Article reprinted from: Frank
Author: Frank, PANews
Fame brings controversy; as the current most watched new Layer 1 public chain, Hyperliquid's token market cap exceeded $11 billion after the airdrop, with a fully diluted market cap approaching $35 billion at one point, and ecosystem data growing exponentially. While the market is extremely optimistic, it has also sparked considerable controversy recently.
These controversies mainly revolve around Hyperliquid's performance as a Layer 1 in decentralized governance and attracting more developers, which has been underwhelming. Especially in terms of node participation, it appears to be filled with closed characteristics, further confirming many skeptics' impressions of Hyperliquid as a standalone chain. The officials have also basically acknowledged these issues in their response but will gradually work to resolve them.
An open letter triggers governance controversy
On January 8th, Kam, an employee from node operator Chorus One, published an open letter on social media, pointing out many problems with Hyperliquid, including closed source code, black market for testnet tokens, and restrictions on decentralization. The statement quickly sparked extensive discussions in the community regarding Hyperliquid's governance.
Kam mentioned in his open letter that operating testnet nodes is difficult and there are issues such as closed source, missing documentation, and excessive reliance on centralized APIs. The incentive mechanism for the testnet has design issues, leading to black market trading of test tokens. There are issues with excessive concentration of mainnet validators and insufficient decentralization.
From the content of this open letter, it is clear that the criticism is aimed at Hyperliquid's low level of decentralization in governance, where the official team and foundation hold absolute control over nodes and staking. Second, the technology and operational information lack transparency, which is a significant issue for ecosystem expansion. Third, the economic incentive mechanism is inadequate, making it difficult for external nodes to maintain costs. Fourth, communication between the official team and nodes is poor, preventing timely guidance for node operations, and nodes also lack channels for feedback.
The above are largely the main issues criticized by the industry regarding Hyperliquid. A well-known asset management institution, VanEck, pointed out in a December crypto research report that Hyperliquid's valuation is around $28 billion but has not attracted a large developer community to join. If the growth expectations for the developer community cannot be realized, the price of the HYPE token may be difficult to sustain. Research firm Messari also published an article on New Year's Day stating that Hyperliquid's excellent performance may have already ended.
After Kam's open letter was released, several industry professionals joined the discussion about Hyperliquid. Charles d'Haussy, CEO of competing project dYdX, commented, "Closed source code + limited number of validators + most of the equity weight under one entity + unclear and unsafe bridge multi-signature setup. The token price trend should not be overlooked by so many people."
Some people also believe: "I don't think the black market speculation on the testnet is a big issue, as we have seen this situation in many other protocols."
Officials acknowledge the existence of issues; the path to governance is still long
However, the majority of opinions still express skepticism towards this phenomenon of excessive centralization. In the face of these doubts, Hyperliquid quickly responded that day, focusing on the following six points: 1. All validators qualify 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 efforts will be made to promote the decentralization of the network. 3. Anyone can run an API server pointing to any node; example client code sends requests to a specific API server, but this is not a basic requirement of the network. 4. The black market for testnet HYPE tokens is unacceptable, and efforts will continue to improve testnet onboarding processes. 5. Node code is currently closed source; open-sourcing is important, and the project will open-source once development stabilizes; Hyperliquid's development speed is several orders of magnitude faster than most projects, and its scope is also several times larger than most projects; code will be open-sourced under safe conditions. 6. Currently, there is only one binary file. Even for a highly mature network 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 these problems exist in the network and will be gradually addressed. From the current data of Hyperliquid's validators, the top five nodes in terms of staking amount are all officially operated nodes, with these five nodes alone holding 330 million tokens, exceeding the total staking amount of all other nodes. Additionally, while the official team has launched a foundation, no governance voting channels or related mechanisms have been introduced yet. From these perspectives, it is clear that Hyperliquid's open governance has a long way to go.
Valuation game, using Layer 1 narrative to surpass all DEX valuations
Since the Hyperliquid airdrop, the data of the Hyperliquid ecosystem has seen a significant increase. As of January 8th, the cumulative number of users reached 300,000, with an additional 100,000 users added in just over a month. Additionally, the TVL data peaked at $2.8 billion in December, increasing 14 times in a single month. According to a research report by VanEck, its main competitor dYdX did not exceed $600 million in TVL within its first 15 months, while the market cap of its token surpassed the total market cap of all its peers.
Hyperliquid's outstanding market performance is greatly 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 needs to be enhanced, as the current main applications in the ecosystem are primarily operated by the official team.
As a DEX, Hyperliquid boasts a performance of 100,000 TPS, and the user experience derived from its independent public chain foundation has a relatively obvious advantage.
Therefore, if Hyperliquid is positioned as a DEX, it is clearly successful. However, if positioned as a Layer 1, there is a much longer road ahead.
Positioning may be an important factor in future market pricing
Additionally, it is worth mentioning that many believe Hyperliquid could be another gold rush after Solana. However, PANews found in analyzing Hyperliquid's on-chain data that the net profit and loss curve for Hyperliquid traders indicates that the overall profit curve for traders has long remained negative, and as trading activity increases, 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 than the same period a year ago. The accumulated liquidation amount also reached $6.69 billion, along with the number of open contracts increasing to $3.78 billion. From this perspective, Hyperliquid resembles another new on-chain casino.
On January 6th, Hyperliquid announced a partnership with Router Protocol to launch a new cross-chain bridge, starting to support cross-chain deposits from over 30 networks including Solana, Sui, Tron, Base, and Ethereum. Compared to the current ability to transfer funds only through Arbitrum, this collaboration will provide Hyperliquid with more flexible channels for fund flow.
Overall, the controversies surrounding Hyperliquid and the reasons many people are optimistic about it stem from the same source. As an exchange dominated by DEX products, Layer 1 currently seems more like supporting infrastructure for this exchange. Critics argue that Hyperliquid lacks transparency and a decentralized governance framework as a Layer 1. Supporters contend that Hyperliquid is the only DEX equipped with Layer 1. For Hyperliquid's own development, the upcoming situation may continuously revolve around the contradictions between these two roles.
If primarily developed as Layer 1, then Hyperliquid's valuation has a lot of room for growth, but also many issues to address. If it is only positioned as a high-performance DEX, then an overvaluation compared to peers may raise market skepticism. Moreover, as the ecosystem continues to open up, HYPE will enter more market transactions, and beyond getting rid of the single coin skepticism, it will also face more market uncertainties. These issues are a test of the art of balance for Hyperliquid officials and a critical challenge for concerned investors.
