Author:** Wu Says Blockchain**
The content of this article represents third-party views and does not reflect Wu Says' views.
On October 11, the entire network experienced the largest liquidation in history, with some altcoins even dropping to zero at one point. Binance may provide its largest compensation plan in history. The following day, as the situation gradually calmed down, the community began discussions:
In an analysis article published on October 12, Jiang Zhuoer pointed out that on the evening of October 10, Trump posted on Truth Social threatening to impose additional tariffs, leading to a sharp decline in U.S. stocks (Nasdaq -3.56%), which transmitted to the crypto market. He emphasized that although this liquidation was the largest in scale, the daily drop in BTC/ETH was smaller than during the 519 incident (BTC 16% vs 30%, ETH 21% vs 44%), reflecting an increase in capital inflow and a decrease in volatility in the crypto market, but the leverage ratio significantly increased, leading to systemic fragility. The chain of liquidation was clear: external geopolitical risks triggered a sharp drop in spot prices, triggering liquidations of leveraged users. Specifically, at 5:20 am, when prices were at their lowest, users exchanged idle USDT for USDe to earn a 12% annualized return on Binance, and sold at market price during the liquidation, causing USDe to depeg (dropping to 0.65 at 5:44 am). This further triggered a cascading liquidation of USDe circular loan arbitrageurs (with leverage as high as 4.45 times).
Jiang Zhuoer disagreed with the view of Vida, the founder of Equation News, that USDe's depeg preceded the BTC/ETH crash, causing a chain reaction. The actual sequence was the opposite: the price crash transmitted to USDe, which then affected wbETH (dropping to 0.1045 ETH) and bnSOL (dropping to 0.2488 SOL) at 5:43 am. He clarified that the depeg was not due to large market makers or arbitrageurs liquidating (no spot/futures reverse movements, such as DOGE being normal), but rather due to users of collateralized loans: using ETH/SOL to stake for wbETH/bnSOL, then borrowing USDT to exchange for USDe in a circular arbitrage. After the collapse of USDe, the collateralization ratio was insufficient (Binance's 91% liquidation threshold), leading to a full account liquidation. He provided an example: borrowing 60,000 USDT against 100,000 ETH could reduce the annual interest rate from 5.5% to 1.35% (offsetting wbETH's 2.49% POS yield), but the risk was enormous — borrowing 11,300 USDT would lead to liquidation, warning that "any profit comes at a cost."
Additionally, he refuted rumors of "attacks on Binance and market makers," stating that Vida and others misjudged the situation by ignoring minute K-line data (altcoins crashed at 5:20 am, USDe/wbETH crashed at 5:43 am, which were two independent events). The root cause was insufficient liquidity of wbETH (with a daily depth of only 2,000 ETH), not algorithmic or external attacks. As the issuer of wbETH/bnSOL (sharing 2.89% POS yield from ETH, users receiving 2.39%), Binance had the responsibility to maintain the peg, but the exchange rate dropping to 0.1x was a failure of duty. Binance's algorithm optimization (changing from 80% USDT + 20% ETH weight to 100% ETH) was only a minor adjustment and did not prevent the next depeg. He praised Binance for compensating low-price trading losses (vs. the price difference at 8 am on the 11th), but suggested setting a hard floor for the ETH/SOL exchange rate (e.g., 0.8) and calculating collateral value based on ETH spot depth.
According to monitoring by Lookonchain, during the market crash, over 1,000 wallets on the Hyperliquid platform were completely emptied, losing all assets. A total of more than 6,300 wallets were in a state of loss, with combined losses exceeding $1.23 billion. Among them, 205 wallets lost more than $1 million, and over 1,070 wallets lost more than $100,000.
Jeff, the founder of Hyperliquid, stated that Hyperliquid maintained 100% uptime without generating bad debts, marking the first occurrence of cross-margin automatic liquidation (ADL) in over two years of platform operation. Jeff introduced HLP (Hyperliquid Protocol) as a permissionless liquidity provider and backup liquidation tool, divided into multiple sub-vaults to manage risk. ADL is a last resort, matching under-collateralized positions with profitable high-leverage positions; although average profits are made, individual events may be unfavorable. HLP earned approximately $40 million to $50 million in profits on the day of the crash by absorbing and processing losing positions (liquidations).
Despite retail institutions suffering massive losses, many protocols and platforms still profited significantly. According to DeFiLlama data, on the largest liquidation day in history, Uniswap captured fees of $15.59 million in a single day, setting a record second only to May 19, 2021 ($17.93 million). Uniswap founder Hayden Adams stated that Uniswap's trading volume approached $9 billion that day, far exceeding normal levels. Additionally, the MEV infrastructure Flashbots captured fees (ETH fees paid by users to Block Proposers) of $18.59 million that day, setting a new historical high. Solana's largest aggregator, Jupiter, captured fees of $16.15 million in a single day, also setting a new historical high. After the market crash, Tether and Circle minted a total of $1.75 billion worth of stablecoins.
The worst-performing PERP DEX Lighter stated that as of 4 PM Eastern Time today, LLP performed poorly in the past 24 hours, with a yield of -5.35%, marking the third worst performance in history, while also recording the largest absolute loss. The team stated that they would release a detailed analysis tomorrow and explain the compensation plan for LLP holders. Historical data shows that LLP's Sharpe ratio is 5.59, with an expected annualized return of 48.4%.
@Haoskionchain stated that the review and subsequent response regarding the depeg of stable projects, like all historical chain liquidations, stemmed from long positions being undercapitalized, with massive contract losses leading to the unified margin account needing to auction off collateral to repay debts. In the case of isolated margin, contract losses would not extend to liquidating spot positions because accounts are separated. However, in the case of cross margin, contract losses create liabilities, which offset the collateral in the spot account. Generally, this increases users' capital utilization and trading flexibility, but in a constantly changing market, it exacerbates the severity of chain liquidations. Last night's event was indeed the most significant chain liquidation impacting retail investors and small institutions in many years, with effects far exceeding previous chain liquidations.
The reasons are as follows: First, asset types/altcoin liquidity: Compared to a few years ago, the number of altcoin assets on exchanges, whether in contracts or spot, has multiplied. It is normal for liquidity to be withdrawn from altcoin contracts during a major market downturn, as no one wants to be the bag holder. However, previously, providing liquidity for ten contracts required only $1 million; now, it requires providing liquidity for thirty underlying contracts. This significantly increases the demands on traders and exchange strategies and systems. In a high-pressure environment, if performance is not improved to cope with the changing (increasing) market conditions, system failures will exacerbate liquidity depletion: there is already little money to distribute among each contract, and now the system is down, making it even less likely to place orders, leading to a direct depletion of buy orders, and the extent of the depletion is unprecedented.
Second, cross margin without buffer liquidation: This clearly means that whatever assets are held are directly dumped into the market. The liquidation of contracts is not elaborated here; just looking at the spot side, USDE, WBETH, and BNSOL were all dumped due to mindless liquidations, meaning that during liquidation, whatever was available was dumped into the market, with no algorithms or complex processing logic behind it. If there were any pricing buffer mechanisms, such large holes would not have been created. This algorithm directly leads to users and the insurance pool losing money together, both being forcibly liquidated, selling a dollar's worth of goods for fifty cents, leaving retail investors with negative losses, while the insurance pool fills the gap. However, traders who bought at the bottom should thank Binance for its structure and the money it provided.
Third, price anchoring to spot trading prices: This directly leads to not only trading accounts being emptied but also wealth management accounts being emptied. However, in reality, assets like WBETH did not experience actual price depegging; rather, they were incorrectly priced due to lazy pricing, leading to forced liquidations. Recently, Binance changed the anchoring mechanism to a strong peg for these projects, but what if the WBETH smart contract gets rug-pulled? Therefore, this change addresses symptoms rather than root causes, akin to robbing Peter to pay Paul. A more comprehensive approach would be to derive a price based on a calculable price rather than just taking an accessible price. The reasoning is not complex. The countermeasures are to expand capacity and rebuild the system; the liquidation mechanism for forced liquidations should first consolidate and centralize bankrupt positions, then handle them uniformly; price anchoring should directly take the on-chain collateralization ratio coefficient multiplied by the underlying price, just like the calculation method for any derivatives.
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