The Game Between Retail Investors and Exchanges: The Ideological and Realistic Struggle in the Crypto Market

In 2021, retail investors in the United States engaged in a fierce confrontation with Wall Street short-sellers over GameStop. Two years later, the crypto market is witnessing a similar scenario. A giant whale almost caused a decentralized exchange to lose nearly $230 million single-handedly.

This is not just a simple technical vulnerability incident, but also involves a crisis of decentralization, a compromise of ideals, and the fierce competition of interests among various parties in the crypto market. Let's revisit this event together and discuss who the ultimate winner is.

Retail investors squeeze, platform cuts losses

A certain token, JellyJelly, experienced a short squeeze, skyrocketing by 429% in just one hour. Subsequently, a certain exchange took over the short position of a trader after their self-explosion, which once had an unrealized loss of over 12 million dollars.

The situation is critical: if JellyJelly rises to 0.15374 again, the exchange's $230 million in funds will face total annihilation. As funds continue to flow out, JellyJelly's liquidation price keeps dropping, creating a vicious cycle.

The attacker precisely exploited the four major weaknesses of the system:

1. Illiquid assets lack real position limits
2. The oracle's anti-manipulation mechanism is weak
3. Automatic Position Inheritance System
4. Lack of circuit breaker mechanism

This is not just a trading operation; it is a precise strike against the system's weaknesses, pushing the platform into a dilemma: either face the risk of huge losses or intervene in the market, deviating from the principle of decentralization.

Market sentiment has peaked, with many retail investors joining the fray. Some well-known figures are calling on other exchanges to participate, triggering another fluctuation in the price of JellyJelly.

When retail investors thought victory was in sight, the exchange suddenly initiated an emergency vote to delist the involved token. This decision quickly reached a "consensus," and the platform immediately issued a statement announcing the intervention of the governance committee and the delisting of the assets, forcibly calming the storm.

The Ideological Crisis of Decentralized Exchanges

This incident exposed a major flaw in decentralized exchanges: allowing oversized positions to be opened on low market cap and low liquidity tokens, while the market depth cannot support such large trading volumes. Once a short squeeze occurs, liquidity collapses, and the liquidation mechanism becomes virtually nonexistent.

The platform was supposed to play a neutral role, but it changed the rules when the situation became unfavorable. The "consensus" reached in two minutes and the urgent intervention of the governance committee were more rapid than many centralized exchanges, raising doubts about the essence of "decentralization."

The Contradiction Between Decentralized Ideals and Capital Efficiency

Decentralized exchanges seem to have an advantage in terms of security, as users have complete control over their assets. However, they often fall short compared to centralized exchanges in liquidity, trading depth, and user experience.

Centralized exchanges provide a better user experience and deeper market depth, but users need to trust the platform to manage their funds, which brings potential security risks.

This incident is a typical case of the conflict between the concept of decentralization and capital efficiency. Pursuing absolute decentralization may affect capital efficiency, while striving for maximum efficiency often requires a certain degree of centralized control.

The Future Development of the Crypto Market

In the future, decentralized exchanges may adopt a model of "partial decentralization + transparent rules + intervention when necessary," rather than pursuing extreme decentralization or complete centralization.

Centralized exchanges are also transforming by integrating Web3 wallet functionalities, retaining the advantages of centralized trading while providing users with more asset control options. Several well-known exchanges have already begun this transformation, trying to find a balance between convenience and security.

In the future, we may see more solutions that coexist with "bordered decentralization" and "transparent centralization." Platforms that can find the best balance between transparency, security, and efficiency will stand out in the fierce market competition.

The next stage of crypto trading may be a fusion of advantages rather than a confrontation of ideas. Combining the efficiency of centralized exchanges with the transparency of decentralized exchanges may become a new direction for industry development.