DeFi Not So Decentralized: Hot Take From The Hyperliquid Scandal

Forbes

01-04-2025

Human hands with strings manipulating diagram.
The accurate level of decentralization in Web3 has been under much scrutiny. After all, it promised an alternative system without a single point of failure. As we learnt through the years, metrics such as the Nakamoto coefficient tell us the degree of network decentralization. At the same time, people associate DeFi with a range of financial products showcasing the same promise of decentralization. And yet, in most cases, DeFi relates to financial applications running on the blockchain, with various degrees of internal control for security measures within the product itself. As DAI is considered the most decentralized stablecoin, USDC is highly centralized. The question is: Is centralization always bad?
This conversation resurfaced after Hyperliquid faced a liquidity crisis. Solana-based memecoin JELLY pumped nearly 500%, triggered by a high-stakes exploit—not of vulnerabilities but of the platform's own mechanisms. The situation escalated rapidly, placing more than $230 million in protocol funds at risk. This event reignited the decentralization debate. Here's why…
Let's explore what happened. A trader opened a $6 million short position using 20x leverage; rather than waiting for the market to move organically, they executed a series of spot market buys that caused JELLY's price to spike. This rapid pump triggered the liquidation of their own short 'intentionally' to offload the risk directly onto the protocol. An audacious tactic.
With no external liquidators willing to absorb the exposure, Hyperliquid's own vault was forced to inherit the short position due to triggering the protocol's built-in fallback mechanism.
At the height of the chaos, data surfaced showing Hyperliquid's vault holding a staggering 388 million JELLY short—amounting to over $10 million in unrealised losses–that left the DeFi community asking not just how it happened but what comes next.
Another observer, @printer_brrr, described it in a single, now-viral meme:
'Short on perp. Pump the *coin on spot. Perp gets liquidated.'
Beneath the humor lay a precise summary of calculated sequences—one that weaponised market mechanics and forced a decentralized platform to absorb the weight of a highly toxic position. As the JELLY price continued its meteoric climb, losses within the vault soared past $12 million; had the rally persisted, the platform could have lost its entire $230M reserve.
Faced with a full vault wipeout, Hypererliquid initiated an emergency response. The platform force-liquidated 392 million JELLY at the price of $0.0095, well below market value at the time.
While extreme, the move ultimately worked in Hyperliquids' favour; the protocol actually made a profit of $703,000. To prevent further exposure, Hyperliquid delisted JELLY, flipping what could have been a platform-threatening liquidation into a controlled act of damage limitation. Talk about sparking controversy in the community.
Although the platform survived intact, the episode made one thing clear: centralization can quietly resurface in a time of survival.
Decentralized finance encompasses a wide range of protocols: exchanges, lending, perps, stablecoins. And while misleading people about the protocol's decentralization capabilities is wrong, centralization can be helpful if we think within the broader spectrum of blockchain-based finance. Onchain finance, for example, does not rely on the promise of decentralization. It usually refers to processes that include centralized counterparties. Take tokenization, for example, where custodians, brokers, and admins are not decentralized. And yet, the financial sector can still benefit from blockchain. It's high time to start differentiating between what fully decentralized platforms can do and what kind of risks they may pose. After all, entities such as Circle being able to freeze their stablecoins in the face of an exploit serves a security function. On the other hand, if people trust the protocol and use it with its supposed decentralization in mind, it is no surprise that some traders are unhappy with how Hyperliquid solved this problem.
In the end, the Hyperliquid scandal opened a Pandora's box of discussions about how many DeFi platforms will operate in a decentralized setting until an exploit happens. The clue to this should be that there is nothing wrong with having centralized elements of business, as long as projects don't present themselves as fully decentralized. Managing expectations of users is the key here, but as always–we need to do our own research.