venues for emerging projects, which many CEXs are reluctant to enter due to compliance or commercial considerations.
Core Characteristics: Non-custodial Security, Transparency and Freedom, Flexibility, Innovation-Driven
CEXs Need to Rethink Their Moat
We can see that DEXs are rapidly developing, with breakthroughs in areas like chain abstraction and cross-chain interoperability. Next-generation DEXs like UniversalX significantly reduce the complexity of user operations, allowing users to trade any token on any chain seamlessly through their wallets without needing to understand the differences between underlying chains. The "plug-and-play" model eliminates the technical barriers of traditional DEXs and frees users from reliance on third-party custody, truly achieving asset autonomy.
This situation is reminiscent of computer operations in the 1990s, when systems were complex and difficult to understand, with very few people able to use them proficiently. Command-line interfaces, complicated configuration requirements, and technical knowledge barriers deterred most users. Today, on-chain operations and DEXs face a similar phase—concepts like private key management, cross-chain interaction, and gas fees remain obscure to the average user.
Although CEXs currently hold significant advantages and dominate the industry in terms of trading volume and user base, innovations like UniversalX are gradually changing this status quo. Just as the graphical user interface revolution eventually brought computers into households, the evolution of DEXs will promote the popularization of blockchain technology, moving from geek culture to mainstream resonance, continuously shaking the user base of CEXs.
If DEXs can further optimize user experience and improve mechanisms to enhance liquidity, gradually reaching the current level of CEXs, then CEXs will have to rethink what their moat is. Simply relying on trading efficiency or fiat channels may no longer be sufficient to maintain a competitive edge, as the decentralized nature and transparency of DEXs align more closely with the long-term vision of blockchain. The convenience of wallets as entry points may also attract more users to shift from CEXs to DEXs.
CEXs can continue to leverage their compliance advantages, shifting from convenience to further breakthroughs in compliance. By deeply collaborating with regulatory bodies, they can position themselves as bridges for traditional capital entering the crypto world, thereby solidifying their market position. This transformation may not only sustain the existing advantages of CEXs but also open up new growth opportunities.
As the saying goes, "The early bird catches the worm." Lawyer Mankun has consistently maintained research and attention to blockchain policies in major countries and regions worldwide, clearly perceiving that the crypto industry is gradually moving from "wild growth" to standardization. By 2024, over 50 countries globally have introduced regulatory frameworks for crypto assets, such as the EU's MiCA regulations and the U.S. Stablecoin Transparency Act. Institutional investors (like hedge funds and pension funds) are increasingly demanding compliance, needing legal and secure channels to enter the crypto market, which is precisely where CEXs have a natural advantage. Compared to the decentralized nature of DEXs, CEXs can more easily integrate with the existing financial system, providing KYC, AML, and other compliance services to meet regulatory and institutional requirements.
HashKey in Hong Kong is a typical example. As one of the first CEXs in Hong Kong to obtain a virtual asset trading license from the Securities and Futures Commission (SFC), HashKey has successfully attracted the attention of traditional finance through compliant operations. HashKey offers custody and trading services for institutional clients and collaborates with Standard Chartered Bank to provide fiat deposit and withdrawal channels, attracting over 20 institutional clients and managing assets exceeding 500 million dollars. Additionally, HashKey plans to launch compliant stablecoin products to further connect traditional funds with the crypto market. This "compliance-first" strategy not only allows HashKey to establish a foothold in the Asian market but also provides a reference for the development of other CEXs.
This breakthrough in compliance can not only solidify CEXs' positions in the existing market but also bring incremental funds to the industry, channeling the vast river of traditional finance into the Web3 market. According to Morgan Stanley's predictions, by 2030, traditional financial institutions' allocations to crypto assets will reach 15 trillion dollars, and if CEXs can become the "gatekeepers" of this trend, their moats will be unassailable. In contrast, DEXs, due to their decentralized nature, will find it challenging to meet regulatory requirements in the short term, providing CEXs with a valuable time window.
Summary by Lawyer Mankun
The crisis of Hyperliquid serves as a mirror, reflecting the real challenges DEXs face in pursuing their ideals of decentralization. At the same time, CEXs are not invulnerable; the risks of centralized platforms should not be overlooked. The competition between DEXs and CEXs is not simply about "who replaces whom," but rather a long-term game concerning convenience versus autonomy and compliance.
In the short term, CEXs, with their mature infrastructure, deep liquidity, and compliance advantages, will continue to be the dominant force in the crypto market, especially for newcomers and institutional investors. However, the rise of DEXs is irreversible; their core values of transparency and freedom, along with technological innovations, are gradually breaking down usage barriers, attracting more users to embrace a "decentralized" future. The success or failure of Hyperliquid is merely a microcosm of the DEX landscape; the development of DEXs will not stagnate and is continuously realizing its potential to surpass CEXs.
For CEXs, perhaps the future moat lies in deep breakthroughs in compliance. Practices represented by HashKey indicate that through deep collaboration with regulators, CEXs are likely to become bridges between traditional capital and the crypto world, seizing the trillion-dollar incremental market of institutional funds.
Ultimately, DEXs and CEXs may not lead to a "winner takes all" scenario, but will coexist and evolve within their respective ecological niches, jointly driving the crypto industry towards maturity. We are fortunate to be in the "1990s" of Web3, an era full of transformation and possibilities, and let us witness this great evolution of technology and ideas together.
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