DeFi Loses Decentralization as TVL Drops 72% in Hyperliquid Exploit

Decentralized finance (DeFi) was founded on the principle of enabling a global, permissionless financial system built on peer-to-peer (P2P) transactions, free from the constraints of traditional finance (TradFi). Early decentralized lending platforms embraced this vision by connecting lenders and borrowers directly, allowing them to negotiate terms without the rigidities of TradFi. However, over time, many DeFi protocols have drifted away from this ethos, relying instead on liquidity pools, external price oracles, and heavily automated market makers (AMMs).

These structures have unlocked liquidity but at the cost of user control, transparency, and exposure to so-called “oracles” that can be centrally overridden. Today’s users are often boxed into preexisting liquidity pools with little say over which collateral assets they can use or what risk profiles they want to take. This shift has led to a situation where even the so-called DeFi leaders do not follow the most basic principles of decentralization. The recent Hyperliquid exchange exploit highlighted this issue when the platform manipulated its oracle’s value, causing its total value locked (TVL) to fall from $540 million to $150 million.

DeFi has lost its way and needs to return to its P2P roots to regain mass adoption. When DeFi first captured mainstream attention, P2P lending was its bedrock. People could lend directly to one another and agree on terms like collateral type and interest rate, all enforced by smart contracts. This was a breakthrough in transparency and trustlessness. However, as demand for liquidity grew, developers shifted toward pooled systems, which streamlined the lending process and improved capital efficiency. Borrowers gained instant access to funds, and lenders could earn passive yield without waiting to be manually matched.

While liquidity pools were groundbreaking, they lack one of the most significant potential selling points of DeFi: the promise of a genuinely independent P2P system. In a pooled system, people could no longer set their own terms and were once again constrained by a rigid system. DeFi had strayed from the P2P ideals on which it was built, risking becoming indistinguishable from the centralized systems it claims to subvert.

The Hyperliquid incident is a case in point of how fragile the illusion of decentralization really is. While the exchange claimed to rely on an independent oracle, it had retained the authority to bypass the oracle’s pricing and used this power without too much hesitation. This forced intervention may have prevented further losses but shattered any confidence in the exchange’s decentralization. A decentralized platform that retroactively rewrites the rules and dictates prices simply cannot be considered truly decentralized.

Oracles in DeFi should be sacred, permissionless, and secured by a decentralized network of validators—not a tool for a pseudo-DeFi team to manipulate the market whenever things get tough. Incidents like this only reinforce public skepticism and make it tougher for credible builders to gain trust. Until DeFi starts living up to its name, it will continue to fall short of the ethos it loudly claims to represent.

DeFi desperately needs to return to its roots. P2P borrowing and lending, reimagined for a more modern and sophisticated system, offers that path ahead. A model where individuals negotiate fixed terms, choose their collateral, and eliminate reliance on fragile, centrally controlled oracle pricing is more transparent and more resilient. In this system, people can set their own rules, directly transact with one another in a truly permissionless, decentralized environment, and choose their own collateral. Whether selecting assets, lending and borrowing directly, or simply transacting without intermediaries, every DeFi user deserves access to an open, secure, user-driven system. This is the only way to achieve mass adoption, by restoring the control and transparency DeFi was built to deliver.

Such a model will appeal to crypto-native users and newcomers alike. The demand for DeFi hasn’t gone anywhere despite the rocky market. Recently, Aave, one of DeFi’s stalwarts, announced that its TVL reached an all-time high of $40 billion, while Uniswap became the first decentralized exchange (DEX) to hit $3 trillion in all-time trading volume. These are not signs of a fading trend—they’re proof of a sector maturing under pressure. To convert that interest into lasting adoption that sticks globally, DeFi needs a better product choice. The future isn’t more complex—simplicity, flexibility, and individuality—exactly what P2P was always meant to be.