Retail Investors vs. Exchange: A Thrilling Turmoil in the Crypto Assets Market

In 2021, retail investors in the United States engaged in a fierce showdown with Wall Street short-sellers over GameStop stocks. Two years later, the Crypto Assets industry is once again playing out a similar drama. On March 26, a mysterious whale single-handedly caused a decentralized exchange to nearly lose $230 million.

This is not just a simple technical failure, but a crisis involving decentralization, compromises of ideals, and intense clashes of interests among various parties in the Crypto Assets trading ecosystem. Let's review the ins and outs of this event together and discuss who the real winners are.

Retail investors force a short squeeze, the platform cuts its losses.

The Event Center is a token named JellyJelly. Within just one hour (Singapore time 21:00-22:00), its price skyrocketed by 429%, leading to severe squeezes on short positions. Subsequently, a certain decentralized exchange took over a trader's self-liquidated short position, facing a floating loss of over 12 million dollars at one point.

The situation has reached a critical point: if the price of JellyJelly rises to 0.15374, the exchange's $230 million fund pool will be completely wiped out. As funds continue to flow out, the liquidation price of JellyJelly will also be further suppressed, creating a vicious cycle.

The attacker precisely exploited the four major fatal vulnerabilities of the exchange system:

1. Illiquid assets lack effective position limits
2. The oracle manipulation resistance mechanism is weak
3. The automatic position inheritance system has issues.
4. Lack of necessary circuit breaker mechanisms

This is not just an ordinary trading operation, but rather a precise strike against the system's weaknesses, pushing the exchange into a dilemma: either watch huge amounts of funds face liquidation risk or abandon the principle of "decentralization" and take emergency intervention measures.

Market sentiment is rapidly heating up, with a large number of retail investors joining the siege. Some influential opinion leaders have even called on the founders of major centralized exchanges to "join the battle." An executive from a large exchange responded on social media to the suggestion of listing JELLYJELLY, triggering further fluctuations in the price of the token.

Retail investors seem to have seen the dawn of victory, eagerly anticipating that the exchange will be unable to withstand this impact.

However, just when retail investors thought victory was in hand, the exchange initiated an emergency validator vote to completely delist the JELLYJELLY token. This decision reached "consensus" in just two minutes. Subsequently, the platform quickly released an official statement announcing that the governance committee had urgently intervened and delisted the involved assets, demonstrating the platform's determination to "stabilize the market" and forcefully quell this short squeeze storm.

This historically intense encirclement operation ultimately ended with the institutional side's "surrender" and withdrawal.

The Crisis of Faith in Decentralized Exchanges

This event reveals that even in the coming years, a completely decentralized exchange may still only exist in ideals.

The incident exposed a major flaw in the exchange: it allowed for extremely large positions to be opened on low market cap and low liquidity coins, where the market could not find enough counterparties during liquidation. In other words, the market depth could not support such large-scale trading, and once a short squeeze occurred, liquidity would collapse directly, rendering the liquidation mechanism virtually ineffective.

The exchange was supposed to play a neutral "dealer" role, but unconsciously became a participant in the gambling game. Even more questionable is that when the situation turns unfavorable, it quickly reverts back to being the "dealer" and directly closes the trading channels.

The market's faith in decentralized exchanges is beginning to waver. The "consensus" passed in two minutes, the governance committee arbitrarily changing rules, and the ability to close trading pairs at will, these actions are even faster than many centralized exchanges. People can't help but start to doubt: is the so-called "decentralization" only effective when the market is stable, and once it gets out of control, does it turn into "doing as one pleases"?

If decentralized exchanges can also "force delistings", then what is the significance of decentralization? Are centralized exchanges more reliable, or are decentralized platforms more trustworthy?

The contradiction between the decentralized concept and capital efficiency

From the perspective of "decentralization", decentralized exchanges seem to be safer because user assets are always in the hands of the users, without the need to worry about central institutions misappropriating them. The Automated Market Maker (AMM) mechanism ensures the viability of decentralized trading, but the drawbacks are also obvious: insufficient liquidity, large slippage, and impermanent loss, leading to an average user experience. Most people use decentralized exchanges either for long-term holding of coins or to participate in airdrop activities, and the daily trading experience is not ideal.

Centralized exchanges are convenient to use, have ample liquidity, and are feature-rich, making both contract trading and spot trading very smooth. However, there are pros and cons: once funds are deposited, users lose direct control over their assets. Historically, there have been multiple incidents of exchanges being hacked or going bankrupt, and no one can guarantee that the exchange they use is absolutely safe.

This incident is a typical embodiment of this dilemma: there is a natural conflict between the idea of decentralization and capital efficiency. Pursuing absolute decentralization will inevitably affect capital efficiency; while pursuing the highest capital efficiency often requires some degree of centralized control.

This is a classic dilemma: should we adhere to the principles of decentralization, accepting potential systemic risks and losses in capital efficiency, or sacrifice some decentralization when necessary to ensure system security and capital efficiency? The exchange chose the latter, taking intervention measures to protect the protocol in the face of significant losses, but this also subjected it to severe criticism.

It is worth noting that many critics have also faced similar dilemmas themselves. For example, a well-known derivatives exchange took emergency measures during the market turmoil on March 12, 2020, leading to mixed reviews. If emergency measures had not been taken at that time, it could have had disastrous consequences for the entire Crypto Assets industry. This fact highlights the complex relationship between ideals and reality.

Future Development Directions of the Crypto Market

Looking to the future, decentralized exchanges may develop towards a direction of "partial centralization + transparent rules + intervention when necessary", rather than pursuing the extremes of "complete decentralization + laissez-faire market" or "complete centralization + black box operations + intervention at any time".

In the balance between crypto culture and capital efficiency, the new generation of decentralized exchanges will seek a equilibrium that retains sufficient on-chain transparency and user control while effectively protecting system security and user assets in times of crisis. This balance is not a betrayal of ideals, but a pragmatic response to reality.

Centralized exchanges are also facing pressure to transform. In response to users' concerns about asset control and the competition brought by decentralized exchanges, centralized exchanges are undergoing a strategic transformation centered around Web3 wallets. Whether it's industry leaders, established exchanges, or emerging platforms, all are attempting to balance the convenience of centralized trading with the security guarantees of decentralization through the "Centralized Exchange + Web3 Wallet" model:

• A well-known exchange has not only expanded its business scope by actively developing wallet services but has also successfully solidified its position in the industry.
• Another large exchange acquired a well-known wallet project as early as 2018, but it wasn't until the rise of decentralized trading markets that they truly took it seriously, significantly increasing their investment in research and marketing.
• Some established exchanges are also keeping up with the trend by building their own Web3 wallets and setting up dedicated areas to launch popular emerging projects, meeting users' demand for high-risk, high-return Crypto Assets.
• In recent years, emerging exchanges have proactively launched fully functional Web3 wallets and have been the first to integrate into multi-chain ecosystems, seeking differentiated positioning in fierce competition.

This transformation is not only a response to user needs but also an adaptation to the development logic of the industry. By integrating Web3 wallet functions, centralized exchanges retain depth and efficiency while providing users with the choice to independently control their assets—users can decide based on their needs when to place their assets in the exchange's custody for convenience and when to transfer them to their own controlled wallets for security.

As the industry matures, we may see more solutions that coexist between "bounded decentralization" and "transparent centralization." In this new stage of integrated development, participants who can find the best balance between transparency, security, and efficiency will be able to stand out in the increasingly fierce market competition.

Combining the efficiency of centralized exchanges with the transparency of decentralized exchanges may be the next development stage of crypto trading—not a contradiction of ideas, but a fusion of advantages.