"Two minutes of decentralization": the battle between DEX and CEX behind the Hyperliquid incident

In 2021, a "retail investors vs. Wall Street" drama was staged between American retail investors and Wall Street short-selling institutions around 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 "unplugging" 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: Did retail investors really win? Who is the ultimate winner of this incident?

Retail investors squeezed out, institutions admitted defeat, and Hyperliquid cut its wrist to stop the bleeding

JellyJelly suffered a short squeeze, and it rose 429% in just one hour (SGT: 21:00-22:00)! Subsequently, Hyperliquid Vault took over the short position of a trader after he blew himself up, and the floating loss once exceeded 12 million US dollars.

The situation at that time can be said to be hanging by a thread: as long as JellyJelly rises to 0.15374 again, Hyperliquid Vault's 230 million US dollars of funds will be wiped out. As the funds in Hyperliquid Vault continue to flow out, JellyJelly's liquidation price will be further depressed, forming a death spiral.

The attackers precisely exploited four fatal vulnerabilities in the Hyperliquid system:

Lack of real position limits for illiquid assets

Weak oracle anti-manipulation mechanism

Automatic position inheritance system

Lack of circuit breaker mechanism

This is not only a trading operation, but also a surgical strike on systemic weaknesses, which puts Hyperliquid in a dilemma: either sit back and watch the $230 million treasury face liquidation risks, or abandon the "decentralization" principle and use emergency measures to intervene in the market.

At this time, market sentiment reached its peak, and many individual investors joined the encirclement and suppression operations. At the same time, some influential KOLs posted @ major CEX founders to "join the war". Binance co-founder He Yi replied to a tweet from a community member suggesting that Binance launch JELLYJELLY, which triggered another fluctuation in the price of JELLYJELLY.

Everyone is hunting casinos together, and retail investors 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 of "stabilizing the market" and forcibly calming the short squeeze.

This most brutal encirclement and suppression operation in history ended with the institutions "admitting defeat" and exiting the market first.

The "decentralization" of DEX is in doubt: free market disillusionment?

The Hyperliquid incident shows that even in 2025, a complete DEX still exists only in fantasy.

This incident also exposed a major loophole in Hyperliquid: allowing large positions to be opened in small-cap, low-liquidity currencies, and these positions cannot be found in the market to take over when they are liquidated. In other words, the market depth cannot support such a large order. Once the short squeeze occurs, the liquidity will collapse directly, and the liquidation mechanism will become a decoration.

Hyperliquid itself should be a dealer, but now it sits at the table. Moreover, after taking the gambling game, when the situation is not favorable to itself, it chooses to become a dealer again and directly closes the casino.

The market's belief in DEX has collapsed, and Hyperliquid has made "decentralization" particularly ironic. The "consensus" passed within 2 minutes; the governance committee changes the rules when it says to change the rules; it closes the trading pairs when it says to close the trading pairs; it is even faster than many CEXs. It makes people begin to doubt: Is the so-called "decentralization" only effective when the market is stable? Once the market is out of control, it will become "whatever you want".

If DEX also has "forced delisting", what is the meaning of decentralization? Is CEX more stable, or is DEX trustworthy?

The contradiction between the concept of decentralization and capital efficiency, which one is more reliable, DEX VS CEX?

If you 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 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 for long-term storage of coins or 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 transactions, but it has advantages and disadvantages: once the money is deposited, the power of life and death is no longer in your hands. Mt.Gox was hacked and FTX exploded. There are too many such "zeroing" accidents. No one can guarantee that the next one will not be their own CEX.

The Hyperliquid incident is a typical manifestation of this dilemma: the natural conflict between the concept of decentralization and capital efficiency. To pursue absolute decentralization, capital efficiency will inevitably be affected; and to pursue the highest capital efficiency, a certain degree of centralized control is often required.

This is a classic "trolley problem": should we 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 wire" to protect the protocol when facing huge losses, but this also caused it to be severely criticized.

It is interesting to note that many critics themselves have faced similar dilemmas. BitMEX, one of the critics, also "pulled the wire" in the 3.12 incident in 2020 and went down directly. The outside world has mixed opinions on BitMEX's move. Some people said that if emergency measures were not taken at the time, it might have had catastrophic consequences for the entire crypto industry. This fact highlights the complex relationship between concept and reality.

The next stage of the development of the crypto market: 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, retaining 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 ideas, but a pragmatic response to reality.

CEX is also facing this transformation. Faced with users' concerns about asset control and the competitive pressure brought by DEX, CEX is undergoing a strategic transformation centered on Web3 wallets. Whether it is the leading exchanges, established exchanges, or emerging exchanges, they are all trying to balance the convenience of centralized transactions with 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 really take its Web3 wallet business seriously, significantly increasing its R&D and marketing investment, trying to make it a core component in the closed loop of the ecosystem.

The established exchange Gate.io also followed the trend and built its own Web3 wallet. It also set up an innovation zone specifically to collect popular Meme coins and emerging projects to meet users' trading needs for high-risk and high-return assets.

Coinstore, a new industry leader established in recent years, has also proactively launched a full-featured Web3 wallet and took 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 in the increasingly fierce exchange competition.

This transformation is not only a response to user needs, but also a compliance with 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 autonomous control of assets - users can decide when to place 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 with the transparency of DEX, this may be the next stage of development of crypto trading - not a conflict of ideas, but a fusion of advantages.