Written by: Frank, PANews
With popularity comes controversy; as the current most attention-grabbing new Layer1 public chain, Hyperliquid's token market value surpassed $11 billion after its airdrop, and its fully circulating market value once approached $35 billion, with ecosystem data growing exponentially. While the market is extremely optimistic, it has also sparked considerable debate recently.
These controversies mainly revolve around Hyperliquid's performance as a Layer1 in terms of decentralized governance and the introduction of more developers. Especially in terms of node participation, it seems to be filled with centralized characteristics, which again confirms many skeptics' impressions of Hyperliquid as a single-entity chain. The officials have also basically acknowledged that the network has these issues in their response, but they will gradually resolve them.
An open letter sparked governance controversy
On January 8, Kam, an employee from node operator Chorus One, published an open letter on social media, pointing out that Hyperliquid currently has many issues regarding closed-source code, a black market for testnet tokens, and limited decentralization. This statement quickly sparked numerous discussions within the community about Hyperliquid's governance.
Kam mentioned in the open letter that there are difficulties in operating testnet nodes, including closed-source, lack of documentation, and over-reliance on centralized APIs. There are design issues with the incentive mechanisms on the testnet, leading to black market trading of test tokens. The mainnet validators are overly concentrated, and there are issues with insufficient decentralization.
From the content of this open letter, the criticism is directed at the low degree of decentralization in Hyperliquid's governance, with the official and foundation holding absolute dominance over nodes and staking. Second, the lack of transparency in technical and operational information presents a significant problem for ecosystem expansion. Third, the economic incentive mechanism is inadequate, making it difficult for external nodes to sustain costs. Fourth, communication between the officials and nodes is poor, and nodes cannot receive timely guidance from the officials during their operation, nor do they have a channel to provide feedback on issues.
The above are basically the main criticisms of Hyperliquid within the industry. A well-known asset management institution, VanEck, pointed out in a crypto research report released in December that Hyperliquid's valuation is about $28 billion, but it has not attracted a large developer community. If it cannot achieve the expected growth of the developer community, the price of the HYPE token may be difficult to maintain. The research firm Messari also stated on New Year's Day that Hyperliquid's outstanding performance may have come to an end.
After Kam's open letter was released, several industry figures joined the discussion about Hyperliquid. Charles d'Haussy, CEO of competing entity dYdX Foundation, commented, 'Closed source code + limited number of validators + most rights held by one entity + lack of clarity and security in multi-signature bridging setup. The price trend of the token should not be overlooked by so many people.'
Some also believe: 'I don't think the black market for trading testnet tokens is a big problem, because we have seen similar situations in many other protocols.'
The official acknowledges that problems exist, and the road to governance is still long
However, the majority still expressed doubts about the phenomenon of excessive centralization. In response to these doubts, Hyperliquid quickly addressed them on the same day, focusing on the following 6 points: 1. All validators are qualified based on their testnet performance and cannot gain positions through purchase; as the blockchain matures, the validator pool will gradually expand. 2. Further efforts will be made to promote decentralization of the network. 3. Anyone can run an API server pointing to any node; sample client code sends requests to specific API servers, but this is not a basic requirement of the network. 4. The black market for testnet HYPE is unacceptable, and efforts will continue to improve the onboarding process for the testnet. 5. Node code is currently closed source; open sourcing is important, and the project will be open-sourced after development reaches a stable state; Hyperliquid's development speed is several orders of magnitude faster than most projects, and its scope is also several orders of magnitude larger than most projects; code will be open-sourced when safe. 6. Currently, there is only one binary file. Even for a mature network like Solana, the vast majority of validators run a single client.
In summary, Hyperliquid's response did not deny the questions raised by Kam, but basically acknowledged that the network has these issues, and it will gradually resolve them. From the current data of Hyperliquid's validators, the top five nodes in terms of staking volume are all officially operated nodes, with the staking token volume of just these five nodes reaching 330 million, exceeding the total staking amount of all other nodes. Furthermore, although the official has launched a foundation, it has not yet introduced governance voting or related channels. From these angles, Hyperliquid's open governance indeed still has a long way to go.
Valuation game, using Layer1 narrative to defeat all DEXs
Since Hyperliquid's airdrop, the data of the Hyperliquid ecosystem has seen a significant rise. As of January 8, the cumulative number of users reached 300,000, adding 100,000 users in just over a month's time. Moreover, the TVL data reached a peak of $2.8 billion in December, increasing 14 times in a single month. According to a research report from VanEck, its main competitor dYdX did not exceed $600 million in TVL within its first 15 months, and the market value of its token surpasses the total market value of all its peers.
Hyperliquid's outstanding market performance is greatly related to its dual attributes as Layer1 and DEX. As of now, Hyperliquid's attributes as a Layer1 are not complete; on one hand, decentralized open governance still has a significant gap compared to mainstream Layer1. On the other hand, the richness of Hyperliquid's ecosystem also needs enhancement, as the current main applications in the ecosystem are primarily operated by the official team.
As a DEX, Hyperliquid has a performance of 100,000 TPS and the user experience brought by an independent public chain has relatively obvious advantages.
Therefore, if Hyperliquid is positioned as a DEX, it is clearly successful. However, if positioned as Layer1, there is still a long way to go.
Positioning may be an important factor in future market pricing
Additionally, many believe that Hyperliquid may be another gold mine after Solana. However, PANews found in its analysis of Hyperliquid's on-chain data that in the change curve of net profit and loss for Hyperliquid traders, the overall profit curve for traders has long remained negative, and as trading enthusiasm rises, the total amount of losses continues to expand. As of January 7, 2025, the cumulative loss amount for traders reached $51.3 million, an increase of nearly 25 times compared to the same period last year. The total liquidation amount also reached $6.69 billion, and the number of open contracts also grew to $3.78 billion. From this perspective, Hyperliquid seems more like another new on-chain casino.
On January 6, Hyperliquid announced a partnership with Router Protocol to launch a new cross-chain bridge, starting to support cross-chain deposits for over 30 networks including Solana, Sui, Tron, Base, and Ethereum. Compared to the current situation where funds can only be transferred via Arbitrium, this cooperation can bring more flexible channels for capital flow to Hyperliquid.
Overall, the controversy surrounding Hyperliquid and the reasons why many people are optimistic about it stem from the same source. As an exchange led by a DEX, Layer1 currently seems more like a supporting foundation for this exchange. Critics argue that Hyperliquid as a Layer1 lacks transparency and a decentralized governance framework. Supporters argue that Hyperliquid is the only DEX equipped with Layer1. For Hyperliquid's own development, the upcoming situation may always revolve around the contradictions between these two roles.
If the main development is positioned as Layer1, then Hyperliquid's valuation still has a lot of room for growth, as well as many issues to address. If it is only positioned as a high-performance DEX, then a valuation far exceeding peers will raise suspicions of market overvaluation. Moreover, as the ecosystem continues to open up, HYPE entering more market trades will not only dispel doubts about single-coin tokens but also face greater market uncertainties. These issues represent a test of the art of balance for Hyperliquid officials and a challenging problem that investors need to scrutinize carefully.
