Former employee's short selling triggers market concerns; Hyperliquid details 9 allegations to defend the "full transparency" principle

Recently, the decentralized perpetual contract trading platform Hyperliquid has been embroiled in public controversy due to the weak performance of its native token HYPE and a series of technical allegations. On December 22, the platform’s official team released a lengthy statement, systematically addressing nine key accusations including the “$362 million funding gap,” “internal privileged trading,” and “backdoor programs.” The core clarifications include: the alleged funding gap stems from the native USDC not accounted for on HyperEVM; the platform’s total reserves amount to $4.351 billion and are fully solvent; the short positions on HYPE were individual actions by former employees and are unrelated to the current team; some code functionalities are limited to the testnet. This response is not only crisis management but also a clear demonstration of Hyperliquid’s competitive strategy of “full state on-chain verifiability” against “centralized sequencers.” By 2025, the platform has incurred $895 million in costs, showcasing strong market appeal and operational resilience.

Sudden Turmoil: Dual Attacks of Short Selling Rumors and Technical Allegations

In late December 2025, the crypto market was disturbed by two “pebbles.” One pointed to human factors: the community discovered that a whale address had established a short position with a nominal value of $45 million on Hyperliquid’s HYPE token, with an unrealized profit of $86 million. Against the backdrop of HYPE’s price retracement from its all-time high, rumors of “insider privileged shorting” quickly spread, shaking some investors’ trust in the platform. The other pointed to technical core issues: a technical analysis article titled “Reverse Engineering Hyperliquid” used reverse engineering to directly accuse the platform of nine major sins, including “insolvency” and “backdoor access in ‘God Mode’,” and drew a provocative conclusion — Hyperliquid is a centralized trading platform disguised as a blockchain.

Faced with this double assault, Hyperliquid’s team did not choose silence. They promptly issued a detailed, data-rich long statement through official channels, aiming to clarify all doubts at once. Regarding the most concerning insider trading allegations, the official stance was clear: after investigation, the main short address (0x7ae4…) involved a former team member who left in early 2024. The individual’s personal trading activities are unrelated to the current team. Hyperliquid emphasized that it enforces strict trading restrictions and compliance checks on all current employees and contractors, strictly prohibiting any form of insider trading. Data shows that the former employee’s short position was only $25,140 (short 1,000 HYPE), negligible compared to the total open interest of HYPE contracts worth up to $1.25 billion. Moreover, this address still holds about 2.5 million HYPE purchased from the spot market and has not liquidated.

Market sentiment, after clarification, reveals a complex picture. On one hand, the short whale still exists; but on the other hand, on-chain data as of December 22 shows that 59% of large holders (whales) on Hyperliquid are long, and over 64% of HYPE contract traders in the past 24 hours have taken long positions, pushing the total open interest to $1.25 billion. This indicates that the core trading community’s long-term confidence in the platform remains intact, and market debates and competition continue.

Point-by-Point Rebuttal: Detailed Explanation of 9 Major Allegations and Hyperliquid’s Transparent Ledger

If the clarification of the former employee’s shorting was a response to “people,” then the systematic rebuttal of the technical article is Hyperliquid’s comprehensive self-affirmation regarding “code” and “architecture.” This response summarizes and dissects each of the nine accusations, focusing on two fundamental questions: Is the platform’s solvency sufficient? Does the system have opaque centralized backdoors?

The most prominent accusation is “the platform is insolvent, with a $362 million funding gap.” The root of this claim lies in differing audit methods. Critics only counted USDC reserves on Arbitrum’s cross-chain bridge, concluding that reserves are less than user deposits. Hyperliquid’s response reveals ongoing architecture evolution: the platform is transitioning from an Arbitrum-dependent L2 AppChain to an independent Hyperchain L1. During this process, asset reserves are presented in a “dual-track” manner.

Hyperliquid’s key reserve reconciliation data

• Audited reserves (only Arbitrum bridge): approximately $3.989 billion USDC
• Unaccounted HyperEVM native reserves: $362 million USDC (HyperEVM native balance) + $59 million USDC (HyperEVM contract balance)
• Total reserves announced by platform: 3.989B + 362M + 59M = $4.351 billion USDC
• Total user balances on HyperCore: fully match the $4.351 billion USDC

The conclusion is very clear: the so-called $362 million “gap” is actually user assets migrated to the native HyperEVM; funds have not disappeared but are recorded in different ledgers (Arbitrum bridge and HyperEVM). The platform has full repayment capacity.

Regarding other technical doubts, Hyperliquid’s responses can be summarized into three categories: first, outright denial with explanation, e.g., “CoreWriter God Mode” is a standard interface for L1 and HyperEVM interaction; “hidden lending protocols” are pre-release features documented publicly (pre-alpha). second, acknowledgment with clarification of reasonable background, e.g., the “TestnetSetYesterdayUserVlm” function in binaries is reserved for testnet environments to simulate fee logic, and mainnet nodes are physically isolated from this path, making it inaccessible. third, limited clarification on sensitive issues, e.g., the claim that “only 8 broadcast addresses can submit transactions” is acknowledged but explained as a temporary anti-MEV (Maximal Extractable Value) measure, with a future upgrade planned to a “multi-proposer” mechanism for further decentralization.

However, the official response also leaves some intriguing “white spaces.” For example, the accusation that “governance proposals’ on-chain contents are not publicly accessible” was not directly addressed. This hints that Hyperliquid’s governance process still has some opacity for ordinary users. Additionally, regarding the lack of a user-initiated withdrawal (“escape pod”) mechanism for cross-chain bridges, the response only explained that locking the bridge during the POPCAT incident was a security measure, not denying the architecture’s fact. This implies that, at present, user asset withdrawals still depend largely on validator cooperation.

Roadmap Declaration: How Does Hyperliquid Define “Real Decentralized Trading”?

The most profound part of this crisis communication is not merely self-affirmation but Hyperliquid’s deliberate shift of the battlefront to the entire decentralized derivatives track, clearly revealing its technological philosophy and competitive stance. In the statement, Hyperliquid explicitly comments on its main competitors, such as Lighter and Astr, attributing their core issue to reliance on “centralized sequencers.”

Hyperliquid points out that in these competitors’ architectures, only the sequencer operator can see the full order book history and transaction snapshots; ordinary users and validators cannot independently verify all data. This “black box” operation leaves room for manipulation (e.g., dark pool trading). In contrast, Hyperliquid claims to achieve “full state on-chain verifiability” by having all validators execute the same state machine. In short, Hyperliquid’s logic is: “I may still have a centralized bottleneck at the transaction submission point (8 broadcast addresses), but all my operations and final states are transparent and verifiable; whereas your bottleneck is not only at the entry but also in the opacity of internal processing.”

Behind this “dissing,” there is fierce market share competition. According to industry data over the past 30 days, the decentralized perpetual contracts market has become a tripartite competition: Lighter leads with about $232.3 billion in trading volume, Astr follows with about $195.5 billion, and Hyperliquid ranks third with about $182 billion. In this context, Hyperliquid chooses to emphasize its “transparency” and “verifiability” as core advantages. Notably, in another key indicator of market depth and user commitment—Open Interest—Hyperliquid often maintains a leading position, reflecting its appeal among high-capital-efficiency traders and large institutions.

This controversy is essentially a route war over the “ultimate form of decentralized trading facilities.” Hyperliquid has chosen to sacrifice some short-term scalability and flexibility in exchange for maximum auditability and resistance to censorship, aiming to evolve from “transparent centralized” to “fully decentralized.” Its $895 million in fees in 2025 and an average daily trading volume exceeding $1.4 billion demonstrate initial market acceptance of its model.

Aftermath and Lessons of the Hyperliquid Incident

Hyperliquid’s response can be regarded as a textbook crisis management case in the DeFi world. Instead of emotional rebuttals, it used on-chain addresses, code links, and clear architecture diagrams to dispel fears about solvency and major backdoors. The platform’s total value locked (TVL) remains stable around $4.15 billion, a direct proof that market confidence has not collapsed.

However, the incident also exposes common challenges faced by DeFi, especially high-performance protocols evolving into independent app chains (AppChains). As architecture becomes more complex and assets cross multiple chains or layers (such as Arbitrum bridge and native HyperEVM), traditional audit methods that only examine single smart contract balances are ineffective. This requires analysts, auditors, and communities to develop more comprehensive cross-chain data analysis capabilities, and projects to proactively disclose multi-chain assets more clearly.

For Hyperliquid, it proves that “funds are safe” and “most code is trustworthy” only pass the survival test. Its long-term challenge lies in how to decentralize the authority of those 8 transaction submission broadcast addresses without sacrificing high performance and MEV resistance, thereby achieving true decentralization of the validator set and fulfilling its whitepaper’s “ultimate DEX” vision. Meanwhile, the community still expects further solutions regarding governance transparency and cross-chain bridge user autonomy.

For every participant in the crypto ecosystem, this event rings a warning: in this rapidly innovating field, complex architectures bring unprecedented efficiency but also new cognitive and verification thresholds. The old adage “Don’t Trust, Verify” remains valid, but “verification” now requires more specialized knowledge and tools. While pursuing high yields, understanding the underlying architecture and trust assumptions of the protocols involved may be the most crucial safeguard to avoid being stranded in the next storm.