Author: Frank, PANews
Fame brings controversy. As the most attention-grabbing new Layer 1 public chain in the current market, Hyperliquid's token market cap surpassed $11 billion after the airdrop, and its fully diluted market cap once approached $35 billion, with ecosystem data growing exponentially. While the market is extremely optimistic, it has also triggered considerable controversy recently.
These controversies mainly revolve around Hyperliquid's performance as a Layer 1 in decentralized governance and in attracting more developers. Especially in terms of node participation, it seems to be filled with closed characteristics, which again confirms many skeptics' impressions of Hyperliquid as a single-token chain. The official response also basically acknowledges that the network has these issues but 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, such as closed-source code, black market tokens on the testnet, and limitations on decentralization. This statement quickly sparked many discussions in the community regarding Hyperliquid's governance.
Kam mentioned in the open letter that operating testnet nodes is challenging, with issues such as closed-source, lack of documentation, and excessive reliance on centralized APIs. The incentive mechanisms for the testnet have design flaws, leading to black market trading of test tokens. There are also issues with excessive concentration of mainnet validators and insufficient decentralization.
From the content of this open letter, it is clear that the focus is on the low level of decentralization in Hyperliquid's governance, with the official and foundation holding absolute control over nodes and staking. Secondly, there is a lack of transparency in technical and operational information, which poses a significant problem for ecosystem expansion. Thirdly, the economic incentive mechanisms are not sound, making it difficult for external nodes to sustain costs. Fourthly, there is poor communication between the official and nodes, and during the node operation process, timely guidance from the official is lacking, and nodes also lack channels to provide feedback on issues.
These are basically the main problems that the industry has criticized Hyperliquid for. 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 the growth expectations of the developer community cannot be met, it may be difficult to maintain the price of the HYPE token. The research institution 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 published, several industry professionals joined the discussion about Hyperliquid. Charles d'Haussy, CEO of competitor dYdX Foundation, commented, "Closed-source + limited number of validators + most voting power under one entity + lack of clarity and security in multi-signature settings for bridging. The price trend of the token should not be ignored by so many people."
Some people believe: "I don't think the black market speculation of the testnet is a big issue because we have seen this situation in many other protocols."
The official acknowledges the existence of problems; the governance journey remains long.
However, the majority of opinions still express skepticism about this phenomenon of excessive centralization. Facing these doubts, Hyperliquid quickly responded on the same day, focusing on the following six points: 1. All validators are qualified based on their performance on the testnet and cannot obtain seats through purchase; as the blockchain matures, the validator pool will gradually expand. 2. Further promotion of the network's decentralization will be pursued. 3. Anyone can run an API server pointing to any node; example client code sends requests to specific API servers, but this is not a basic requirement of the network. 4. The HYPE black market on the testnet is unacceptable, and efforts will continue to improve the entry process for the testnet. 5. The node code is currently closed-source; open-source is important, and the project will become open-source 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; the code will be made open-source in a secure environment. 6. Currently, there is only one binary file. Even for very mature networks like Solana, the vast majority of validators also run a single client.
In summary, Hyperliquid's response did not deny the issues raised by Kam but basically acknowledged that the network has these problems and that they will be gradually resolved. From the current data on Hyperliquid's validators, the top five nodes by staking volume are all self-operated nodes by the official team, and the staking volume of just these five nodes has reached 330 million tokens, exceeding the total staking amount of all other nodes combined. Additionally, although the official has launched a foundation, there is still no governance voting or related channels available. From these perspectives, Hyperliquid's open governance indeed has a long way to go.
Valuation game, using Layer 1 narrative to outperform all DEX valuations.
Since the Hyperliquid airdrop, the data of the Hyperliquid ecosystem has seen a significant increase. As of January 8, the total number of users reached 300,000, with an additional 100,000 users added in just over a month. Moreover, the TVL data peaked at $2.8 billion in December, increasing 14 times in a single month. According to VanEck's research report, its main competitor dYdX did not exceed $600 million in TVL within the first 15 months of its creation, and its token market cap exceeds the total market cap of all its peers.
Hyperliquid's excellent market performance is closely related to its dual attributes of Layer 1 and DEX. As of now, Hyperliquid's Layer 1 attributes are not complete; on one hand, the decentralized open governance still has a significant gap compared to mainstream Layer 1s. On the other hand, the richness of the Hyperliquid ecosystem also needs to be improved; currently, most applications in the ecosystem are primarily operated by the official team.
As a DEX, Hyperliquid has the 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 obviously successful. However, if positioned as a Layer 1, there is still a long way to go.
Positioning may be an important factor in future market pricing.
It is also worth mentioning that many believe Hyperliquid may be another gold mine after Solana. However, PANews found during the analysis of Hyperliquid's on-chain data that in the change curve of Hyperliquid traders' net gains and losses, the overall profit curve of Hyperliquid traders has long been negative, and as trading activity rises, the total amount of losses continues to expand. As of January 7, 2025, the cumulative loss amount for traders reached $51.3 million, nearly 25 times larger compared to the same period a year ago. The cumulative liquidation amount has also reached $6.69 billion, along with an increase in the number of open contracts, reaching $3.78 billion. From this perspective, Hyperliquid resembles another new on-chain casino.
On January 6, Hyperliquid announced a partnership with Router Protocol to launch a new cross-chain bridge, beginning 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 through Arbitrium, this collaboration can bring more flexible channels for fund flow to Hyperliquid.
Overall, the controversies surrounding Hyperliquid stem from the same reasons that many are optimistic about it; as an exchange dominated by DEX products, Layer 1 currently seems more like a supporting underlying layer for this exchange. Critics argue that Hyperliquid lacks transparency and a decentralized governance framework as a Layer 1. Supporters argue that Hyperliquid is the only DEX equipped with Layer 1. For Hyperliquid's own development, the situation it faces in the future may also always revolve around the contradictions between these two roles.
If mainly developed as Layer 1, then Hyperliquid's valuation still has a lot of space and many issues to address. If only positioned as a high-performance DEX, then the valuation far exceeding its peers will raise suspicions of market overvaluation. Moreover, as the ecosystem continues to open up and HYPE enters more market transactions, it will face more market uncertainties beyond the doubts of being a single-token coin. These issues are a test of the balance for Hyperliquid's officials and a difficult problem that requires careful scrutiny for concerned investors.
