The crypto market sees "retail investors battle Wall Street"

In 2021, the showdown between American retail investors and short-selling institutions around GameStop was once again played out in the crypto industry. On March 26, a single whale almost caused decentralized exchange Hyperliquid to lose nearly $230 million. This was not just a simple "unplugging the network cable" incident; it also involved a decentralized crisis, the compromise of ideals, and the intense game of interests among various parties in the crypto trading ecosystem.

Retail investors force a short squeeze, platform cuts losses

JellyJelly encountered a short squeeze, soaring 429% within just one hour. Subsequently, a certain trading platform took over a short position after a trader's self-exposure, which at one point had an unrealized loss exceeding 12 million USD. The situation was critical: as JellyJelly rose to 0.15374, the platform's 230 million USD in funds would be completely wiped out. As funds continued to flow out, JellyJelly's liquidation price further declined, creating a vicious cycle.

The attacker precisely exploited the four major weaknesses of the system:

1. Illiquid assets lack real position constraints.
2. The oracle's anti-manipulation mechanism is weak.
3. Automatic Position Inheritance System
4. Lack of circuit breaker mechanism

This is not just a trading operation, but a precise strike against the system's weaknesses, pushing the platform into a dilemma: either watch $230 million face liquidation, or abandon the principle of "decentralization" to intervene in the market.

Market sentiment has peaked, with numerous retail investors joining the fray. Some influencers are calling on major exchanges to "join the battle." An executive from a certain trading platform responded to the suggestion to list JELLYJELLY, causing price fluctuations once again.

The crowd besieged the exchange, and retail investors hoped for its collapse. However, just when victory seemed within reach, the platform initiated an emergency vote and quickly delisted the JELLYJELLY token. A "consensus" was reached within two minutes, and the platform then issued a statement announcing the intervention of the governance committee and the delisting of related assets, forcibly calming the short squeeze storm.

The Ideal and Reality of Decentralized Exchanges

This event reveals that even in 2025, a fully decentralized exchange remains a fantasy.

The incident exposed a significant vulnerability: it allows for the opening of oversized positions on low market cap, low liquidity coins, which the market depth cannot support. Once a short squeeze occurs, liquidity collapses, and the liquidation mechanism is rendered meaningless.

Exchanges were supposed to be neutral dealers, but they have become participants in the betting game. Ironically, when the situation turns unfavorable, they quickly revert to being dealers and shut down the casino. This has shattered the market's faith in decentralized exchanges. The "consensus" passed in 2 minutes, arbitrary rule changes, and the closure of trading pairs are even faster than many centralized exchanges. People can't help but wonder: is the so-called "decentralization" only effective when the market is stable, and once it spirals out of control, does it become arbitrary and reckless?

If decentralized exchanges can also "force delist", what is the significance of this? Which is more reliable, centralized exchanges or decentralized exchanges?

The Trade-off Between Decentralization and Efficiency

From the perspective of "decentralization", decentralized exchanges seem to be safer because assets are always under the control of users. The AMM mechanism ensures the feasibility of decentralized trading, but the drawbacks are obvious: poor liquidity, high slippage, and the presence of impermanent loss, with an average user experience. Most people use decentralized exchanges either for long-term holding or for participating in airdrops, leading to a subpar daily trading experience.

Centralized exchanges are easy to use, have sufficient depth, and strong functionality, allowing for smooth trading whether it is contracts or spot trading. However, the risks are also obvious: once funds are deposited, users lose control. Historical incidents of exchanges being hacked or going bankrupt have raised doubts about the security of centralized exchanges.

This incident is a microcosm of this dilemma: the concept of decentralization is in natural conflict with capital efficiency. Pursuing absolute decentralization inevitably affects efficiency; while pursuing the highest efficiency often requires a certain degree of centralized control.

This is a typical "trolley problem": should we adhere to the principle of decentralization, accepting potential system risks and efficiency losses, or should we sacrifice some decentralization when necessary to ensure system security and efficiency? The platform chose the latter, "pulling the plug" to protect itself in the face of huge losses, but has also been criticized for this.

Interestingly, many critics have faced similar choices. A well-known trading platform also "pulled the plug" on March 12, 2020, in response to severe market fluctuations, and the reactions were mixed. Failing to take emergency measures could lead to catastrophic effects on the entire industry. This highlights the complex relationship between ideals and reality.

Future Development Directions of the Crypto Market

Looking ahead, decentralized exchanges may develop towards "partial decentralization + transparent rules + necessary intervention," rather than pursuing absolute decentralization or complete centralization.

The new generation of decentralized exchanges will seek a balance between crypto culture and capital efficiency, retaining sufficient on-chain transparency and user control, while effectively protecting the system and user assets in times of crisis. This balance is not a betrayal of ideals, but a pragmatic response to reality.

Centralized exchanges are also facing transformation. In response to users' concerns about asset control and competition from decentralized exchanges, centralized exchanges are undergoing a strategic transformation centered around Web3 wallets. Whether they are leading, established, or emerging exchanges, they are all trying to balance convenience and security through the "Centralized Exchange + Web3 Wallet" model:

• A well-known trading platform has not only expanded its business scope by vigorously developing its wallet services but also consolidated its position in the industry.
• Another large exchange acquired a well-known wallet early on, but it wasn't until the rise of the decentralized market that it truly valued the Web3 wallet business, increasing investment to make it a core of the ecosystem.
• Some established exchanges are also following the trend by launching their own Web3 wallets and setting up innovation zones to attract popular projects.
• Emerging exchanges proactively launch full-featured Web3 wallets and take the lead in accessing multi-chain ecosystems, seeking differentiation in fierce competition.

This transformation not only responds to user needs but also aligns with the logic of industry development. By integrating Web3 wallets, centralized exchanges retain depth and efficiency while providing users with asset autonomy: users can freely choose to have their assets held by the exchange or transferred to a self-custody wallet.

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 intense competition.

Combining the efficiency of centralized exchanges with the transparency of decentralized exchanges may be the next development stage of crypto trading—not a conflict of ideas, but a fusion of advantages.