"Two Minutes of Decentralization": The Battle between DEX and CEX behind the Hyperliquid Event

In 2021, a "retail investors fight Wall Street" plot was staged around GameStop between retail investors and Wall Street short-selling institutions. On March 26, the crypto industry staged this plot again. There is a giant whale who almost caused a decentralized exchange "Hyperliquid" to lose nearly $230M by just one's own efforts.

This is not just a simple "unplugging the network" incident, it covers the crisis of decentralization, the forced compromise of an idea, and the fierce competition for the interests of all parties in the crypto trading ecosystem.

Next, let’s review this event together: Have retail investors really won? Who is the ultimate winner of this incident?

Retail investors squeeze short, institutions admit defeat, Hyperliquid

cuts his arm to stop blood

JellyJelly suffered a short squeeze, and in just one hour (SGT: 21:00-22:00) he pulled 429%! Later, Hyperliquid Vault took over a short position after a trader exploded, and once lost more than $12 million.

The situation at that time could be said to be a life-long hang: as long as JellyJelly rises to 0.15374, Hyperliquid Vault's $230 million fund will be wiped out. As funds in Hyperliquid Vault continue to flow out, JellyJelly's liquidation price will be further lowered, forming a death spiral.

The attacker accurately exploited the four fatal vulnerabilities of the Hyperliquid system:

1. Lack of real position restrictions for illicit assets

2. Weak oracle anti-operation mechanism

3. Automatic position inheritance system

4. Loss of circuit breaker mechanism

This is not only a trading operation, but also a surgical blow to systemic weaknesses, pushing Hyperliquid into a dilemma: either sit and watch the $230 million vault 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 operation. At the same time, some influential KOLs posted @The founders of major CEXs "participated in the war". Binance co-founder He Yi responded to a tweet from community members suggesting Binance launches JELLYJELLY, which triggered another fluctuation in JELLYJELLY prices.

Everyone is hunting a casino 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 remove JELLYJELLY tokens. This decision reached a "consensus" within two minutes. Hyperliquid quickly issued an official statement announcing that the Governance Committee had urgently intervened and removed the assets involved, showing the platform's attitude towards "stabilizing the market", forcibly calming the short squeeze storm.

The most ruthless encirclement and suppression operation in history was the institution that "sayed" and left the market first.

DEX's "decentralization" is doubtful: free market disillusionment?

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

This incident also exposed a major loophole in Hyperliquid: allowing ultra-large positions to be opened on small-cap, low-liquid currencies, and the market could not find competitors to take over when these positions were liquidated. In other words, the market depth cannot hold on to such a large order. Once short squeezes, liquidity will collapse directly, and the liquidation mechanism will become a decoration.

Hyperliquid should be a dealer dealer, but now he sits on the card table. And after the next bet, when the situation was unfavorable to me, he chose to turn back into the dealer and directly shut down the casino.

The market's belief in DEX collapsed, and Hyperliquid made "decentralization" particularly ironic. "Consensus" passed within 2 minutes; the Governance Committee changes the rules if it says it changes the rules; the trading pair is closed, and it even moves faster than many CEXs. Without further ado, people begin to wonder whether the so-called "decentralization" is 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 removal", what is the significance of decentralization? Is CEX more stable or DEX trustworthy?

The contradiction between decentralization concept and capital

efficiency, who is more reliable by DEX VS CEX?

If you just look at the label "decentralization", DEX seems to be safer because assets are always in your wallet, so you don't have to worry about 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 losses, and average experience. Most people use DEX, either to store coins in a long term or to make airdrops. The daily trading experience is very poor.

CEX is easy to use, has sufficient depth and strong functions. It is very smooth to make contracts and spot stocks, but it has advantages and disadvantages: once the money is deposited, the power of life and death will not be in your hands. Mt.Gox was hacked and FTX exploded. There were too many such "zero" accidents, and no one can guarantee that the next one would not be the CEX in their hands.

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; while pursuing the highest capital efficiency often requires a certain degree of centralized control.

This is a classic "tram puzzle": should we adhere to the principle of decentralization, accept possible systemic risks and capital efficiency losses, or sacrifice partial decentralization when necessary to ensure system security and capital efficiency? Hyperliquid chose the latter, "drag the network cable" protection protocol when facing huge losses, but it also suffered severe criticism.

It is interesting to note that many critics themselves have faced similar dilemmas. BitMEX, among the critics, also "dragged the network cable" in the March 12 incident in 2020 and went down directly. External praise and criticism of BitMEX's move. If someone did not take urgent measures at the time, it could have disastrous consequences for the entire crypto industry. This fact highlights the complex relationship between ideas and reality.

The next stage of development of the crypto market: complementary

advantages and blurred boundaries

Looking ahead, DEX may move towards the direction of "partial centralization + transparent rules + intervention if necessary", rather than pursuing the extreme of "100% decentralization + laissez-free market" or "100% centralization + black box status + intervention at all times".

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. Faced with 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 trying to take into account the convenience of centralized transactions and decentralized security through the "CEX+Web3 wallet" model:

• OKX is the best example of this trend: by actively developing the wallet business, OKX not only broadened its business scope, but also successfully consolidated its second-largest market position in the industry.

• Binance acquired Trust Wallet as early as 2018, but the importance was limited. It was not until the rise of the DEX market put substantial competitive pressure on it that Binance began to truly take its Web3 wallet business seriously, significantly increasing its investment in R&D and marketing, and trying to build it into a core component in the ecological closed loop.

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

• The industry newcomer Coinstore, which was established in recent years, has also launched a full-featured Web3 wallet forward-looking 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 enables Coinstore to differentiate its positioning 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 the Web3 wallet function, CEX not only retains the depth and efficiency of centralized transactions, but also provides users with the right to independently control assets - users can decide when to place assets on exchange custody to obtain convenience and when to transfer to the wallet they control to ensure security.

As the industry matures, we may see more solutions to coexist with "boundary decentralization" and "transparent centralization". In this new stage of integrated development, 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 the opposition of ideas, but the integration of advantages.