"Two Minutes to Decentralization": The Battle Between DEX and CEX Behind the Hyperliquid Event
The beginning and end of a concept forced to compromise.In 2021, a "retail vs. Wall Street" drama unfolded around GameStop in the U.S. On March 26, the crypto industry witnessed a similar scenario. A single whale almost caused a decentralized exchange, "Hyperliquid," to incur losses of nearly $230M.
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 Surrender, 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 critical: if JellyJelly rose to 0.15374, Hyperliquid Vault's $230 million in funds would be 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:
- Illiquid assets lack real position limits
- Weak oracle manipulation resistance mechanisms
- Automatic position inheritance system
- Absence of a circuit breaker mechanism
This was not just a trading operation but a surgical strike against systemic weaknesses, pushing Hyperliquid into a dilemma: either watch the $230 million 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 tweeted 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 of "stabilizing the market," forcibly calming the short squeeze storm.
In this historically fierce hunt, it was the institutions that "surrendered" and exited first.
The "Decentralization" of DEX in Doubt: The Illusion of a 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 extremely large positions to be opened on low market cap and low liquidity tokens, and during liquidation, the market could not find counterparties. In other words, the market depth could not support such large orders; once a short squeeze occurred, liquidity would collapse, rendering the liquidation mechanism ineffective.
Hyperliquid was supposed to play the role of a dealer, but it ended up sitting at the poker table itself. After the subsequent gambling round, when the situation turned unfavorable, it chose to revert to being a dealer and directly 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 changed the rules at will; trading pairs were shut down at will; even faster than many CEX actions. This inevitably led people to question: Is the so-called "decentralization" only effective when the market is stable? Once the market is out of control, it becomes "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, without worrying 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, and impermanent loss, leading to a mediocre user experience. Most people use DEX either for long-term holding or to grab airdrops; the daily trading experience is quite poor.
CEX is user-friendly, has deep liquidity, and powerful functions, making contract trading and spot trading very smooth, but it has its pros and cons: once money is deposited, the power of life and death is no longer in your hands. Incidents like Mt. Gox being hacked and FTX collapsing happen too often, and no one can guarantee that the next one won't be the CEX in their hands.
The Hyperliquid incident is a typical manifestation of this dilemma: the inherent conflict between decentralized ideals and capital efficiency. Pursuing absolute decentralization will inevitably affect capital efficiency; while pursuing 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 possible 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 also faced similar dilemmas. BitMEX, among the critics, also "pulled the plug" during the March 12 incident in 2020, directly going offline, with mixed external opinions on this move. 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 the 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 new generation of DEX will seek a balance that retains sufficient on-chain transparency and user control while effectively protecting system safety and user assets during crises. This balance is not a betrayal of ideals but a pragmatic response to reality.
CEX is also facing this transformation. In response to users' concerns about asset control and the competitive pressure brought by 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 the "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 given limited 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 by building its own Web3 wallet and has specifically set 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.
