Article source: Frank
Author: Frank, PANews
Fame brings controversy; as the most talked-about new Layer1 public chain in the current market, Hyperliquid's token market capitalization surpassed $11 billion after the airdrop, with its fully diluted market cap once approaching $35 billion, and its ecosystem data has grown exponentially. While the market is highly optimistic, it has recently also sparked some controversies.
These controversies mainly revolve around Hyperliquid's performance as a Layer1, where its decentralized governance and the introduction of more developers have been underwhelming. Particularly in terms of node participation, there seems to be an air of closure everywhere, which reinforces many skeptics' impression of Hyperliquid as a standalone chain. The official team has also basically acknowledged the existence of these issues in their response but stated that they will gradually be resolved.
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, black market trading of testnet tokens, and limited decentralization. This statement quickly sparked a lot of discussion in the community about Hyperliquid's governance.
Kam mentioned in the open letter that running testnet nodes is difficult, with issues of closed source, lack of documentation, and excessive reliance on centralized APIs. There are design issues with the incentive mechanisms of the testnet, leading to black market trading of test tokens. The mainnet validators are overly concentrated, with insufficient decentralization.
From the content of this open letter, the sharp criticism is directed at Hyperliquid's low level of decentralization in governance, with the official team and foundation holding absolute control over nodes and staking. Second, the lack of transparency in technology and operational information poses a significant issue for ecosystem expansion. Third, the economic incentive mechanism is not sound, making it difficult for external nodes to sustain costs. Fourth, communication between the official team and nodes is poor, with nodes unable to receive timely guidance from the official team during operations, and lacking channels to provide feedback on issues.
The above points are essentially the main issues that the industry criticizes Hyperliquid for. A well-known asset management firm, VanEck, pointed out in a crypto research report released in December that Hyperliquid's valuation is approximately $28 billion, yet it has not attracted a large developer community. If the growth expectations of the developer community cannot be met, then the price of HYPE tokens may be difficult to maintain. 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 published, several industry professionals joined the discussion about Hyperliquid. Charles d'Haussy, CEO of competitor dYdX Foundation, commented, 'Closed-source code + limited number of validators + most rights weight under one entity + lack of clarity and security in the multi-signature bridge setup. The price trend of the tokens shouldn't go unnoticed by so many people.'
Some 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 team admits the existence of issues; the road to governance remains long
However, most people's 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 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 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. The node code is currently closed source; open-sourcing is important and will be done once the project 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 open-sourced in a secure manner. 6. Currently, there is only one binary file. Even for very mature networks 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 the existence of these issues in the network, stating that they will gradually be resolved. From the current validator data of Hyperliquid, the top five staking nodes are all self-operated by the official team, with just these five nodes' staking token amount reaching 330 million, surpassing the total staking amount of all other nodes. Moreover, although the official team has launched a foundation, they have yet to introduce governance voting and other related channels. From these perspectives, Hyperliquid's open governance indeed still has a long way to go.
Valuation game, using Layer1 narrative to defeat all DEX valuations
Since the Hyperliquid airdrop, the data of the Hyperliquid ecosystem has seen a significant increase. As of January 8, the cumulative number of users reached 300,000, with an addition of 100,000 users in just over a month. Moreover, the TVL data peaked at $2.8 billion in December, a 14-fold increase in a single month. According to a report by VanEck, its main competitor dYdX did not exceed $600 million in TVL within its 15 months of creation, and the market capitalization of its tokens surpasses the total market capitalization of all its peers.
Hyperliquid's outstanding market performance is greatly related to its dual attributes of Layer1 and DEX. As of now, Hyperliquid's attributes as a Layer1 are still incomplete; on one hand, its decentralized open governance still has a significant gap compared to mainstream Layer1s. On the other hand, the richness of the Hyperliquid ecosystem also needs to be improved; currently, the main applications of the ecosystem are predominantly operated by the official team.
As a DEX, Hyperliquid boasts performance of 100,000 TPS, and the user experience brought by its independent public chain foundation has relatively obvious advantages.
Therefore, if Hyperliquid is positioned as a DEX, it is clearly successful. However, if positioned as a Layer1, it has a longer road to traverse.
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 discovered through analysis of Hyperliquid's on-chain data that in the change curve of net gains and losses of Hyperliquid traders, the overall profit curve of traders has long remained negative, and with the rise in trading activity, the total amount of losses has continued to expand. As of January 7, 2025, the cumulative loss amount of traders reached $51.3 million, nearly 25 times larger than 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 seems more like another new on-chain casino.
On January 6, Hyperliquid announced a new cross-chain bridge in collaboration with Router Protocol, starting to support cross-chain deposits across more than 30 networks including Solana, Sui, Tron, Base, and Ethereum. Compared to the current method of transferring funds only through Arbitrium, this collaboration will bring more flexible channels for capital flow to Hyperliquid.
Overall, the controversy surrounding Hyperliquid and the reasons many people are optimistic about it stem from the same source. As an exchange dominated by DEX as its main product, Layer1 currently appears more like a supporting foundation for this exchange. Those questioning it argue that Hyperliquid lacks transparency and a decentralized governance framework as Layer1. Supporters believe that Hyperliquid is the only DEX equipped with Layer1. For Hyperliquid's own development, the upcoming situation may always revolve around the conflicting issues between these two roles.
If primarily developed as Layer1, there is still a lot of room for valuation for Hyperliquid, and many issues to address. If only positioned as a high-performance DEX, then its valuation far exceeding its peers could raise suspicions of market overvaluation. Furthermore, as the ecosystem continues to open up, the entry of HYPE into more market transactions will not only shed the doubts of being a standalone token but also face more market uncertainties. These issues present a balancing act for the Hyperliquid team and a challenging puzzle that requires careful scrutiny from concerned investors.
