Author: Frank, PANews
As the most popular new Layer 1 public chain in the market, Hyperliquid's token market value exceeded 11 billion US dollars after the airdrop, and the total circulation market value was close to 35 billion US dollars. The ecological data has grown exponentially. While the market is extremely optimistic, it has also caused a lot of controversy recently.
These controversies mainly revolve around the fact that Hyperliquid, as a Layer 1, has performed poorly in terms of decentralized governance and the introduction of more developers. Especially in terms of node participation, it seems to be full of closed colors, which once again confirms the impression of many skeptics that Hyperliquid is a stand-alone chain. The official also basically admitted in its response that these problems exist in the network, but will be gradually resolved in the future.
An open letter sparked governance controversy
On January 8, Kam, an employee of node operator Chorus One, published an open letter on social media, pointing out that Hyperliquid currently has many problems in terms of closed source code, black market for testnet tokens, and limited decentralization. This statement quickly triggered many discussions in the community about Hyperliquid governance.
Kam mentioned in the open letter that the testnet nodes are difficult to operate, with problems such as closed source, lack of documentation, and over-reliance on centralized APIs. There are design problems with the testnet incentive mechanism, and black market transactions of test coins have occurred. The mainnet validators are over-concentrated and the degree of centralization is insufficient.
Judging from the content of this open letter, the criticism is directed at Hyperliquid's low degree of decentralization in governance, and the official and foundation have absolute dominance in nodes and pledges. Second, the technical and operational information is not transparent, which is a big problem for expanding the ecosystem. Third, the economic incentive mechanism is not sound, and it is difficult for external nodes to maintain costs. Fourth, the communication between the official and the nodes is not smooth. During the operation of the nodes, it is impossible to obtain official guidance on the nodes in a timely manner, and the nodes also lack channels for feedback.
The above are basically the main problems that the industry criticizes about Hyperliquid. In a crypto research report released in December, VanEck, a well-known asset management institution, also pointed out that Hyperliquid's valuation is about 28 billion US dollars, but it has not attracted a large number of developer communities to join. If the growth expectations of the development community cannot be achieved, the price of HYPE tokens may be difficult to maintain. Research institution Messari also published an article on New Year's Day saying that Hyperliquid's excellent performance may have ended.
After Kam's open letter was released, many industry insiders joined the discussion about Hyperliquid. Charles d'Haussy, CEO of dYdX Foundation, a competitor on the same track, commented, "Closed source code + limited number of validators + most of the equity weight under 1 entity + bridge multi-signature setting lacks clarity and security. The price trend of tokens should not be ignored by so many people."
Another person said: “I don’t think the black market for testnet hype is a big problem because we have seen this on many other protocols.”
Officials admit that the problem exists, but there is still a long way to go to solve it
However, most people still question this phenomenon of excessive centralization. Faced with these doubts, Hyperliquid also responded quickly on the same day, focusing on the following 6 points: 1. All validators are qualified based on the performance of the test network and cannot obtain seats by purchasing; as the blockchain matures, the validator set will gradually expand. 2. It will further promote the decentralization of the network. 3. Anyone can run an API server pointing to any node, and the sample client code sends a request to a specific API server, but this is not a basic requirement of the network. 4. The test network HYPE black market is unacceptable, and efforts will continue to be made to improve the entry process of the test network. 5. The node code is currently closed source; open source is important, and the project will be open source after the development enters 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 source when it is safe. 6. There is only one binary file at present. Even for a very mature network like Solana, the vast majority of validators run a single client.
In summary, Hyperliquid's response did not deny the issues raised by Kam in the questioning, but basically acknowledged that these problems exist in the network, but will be gradually resolved in the future. Judging from the current data of Hyperliquid's validators, the top five nodes with the highest stakes are all officially operated nodes. The staked tokens of these five nodes alone reached 330 million, which exceeded the total number of stakes of all other nodes. In addition, although the official has launched a foundation, it has not yet launched related channels such as governance voting. From these perspectives, Hyperliquid's open governance still has a long way to go.
Valuation Game, Using Layer 1 Narrative Valuation to Defeat All DEXs
Since the Hyperliquid airdrop, the data of the Hyperliquid ecosystem has seen a sharp increase. As of January 8, the cumulative number of users reached 300,000, with 100,000 new users in more than a month. In addition, the TVL data reached a peak of US$2.8 billion in December, a 14-fold increase in a single month. According to VanEck's research report, its main competitor dYdX has not exceeded US$600 million in TVL within 15 months of its creation, and the market value of its tokens exceeds the total market value 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 attributes as a Layer 1 are not complete. On the one hand, decentralized open governance is still far behind the mainstream Layer 1. On the other hand, the richness of the Hyperliquid ecosystem also needs to be improved. The current main applications of the ecosystem are all operated by the official team.
As a DEX, Hyperliquid has a relatively obvious advantage in user experience due to its 100,000 TPS performance and independent public chain foundation.
Therefore, if Hyperliquid is positioned as a DEX, it is obviously successful. If it is positioned as a Layer 1, it has a long way to go.
Positioning may be an important factor in future market pricing
It is also worth mentioning that many people believe that Hyperliquid may be another gold rush after Solana. However, when PANews analyzed Hyperliquid's on-chain data, it was found that in the change curve of Hyperliquid traders' net profit and loss, it can be seen that the overall profit curve of Hyperliquid traders has been negative for a long time, and as the trading heat increases, the overall amount of losses is still expanding. As of January 7, 2025, the cumulative loss of traders is 51.3 million US dollars, which is nearly 25 times higher than the same period a year ago. The cumulative liquidation amount has also reached 6.69 billion US dollars, and the number of open contracts has also increased, reaching 3.78 billion US dollars. From this perspective, Hyperliquid is more like another new on-chain casino.
On January 6, Hyperliquid announced the launch of a new cross-chain bridge in cooperation with Router Protocol, which began to support cross-chain deposits of more than 30 networks including Solana, Sui, Tron, Base and Ethereum. Compared with the current funds transfer that can only be carried out through Arbitrium, this cooperation can bring Hyperliquid more flexible channels for capital flow.
In general, the controversy surrounding Hyperliquid is the same as the reason why many people are optimistic about it. As an exchange with DEX as its leading product, Layer1 is currently more like the underlying supporting product of this exchange. Those who doubt it believe that Hyperliquid lacks transparency and a decentralized governance framework as a Layer1. Supporters believe that Hyperliquid is the only DEX equipped with Layer1. As for the development of Hyperliquid itself, the situation it will face in the future may always revolve around the contradiction between these two roles.
If the main development is Layer 1, then Hyperliquid's valuation still has a lot of room for improvement and there are many problems to deal with. If it is only positioned as a high-performance DEX, then the valuation far exceeding that of its peers will raise suspicions of overvaluation in the market. Moreover, as the ecosystem continues to open up, HYPE will enter more market transactions, get rid of the doubts about stand-alone coins, and will also face more market uncertainties and changes. These issues are a test of the art of balance for Hyperliquid officials, and for investors who are concerned, they are even more difficult problems that require careful scrutiny.
