Recently, the decentralized exchange (DEX) Hyperliquid has once again become the focus of discussion in the crypto community due to the 'JELLY short-squeeze incident.' This crisis not only caused Hyperliquid's credibility to plummet but also prompted people to rethink an age-old question: can decentralized exchanges (DEX) truly surpass centralized exchanges (CEX)?
Industry leaders have differing views on this issue. Arthur Hayes predicted on his blog that Hyperliquid will decline, while CZ reaffirmed the irreplaceability of CEX, and DEX supporters still firmly believe that 'decentralization is the future.' This article will analyze the current situation and future trends of DEX and CEX from the perspective of a retrospective of events, providing insights for this debate.
Crisis Review: The 'disguise' of decentralization is 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, boasting efficiency, low cost, and high leverage. As of early 2025, Hyperliquid has captured about 70% of the decentralized perpetual contract market, becoming an important player competing with centralized exchanges.
The incident was triggered when an attacker exploited the platform's high leverage trading mechanism, purchasing a large amount of JELLY spot on-chain and on other exchanges on the night of March 26, 2025, pushing the price of JELLY up nearly tenfold in a short time 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 short positions, leading to a floating loss of up to 12 million USD. If prices continued to rise, the 240 million USD reserve could be fully liquidated, resulting in huge losses for the platform.
That night, Hyperliquid took two emergency measures:
1. Announce forced liquidation of affected positions at discounted prices.
2. Utilize foundation reserve funds to partially compensate users.
Through the forced liquidation of positions at discounted prices, Hyperliquid not only incurred no losses but even made a profit of 703,000 USD. Marketed as a decentralized exchange, Hyperliquid, however, has the right to make such centralized decisions, which is somewhat perplexing and raises 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, dropping from 800 million USD to 560 million USD, and trading volume shrank to 50% of pre-crisis levels.
Hyperliquid stepped on the brakes just before the market was about to enter a liquidation spiral. Although the response seemed decisive, preserving funds and core liquidity, it can be said that it traded trust for survival time, exposing many flaws in the platform's mechanism design and governance.
Highly centralized decision-making
The decision to forcibly liquidate at a discounted price, though an emergency measure during a crisis, is heavily centralized in nature, akin to 'government bailouts' in traditional finance. Hyperliquid's official claim that this decision was passed through 'validator voting' is widely questioned by the community regarding the transparency and participation of the voting process, believing it more resembles a unilateral push by the team rather than true community consensus. This approach contradicts the platform's proclaimed principle of 'decentralized governance.'
Shortcomings in mechanism design
Hyperliquid allows up to 50 times leverage trading but lacks dynamic risk control mechanisms to deal with market manipulation. Attackers exploited this loophole, triggering liquidations through short-term price manipulations, targeting the HLP liquidity pool, revealing the platform's inadequacies in risk management. The subsequent measures of lowering leverage limits and utilizing foundation funds, while easing short-term pressure, do not solve the deeper issues of trading mechanisms and power structures, resembling a 'band-aid solution.'
The trust crisis is intensifying.
The handling of the incident weakened Hyperliquid's credibility, and user trust in its level of decentralization significantly dropped. According to data from Dune Analytics, within a week after the incident, Hyperliquid's daily active users decreased by 25%, with some funds flowing to other DEXs or CEXs such as Binance. On community forums, discussions about 'Hyperliquid is dead' are rampant.
For a DEX aiming to challenge centralized exchanges, such an event is undoubtedly a dangerous signal. This crisis is not only Hyperliquid's Waterloo but also serves as a wake-up call for the entire DEX industry: decentralization cannot remain just a slogan; it must have matching technical architecture and governance mechanisms to support it. Otherwise, the ideals of DEX will struggle to withstand the shocks of reality.
Arthur Hayes's prediction of decline: Does Hyperliquid still have a chance?
(Bible, Old Testament) In 'David vs. Goliath,' a well-known idiomatic story, Goliath is a tall and well-equipped warrior, representing strength and invincibility. David is just a weak young man, facing him with a slingshot and a few stones.
*Image Source: From the Internet
Prominent figure in the crypto community, Arthur Hayes, referenced this idiom in a recent tweet, comparing Hyperliquid to David, the shepherd in 'David vs. Goliath,' believing it is at a significant disadvantage against strong competitors (such as Binance and dYdX). He pointed out that the handling of the JELLY incident exposed Hyperliquid's false decentralization and its vulnerabilities during crises, bluntly stating, 'No more pretending Hyperliquid is decentralized,' predicting that it will follow the path of FTX's decline and ultimately be eliminated by the market.
Hayes's 'prediction of decline' is not unfounded; the handling of Hyperliquid indeed exposed the platform's issues in risk management and product design, and a trust crisis is inevitable in the short term. However, I believe Hyperliquid's fate is not irreversible; it largely depends on the team's subsequent actions.
In 2016, Ethereum experienced TheDAO incident, in which 50 million USD worth of ETH was stolen, causing a split in the community and even triggering the controversy of a hard fork to roll back the transaction. However, Ethereum did not decline; instead, it took the opportunity to improve smart contract security standards, laying the foundation for development.
Hyperliquid also has similar opportunities. The vulnerabilities exposed by the JELLY incident may serve as stepping stones for development. The platform should implement some corrective measures, such as:
1. Transparent audits to rebuild credibility: publicly disclose the audit report of the liquidity pool and the details of liquidation decisions, allowing the community to see the sincerity.
2. Optimize mechanisms to prevent risks: improve liquidation mechanisms, introduce dynamic risk control measures such as real-time adjustment of leverage, and prevent similar price manipulation attacks. dYdX's perpetual contracts have effectively reduced systemic risks through oracles and dynamic margin requirements, which Hyperliquid could consider as a reference for its technical upgrades.
3. Decentralized governance to rebuild consensus: Transform 'validator voting' from formalism into true autonomy, expanding community participation.
If it can transparently audit, optimize liquidation mechanisms, and rebuild trust, there may still be a chance for a comeback. Hayes's view of 'David vs. Goliath' may be too pessimistic. It’s worth noting that the ending of the story in the Old Testament is that David, with wisdom and courage, defeated the seemingly invincible giant Goliath.
Even though Hyperliquid is facing a life-and-death test, the demand for the DEX space remains solid. In 2024, the number of global DeFi users exceeded 150 million, with DEX daily trading volume peaking at 2 billion USD, boasting a solid demand base. Users' demand for 'control over their assets' and 'trustlessness' has never diminished. Hyperliquid's users will not completely abandon this model due to a single crisis—they are looking forward to a safer and fairer platform.
Of course, if Hyperliquid cannot improve its mechanisms and close loopholes, its decline is inevitable. The market is very realistic; once trust is lost, funds and users will immediately turn to CEXs like Binance or other DEXs. Even if Hyperliquid falls, the DEX space will not be over. New players will continuously emerge, and only those who can improve their mechanisms will become the final winners. The road for DEX is still long. Hyperliquid may decline, but DEX will never.
Who is the future: DEX or CEX?
Since the last bull market, many have believed that DEX will eventually surpass CEX; however, recent doubts have emerged, including Zhao Changpeng reiterating that DEX is not as good as CEX. Who is the future: DEX or CEX?
In fact, at the current stage, DEX and CEX are not a zero-sum game or a 'you die, I live' competitive relationship, but rather complementary co-existence. Each occupies an indispensable ecological niche, meeting different user needs, while also facing their own problems. DEX has experienced incidents like this Hyperliquid event, while CEX has also faced issues, such as the recent theft of major cryptocurrencies from Bybit. It is not difficult to see that the current situation has advantages for both CEX and DEX, with user needs diverging and ongoing trade-offs.
Advantages of CEX: 'Centralized convenience' is difficult to replace in the short term.
Currently, CEX still largely serves as the first stop for beginners and is the main stage for large traders.
1. CEX provides convenient fiat deposit channels, becoming the main bridge for new users to enter the crypto world.
2. 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 require platforms that can quickly handle large orders, and CEX's deep liquidity can easily absorb these.
3. CEX has compliance guarantees, connecting with traditional finance through identity verification and anti-money laundering checks. For example, centralized exchange Coinbase is very popular in the U.S. because institutional funds find it reliable.
Core characteristics: low threshold, deep liquidity, strong compliance
The appeal of DEX: The core value of transparency and freedom is precious.
With DEX platforms like Uniswap and GMGN, the ecosystem and operations are becoming increasingly user-friendly, trading speed and liquidity are gradually improving, and the advantages brought by centralized characteristics that CEX does not possess are growing.
1. DEX uses wallets as interfaces and completes transactions directly through smart contracts, with assets always in the user's control, a model that naturally aligns with the blockchain's principle of 'trustlessness.'
2. Unlike the 'black box' of CEX, DEX operates entirely through smart contracts, with rules publicly accessible on-chain, ensuring greater fairness.
3. The decentralized characteristics bring flexibility and opportunities. For instance, in the face of token events like TRUMP, new coins often launch on DEX first, while CEX, due to centralized review and listing processes, typically lags behind or even misses the window. DEX allows players to seize early opportunities without being constrained by CEX's pace.
4. Open-source and community-driven characteristics enable faster innovation, allowing for the rapid incubation of novel mechanisms and providing trading venues for emerging projects by developers, which many CEX are reluctant to venture into due to compliance or commercial considerations.
Core characteristics: non-custodial security, transparent freedom, flexibility, innovation-driven
CEX needs to rethink its moat.
We can see that DEX is rapidly developing, with breakthroughs in areas such as Chain Abstraction and cross-chain interoperability. The next-generation DEX, such as UniversalX, significantly reduces the complexity of user operations; users do not need to understand the differences in underlying chains and can seamlessly trade tokens on any chain simply through their wallets. The 'plug-and-play' model eliminates the technical barriers of traditional DEX and frees users from dependence on third-party custody, truly achieving asset autonomy.
Reflecting on the computer operations of the 1990s, when systems were complex and difficult to understand, only a few could master them. Command-line interfaces, complex configuration requirements, and technical knowledge barriers deterred most people. The current on-chain operations and DEX face a similar stage—concepts like private key management, cross-chain interactions, and Gas fees remain obscure and challenging for ordinary users.
Although CEX currently has many significant advantages and still occupies a dominant position in terms of trading volume and user base, innovations like UniversalX are gradually changing this status quo, just as the graphical interface revolution of the past ultimately brought computers into households. The evolution of DEX will also promote the popularization of blockchain technology, moving from geek culture to widespread resonance, continuously shaking CEX's user base.
If DEX can further optimize user experience, enhance mechanisms to increase liquidity, and gradually reach the current levels of CEX, then CEX will have to rethink what its moat is. Simply relying on trading efficiency or fiat channels may no longer be sufficient to maintain a competitive advantage, as the decentralized characteristics and transparency of DEX align more closely with the long-term vision of blockchain, and the convenience of wallets as entry points may attract more users to shift from CEX to DEX.
CEX can continue to leverage compliance advantages, shifting its focus from convenience to further breakthroughs in compliance. By deeply cooperating with regulatory bodies, positioning itself as a bridge for traditional capital to enter the crypto world, it can consolidate its market position. This transformation may not only extend CEX's existing advantages but also open up new growth opportunities.
As spring water warms, the duck knows first, Lawyer Mankiw has always maintained research and attention to blockchain policies in mainstream countries and regions around the world, clearly sensing that the crypto industry is gradually moving from 'barbaric growth' to normalization. In 2024, over 50 countries worldwide have introduced regulatory frameworks for crypto assets, such as the EU's MiCA regulations and the U.S. (Stablecoin Transparency Act). Institutional investors (such as hedge funds and pension funds) have an increasing demand for compliance; they need legal and secure channels to enter the crypto market, which is a natural advantage of CEX. Compared to the decentralized characteristics of DEX, CEX is easier to integrate with the existing financial system, providing compliance services such as KYC and AML to meet regulatory and institutional requirements.
Hong Kong's HashKey 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 successfully attracted the attention of traditional finance through compliant operations. HashKey launched custody and trading services for institutional clients and partnered with Standard Chartered Bank to provide fiat deposit and withdrawal channels, attracting over 20 institutional clients with total assets under management exceeding 500 million USD. Additionally, HashKey plans to launch compliant stablecoin products to further connect traditional funds with the crypto market. This 'compliance-first' strategy not only helps HashKey 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 consolidate CEX's position in the existing market but also bring incremental funds to the industry, channeling traditional capital into the Web3 market. According to Morgan Stanley's predictions, by 2030, the allocation of crypto assets by traditional financial institutions is expected to reach 15 trillion USD. If CEX can become the 'gatekeeper' of this trend, its moat will be unbreakable. In contrast, DEX, due to its decentralized characteristics, will find it challenging to meet regulatory requirements in the short term, providing CEX with a valuable window of opportunity.
Summary by Lawyer Mankiw
The crisis at Hyperliquid is like a mirror, reflecting the real challenges that DEX faces in pursuing the ideal of decentralization: at the same time, CEX is also not impregnable, and the risks of centralized platforms cannot be ignored. The battle between DEX and CEX is not simply 'who replaces whom,' but a long-term game about convenience versus autonomy, and compliance.
In the short term, CEX, with its mature infrastructure, deep liquidity, and compliance advantages, will still be the dominant force in the crypto market, especially for beginners and institutional investors. However, the rise of DEX is irreversible; its core values of transparency and freedom, along with technological innovation, are gradually breaking down barriers to use, attracting more and more users to embrace a 'trustless' future. The success or failure of Hyperliquid is just a microcosm of the DEX landscape; the development of DEX will not stagnate and is continuously fulfilling its potential to surpass CEX.
For CEX, perhaps the future moat lies in deep breakthroughs in compliance. Practices represented by HashKey show that through deep cooperation with regulators, CEX is expected to become a bridge between traditional capital and the crypto world, seizing the trillion-dollar incremental market of institutional funds.
Ultimately, DEX and CEX may not lead to 'one dominant player' but will coexist and evolve in their respective ecological niches, working together to drive the crypto industry toward maturity. We are fortunate to be in the '1990s of Web3,' an era full of transformation and possibilities, let us witness this great evolution of technology and ideas together.
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