Hyperliquid Debacle Shows Crypto Still Relies on Centralized Systems, Experts Say

Key Takeaways:

The recent Hyperliquid exploit proves crypto is still centralized, experts say. Most centralized exchanges and DeFi protocols operate on models relying on “implicit trust.” Analysts say crypto needs to build a native peer-to-peer framework that “removes trust from the equation.”

The recent crisis at the decentralized perpetual futures exchange Hyperliquid shows that cryptocurrency still relies on centralized or opaque infrastructure, according to experts who spoke to Cryptonews.

On March 26, Hyperliquid suffered its second whale manipulation event in as many weeks after a trader shorted Solana-based token Jelly-My-Jelly on the exchange, forcing the platform to take up to $12 million in losses.

Shortly after, the exchange delisted Jelly-My-Jelly perpetual futures and pledged to refund affected users. As Kaiko Research notes, the “price manipulation exposed cracks in Hyperliquid’s liquidation engine.”

Hyperliquid potentially desecrated the Mecca of old-style Bitcoin (BTC) purists on decentralization when its validators intervened to stop further loss, as the protocol came under attack, according to analysts.

Eric Chen, CEO of layer-one DeFi protocol Injective, told Cryptonews:

“Hyperliquid is a strong non-KYC perp exchange, but it’s not decentralized by most metrics.”

One of the key selling points for cryptocurrency is its ability to maintain a skeptical remove from a central authority like the government, central banks, or third-party intermediaries. This is especially true for DeFi, or decentralized finance – at least in theory.

But the Hyperliquid crisis pours cold water on this foundational principle. It has even started to draw comparisons with FTX, the Sam Bankman-Fried-led exchange that collapsed in 2022 with an estimated $9.7 billion in customer and investor funds.

“The Jelly situation revealed some parallels to FTX—where HLP plays the similar role for Hyperliquid that Alameda did for FTX with regards to backstopping liquidations,” Chen said, adding:

“The way Jelly was delisted—and how its price was set at that time—shows how much control one person or team has over the platform. These kinds of centralized decisions, made with limited transparency or discourse, are exactly what led to problems at FTX. And unfortunately, this kind of structure is still too common across the crypto space.”

To reduce the risks associated with centralized systems, Chen says crypto companies need to build models that blend usability with greater user control.

He cited Helix crypto exchange “as already moving in this direction by adopting hybrid approaches that maintain strong UX without compromising decentralization and custody.”

What Happened?

The attack on Hyperliquid followed a familiar pattern, similar to previous incidents like Mango Markets: exploit thin liquidity on spot and perpetual markets to manipulate the price of a low-liquidity token.

According to Kaiko Research, a trader attacked Hyperliquid’s Liquidity Provider (HLP) vault by opening large positions in JellyJelly’s perp futures market: One short worth $4 million and two longs totaling $3 million.

At the time, the meme coin had a total market cap of $15 million, with an average daily liquidity of $72,000. The trader carried out two coordinated, simultaneous actions.

The trader opened a short position on Jelly-My-Jelly, then removed the margin supporting it, triggering forced liquidation and transferring the short to Hyperliquid’s HLP vault.

JELLY was then aggressively bought on spot markets, causing the price to spike by 500% within one hour.

The strategy resulted in a loss of about $12 million for HLP, according to Lookonchain data. There was speculation that if the JellyJelly price fell too low, the Hyperliquid Liquidity Provider vault could be cleaned out.

“As open interest exceeded key thresholds, new positions were blocked, preventing liquidators from effectively closing the liquidation of the attacker’s short position,” Kaiko said in a report released on March 31.

“The delay amplified losses, further worsening the situation for the HLP vault.”

It said the attack was “calculated,” citing on-chain data which revealed that as early as 10 days before the attack, the user “was already running test transactions on Hyperliquid, likely to refine their strategy.”

Eventually, Hyperliquid announced its validators had voted to delist Jelly perpetual futures contracts “after evidence of suspicious market activity.”

“All users apart from flagged addresses will be made whole from the Hyper Foundation,” said the team. “Technical improvements will be made, and the network will grow stronger as a result of lessons learned.”

‘Trust’ Let Down Hyperliquid

Alexis Sirkia is the chairman of Yellow Network, a decentralized clearing layer that aims to remove trust dependencies in DeFi, allowing for peer-to-peer trades, signed orders, and direct settlements. Sirkia argues that FTX didn’t fail because it was centralized.

“It failed because users had to trust it,” he tells Cryptonews, adding that he sees the same vulnerabilities with Hyperliquid.

“Hyperliquid showed the same flaw: when pressure hit, trades could be halted and settlements changed. If you need to trust a platform, it’s not trustless no matter how ‘DeFi’ it looks.”

According to Sirkia, most centralized crypto exchanges (CEXs) and DeFi protocols operate on models relying on “implicit trust,” such as custodians, dark order books, and admin keys with override capability. This is a problem, he says.

“What we are seeing is an industry built on the principles of decentralization, yet with centralized choke points. These fail points are everywhere, and all it takes is market pressure or malicious players to expose them.”

Sirkia says crypto needs to build a native peer-to-peer framework that “removes trust from the equation”. For example, a decentralized communication layer for market makers and traders would improve efficiency and eliminate manipulation, he suggests.

Bitget CEO Gracy Chen was more scathing in her analysis, saying, “Hyperliquid may be on track to become the next FTX 2.0.”

“The way it handled the JELLY incident was immature, unethical, and unprofessional, triggering user losses and casting serious doubts over its integrity,” Chen wrote on X.

“Despite presenting itself as an innovative decentralized exchange with a bold vision, Hyperliquid operates more like an offshore CEX with no KYC/AML, enabling illicit flows and bad actors.”

She said:

“The platform’s product design reveals alarming flaws: mixed vaults that expose users to systemic risk, and unrestricted position sizes that open the door to manipulation. Unless these issues are addressed, more altcoins may be weaponized against Hyperliquid—putting it at risk of becoming the next catastrophic failure in crypto.”

Regulation: The Price of Crypto’s Mainstream Adoption

According to Todd Ruoff, CEO of decentralized AI infrastructure network Autonomys, one of the biggest counterparty risks in crypto today comes from what he calls “opaque, centralized intermediaries that lack robust oversight.”

“Many platforms still operate without full transparency regarding their balance sheets, liquidity buffers, or risk management practices,” Ruoff told Cryptonews, adding:

“This creates vulnerabilities where a single entity’s failure—or worse, mismanagement—can trigger a domino effect across the ecosystem. To tackle these issues, the industry must push for greater transparency and stricter auditing standards.”

Crypto’s short history is a place for finding roots, constants, and recognitions. Pilgrims withdraw from modern times to contemplate the “noblest periods, the highest forms, the purest individualities,” as French philosopher Michel Foucault puts it.

But crypto aficionados appear to have failed to stand for libertarian, human-centered ideals for too long. Of late, there has been a departure from the principle of decentralization and privacy in cryptocurrency.

In 2022, Ethereum-based crypto mixer Tornado Cash announced it had started to block addresses sanctioned by the U.S. Office of Foreign Assets Control. The announcement indicated the direction that the crypto industry was taking in relation to regulation.

For governments, crypto is becoming too mainstream to ignore and too chaotic to neglect. For example, former U.S. President Joe Biden released an executive order three years ago justifying his government’s encroachment into sovereign finances in the interest of “national security.”

“We must mitigate the illicit finance and national security risks posed by misuse of digital assets,” Biden said at the time. “Digital assets may pose significant illicit finance risks, including money laundering, cybercrime, and ransomware…terrorism financing.”

Across the world, government agencies are targeting crypto investors not only with taxes but mandatory registration and full disclosure rules.

Some of the regions that have weaponized lawbooks to control aspects of digital asset use include China, India, Australia, Japan, and the EU.

Experts say state regulation appears to be the price the crypto sector will have to pay for assimilation into the mainstream economy. However, this also raises questions about whether decentralization as a tool for resisting censorship is a myth.

“While Bitcoin’s core technology remains decentralized, the crypto industry as a whole has grown more centralized than Satoshi originally envisioned,” said Ruoff, the Autonomys chief executive officer.

“Today, key infrastructure—like centralized exchanges, mining pools, and even some governance mechanisms—concentrate power in ways that stray from Bitcoin’s ideal of a fully permissionless system.”

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