Who is the Centralized Chain, again?

Key Takeaways

• The blockchain investment market is trending back towards community-based funding after going through phases of ICOs and VC-led private markets. This shift is occurring because there has been growing resistance to VCs investing at relatively low prices, then listing tokens at high valuations and selling them to retail investors.
  

• In this market, Hyperliquid has introduced a groundbreaking tokenomics with "70% community airdrop," while simultaneously showcasing an outstanding product, establishing a new paradigm in the market.
  

• While there are criticisms that Hyperliquid is "centralized," I feel that in many aspects, it's actually quite decentralized and well embodies the blockchain spirit - too much so to be considered centralized. What truly constitutes a centralized chain? Let's reconsider this question.

1. Hyperliquid - The Heretic That Set New Standards

1.1 Building Blockchain Requires Substantial Resources

Building blockchain infrastructure and establishing an ecosystem requires astronomical amounts of money. Consequently, like any other product development, the blockchain industry has considered initial capital raising as a natural process. Despite the industry's emphasis on decentralization and community, blockchain infrastructure design and implementation required significant resources, leading all projects to raise initial funding through their respective methods.

While ICO-based community funding models aligned best with blockchain's "philosophy," the trend shifted towards raising funds from VCs (Venture Capital) in exchange for tokens, similar to other industries, as financial fraud under the guise of 'decentralization' became frequent.

1.2 The Money Flex Disguised as Fundraising

However, anything that stagnates tends to rot. Initially, VCs were brought in to prevent ICO-related financial fraud and align incentives with capable early investors to build excellent blockchain infrastructure. But as the market overheated and demand for promising blockchains surged, the VC investment market began to bubble. In 2019 and 2021, initial investments rarely exceeded $10M, and surpassing $50M was considered substantial. Valuations exceeding $100M were deemed "expensive." However, as the investment market bubbled, projects started emerging with incredible valuations of $500M, reaching even $1B and $5B, without proper products.

This pattern was highly irrational, considering that even in traditional industries, unicorn status (value over $1B) required proper products and significant global impact(at least huge impact on local market). Yet, in the blockchain market, projects were achieving unicorn valuations before product launch (pre-mainnet), creating an abnormal phenomenon.

The question is: who supports these unreasonably inflated values? Ultimately, it's retail investors. VCs invest large sums at absurd valuations and dump them into the retail market. Projects began spending money on various things beyond "protocol building" after raising funds at high valuations. Whether creating merchandise or throwing parties, protocols emerged left and right, spending money recklessly. Was this really necessary for protocol development? Though subjective, I absolutely think not.

1.3 What is the Investment For?

Raising substantial initial capital ultimately shook blockchain's foundation. Most post-Ethereum infrastructures build blockchain consensus through Proof of Stake, and allocating large token allocation to early investors means giving them significant influence over the blockchain itself, diverging from blockchain's pursued 'fairness.' Originally, blockchain didn't prioritize allocating supply to famous investors or offer exclusive investment opportunities. It was a system that rewarded anyone who saw the chain's potential and participated.

But today's blockchain is different. Even if you recognize a chain's potential early, you can't invest unless you're famous, influential, or a VC. By the time regular people can purchase tokens in the market, the value has already exceeded unicorn status. Opportunities have become exclusive to those with money, connections, and loud voices (perhaps including myself in this category).

For a while, this phenomenon was accepted as normal. Rather than complaining, retail investors tended to 'accept' this situation, even using early VC investments and track records as major investment references(People tend to believe in big names like a16z, multicoin, etc).

1.4 The Emerging Cracks - High FDV and Low Float

However, as time passed, resistance against VC-invested tokens began to emerge. The reason was obvious: most VC-invested tokens showed significant price declines. When assets decline, people look for reasons why. Most significantly declined tokens shared common traits: VC investment and extremely high listing valuations. This eventually led to resistance against expensive VC-invested tokens, with some of this resistance manifesting in meme coins, leading to what's called the meme coin super cycle. While meme coins had no utility (a criticism applicable to most non-meme tokens as well), they had merit in their fair launches. Now, people refuse to be VCs' "liquidity exit." They've become smart enough to understand market mechanisms. The term "High FDV Low Float" might have been coined to express resistance against projects where VCs invest enormous sums and dump tokens upon market listing.

At this point, a blockchain "of the community, by the community, for the community" emerged. That was Hyperliquid.

1.5 The Emergence of a Heretic - Hyperliquid

Hyperliquid was an "Antithesis" to the crypto market's existing tendencies. And it was exactly what the market wanted. Even before Hyperliquid gained attention, the market already harbored resistance against VC-invested tokens. This resistance was reflected in the meme coin market. Meme coins, at least, launched fairly without initial investment (though this too became diluted later with insider trading, many major coins remained exceptions).

Perfectly timing with this sentiment, Hyperliquid began receiving tremendous market attention.

Source: ASXN

While there are various factors behind Hyperliquid's attention, the most notable was its 'airdrop allocation' at an extreme level, possible only because it didn't take private investment. Hyperliquid decided to allocate a whopping 70% of total token supply to the community, establishing an unprecedented level of airdrop allocation in PoS chain history. This literally created a structure where the community became both the primary beneficiary and decision-maker of the Hyperliquid blockchain.

Of course, success isn't guaranteed just by providing airdrops. Hyperliquid's user-friendly product and the philosophy of its founder Jeff were sufficient to build a loyal community and customer base. The fact that Hyperliquid's trading volume continued to increase even after its points program ended shows that its success wasn't solely due to airdrops. (For more on Hyperliquid's strategy, refer to "Can't Help But Love, Hyperliquid" written by Ponyo from Populous)

However, as the saying goes, with great attention comes criticism. Some critics attacked Hyperliquid, claiming it was 'centralized,’

Source: Peter Kris

And for good reason - Hyperliquid was highly centralized (until the token launch, validators were mostly operated by the foundation, and the source code wasn't open), which in some ways seemed un-blockchain-like. Therefore, through this article, I aim to discuss whether Hyperliquid is truly centralized and explore the deeper meaning of decentralization.

2. Takeaway - What Matters? Who’s More Centralized Chain?

2.1 What is Decentralization?

I categorize blockchain decentralization into two categories: 1) Technical decentralization (no single point of failure in the technical infrastructure) and 2) Political decentralization (freedom from external control). When discussing the first category, we typically look at the number of validators running the chain and their physical distribution. This also includes the diversity of chain clients and the number of storage and RPC nodes.

From perspective 1, Hyperliquid could be considered "centralized." However, regarding perspective 2, while Hyperliquid might appear "centralized" in the short term, it has the potential to become more decentralized than any other chain in the long run. After all, 70% of tokens are allocated to the community/users. If VCs want tokens, they must purchase HYPE tokens at the same price as retail investors. Could there be a chain more politically decentralized than this?

2.2 What's More Important?

What matters more? A blockchain with over 100~200 validators that receives billion-dollar valuation from VCs and gives them early blockchain control through unlocked token delegation? Or a blockchain with fewer validators but equal opportunities and rights for VCs, users, and community members, with no early VC participation?

Which can we call more decentralized? This isn't about making value judgments but rather questioning how subjective the criticism of Hyperliquid's "centralization" really is.

2.2.1 The PoS Paradox: # of Validators Isn't Everything

The number of validators is just one factor in assessing a PoS blockchain's "decentralization" - it's not an absolute criterion. Even with thousands or tens of thousands of validators, if there's a single entity making delegations to these validators, it's hard to consider this truly decentralized. This is a crucial point when discussing PoS chain decentralization.

2.2.2 Community Isn't Just a Meme

While all blockchains emphasize "community," it's often unclear how much they truly value it. Tweeting about "community first" doesn't equate to actually valuing it. What rewards does the community receive? How substantially are community voices reflected in the chain? Which better embodies the blockchain spirit: an open-source chain that treats community as a meme, or a closed-source chain that genuinely reflects community voices?

2.3 Each Has Its Own Value

Not everyone needs to become like Hyperliquid. Nor could they. This was only possible because the Hyperliquid team was prepared to bear such costs even before creation. However, Hyperliquid has rung a significant warning bell for the industry. It has reminded us what's important in this market and provided an opportunity to reconsider values including decentralization.

From a funding perspective, Hyperliquid's success will likely discourage many projects from raising hundreds of millions at ~$B valuations (personally, I can't understand how projects without even an MVP can be valued at ~$B). Ultimately, Hyperliquid's value and symbolism lie in making this market healthier. Though I've never traded on Hyperliquid nor hold any tokens, as a researcher and content creator, I must keep mentioning it. Hyperliquid has brought value far beyond just being an L1.

I'm unsure how differentiated the Hyperliquid ecosystem will be when HyperEVM (their upcoming virtual machine support) launches. But perhaps that's not important. Hyperliquid has already created an unprecedented community, and ultimately, an ecosystem's 'differentiation' comes from its community, not technical design.

Blockchain is like a 'state without coercive power.' While similar to traditional states in how people gather and develop their cultures, it differs in lacking coercive power. This means that to maintain a blockchain "state," things that traditional states achieve through force (like preventing citizens from leaving for other ecosystems) must be achieved voluntarily. Hyperliquid maintains its ecosystem by properly rewarding loyal users. While we'll need to keep watching how sustainable this is, dismissing Hyperliquid with criticism of being "centralized" seems to miss something far more significant.

So, now who’s centralized chain, again?

3. Others’ Opinion

3.1 Jay Jeong from Four Pillars - Another Key Lesson from Hyperliquid: The Need for the Evolution and Adoption of Valuation Frameworks

3.1.1 Thesis(正) and Antithesis(反), Two Polarizing TGE Launch Cases

The TGE is undoubtedly one of the most highly anticipated events for both the community and the project. For the project, it holds great significance as it marks the first official market evaluation of their envisioned product. For the community, it is equally meaningful as it represents the first opportunity to actively reflect their expectations for the project’s achievements to date and its proposed roadmap in the market.

In the latter half of this year, numerous projects drew attention with their TGEs, but if one were to pick the most talked-about ones, Hyperliquid and Movement would undoubtedly top the list. However, the market's response following the TGEs of these two projects has been strikingly different. In the case of Hyperliquid, its token price has shown a steady upward trajectory post-launch, maintaining strong momentum with continuous new user inflows. On the other hand, Movement has struggled to gain traction, with no significant rebound or new user inflows observed since its initial launch, where prices were abnormally high.

Of course, both projects have ambitious visions and roadmaps, making it premature to judge their ultimate success. However, whether the market's initial expectations for these projects have continued to sustain positive momentum after the TGE will serve as a strategically important reference case: 1) for other new projects in preparing for their launches and managing their communities, and 2) for investors in deciding when to invest in projects they are interested in.

In my opinion, the key operational differences that determined the momentum of these two projects are as follows:

Community-Friendly Tokenomics

• HyperLiquid designed its tokenomics to allocate approximately 70% of the total token supply to the community, instead of conducting separate private agreements such as VC or KOL rounds for fundraising and strategic investments.
  

• Of this, a substantial portion—just under half (31% of the total token supply)—was distributed to the community at TGE.
  

• Movement allocated 22.5% of its total token supply to backers, with only 10% of the total supply distributed to the community at TGE.
  

• According to Movement's tokenomics, 40% of the total supply is allocated for "Ecosystem & Community" in the future. However, it is currently unclear how much of this will be directly distributed to the community (e.g., Movement allocated 7% of the total token supply to Binance).

Community-Driven Token Pricing via Unified Trading Spot

• Movement, like most projects tend to, list its token on multiple major CEXs simultaneously with its TGE.
  

• In such cases, the initial listing price is determined independently by each CEX, and the global token price largely depends on the prices set by major CEXs.
  

• However, as the token is listed on more CEXs, liquidity becomes increasingly fragmented, making it more vulnerable to weaknesses in market making.
  

• HyperLiquid, on the other hand, chose to concentrate liquidity on its own platform rather than listing on major CEXs, allowing token prices to be determined organically by the community.

Proof of Value Accretion for the Token

• HyperLiquid has not only demonstrated outstanding performance by capturing approximately 45% of the crypto futures DEX market, but it also actively works to enhance and stabilize token value through mechanisms like fee burning or buybacks.
  

• Movement, however, is still in the mainnet beta stage, with its public mainnet yet to launch. It has only issued its token temporarily as ERC-20 token instead of native token, and the token's utility structure is not yet fully realized.

Among the projects that launched with much anticipation, I have selected HyperLiquid and Movement as extreme cases for comparison. However, these operational strategies are by no means limited to these two projects. Examples like HyperLiquid, where token prices are determined in a bottom-up manner by the community within a single platform, can also be seen in the many meme coins launched recently. On the other hand, Movement's case represents countless prominent protocol projects launched in recent years.

3.1.2 同床異夢: Same Token, Different Price Targets - Flaws in Valuation

Another critical takeaway from these examples is the ‘fundamental reason’ behind cases like Hyperliquid, which launched in a way that defied conventional practices, sounding an alarm across the industry. In my view, the root cause lies in the underdevelopment of valuation methodologies capable of accurately explaining the token price of a project.

Valuation plays a pivotal role in shaping the price targets of investors, making it essential to pursue widespread research and adoption of robust valuation methodologies. However, in the current blockchain market, such methodologies are far from advanced. As a result, many investors unwittingly rely on valuations set by numerous VCs, often based on vague or unclear criteria. Other investors, lacking access to this information, may take the token’s initial listing price on CEX as a benchmark. Some also look to the market capitalization of similar projects or gauge the extent of promotional efforts by so-called crypto influencers (KOLs) on platforms like Telegram and Twitter to form their own price targets.

This fragmented landscape creates significant gaps. It sometimes forces projects to adopt distorted funding structures or makes token prices vulnerable to market manipulation. The higher the valuation of a project relative to the initial investment price, the wider the gap between the profit-taking price range of early investors and retail investors becomes. This disparity translates into a greater difference in profit opportunities between the two groups.

This is not an argument to exclude the role of early-stage investors like VCs. Whether it involves traditional VC participation or allocating a larger portion to the community in the early stages, these are merely different approaches. What truly matters is the establishment of a clear valuation framework that allows all stakeholders to reasonably evaluate and accept a project’s token price over specific timeframes. Such a framework would help bridge the perception gap in price targets among investors, promote fairer distribution of profit opportunities, and foster a healthier, more stable market environment that strengthens investor protection.

In some ways, the soaring price of Hyperliquid tokens day after day almost feels like a protest against the status quo. Beyond merely learning about another token launch strategy, the Hyperliquid case offers us an opportunity to derive deeper lessons that can drive the industry forward to its next stage of maturity.

4. Resource

Related Articles, News, Tweets etc. :

• How Can You Not Love Hyperliquid? by Ponyo
  

• Introducing Movement (MOVE) on Binance HODLer Airdrops! Subscribe your BNB to Simple Earn