On January 29, in the East 8 Time Zone, the governance token XVS of the leading lending protocol Venus on the BNB Chain experienced a dramatic plunge within 24 hours, with its price dropping from around $5.3 to the $2.97-3.1 range, marking a nearly 40% decline in a single day, which sparked significant attention both on-chain and within the community. More dramatically, a whale address that had heavily leveraged its position on Venus faced partial liquidation of its circular loan position during this downturn, turning what seemed like a “stable as a rock” strategy into a bloody textbook example of a failure. Accompanied by 532,000 XVS in high collateral, a liquidation scale of 287,000 XVS (approximately $930,000), and over a million dollars in unrealized losses, this flash crash not only shattered the order book and price range but also prompted all participants involved in high-leverage plays on small-cap assets to collectively reassess this seemingly sophisticated yet fundamentally fragile circular gamble.
From $5.3 to $3: The Price Trajectory and Emotional Fault Line of the Flash Crash
● Price Path: According to multiple data sources and media reviews, on the morning of January 29, XVS was still oscillating around $5.3. Within a few hours, it first experienced a relatively mild decline, followed by a phase where concentrated selling pressure emerged and buy orders quickly retreated, driving the price directly down to around $3. During the day, it fluctuated multiple times between $2.97-3.1. On the surface, this represented a nearly 40% drop in a single day, but behind it lay a chain reaction of a “gradual decline to a vertical drop.”
● Liquidity Collapse: The true fatal flaw of the flash crash was not the initial drop, but the sudden disappearance of market depth at critical price levels. When selling pressure began to concentrate, assets like XVS, which had a market cap of only approximately $160 million, already had relatively thin order books. Massive sell orders had almost no counterparties to absorb them in a short time, leading to a sharp increase in slippage, causing the price to break through multiple price levels in one go. The role of on-chain liquidation bots and arbitrage further accelerated the price's free fall.
● Emotional Turn: At the beginning of the event, discussions in the community and on social media regarding the XVS pullback were largely interpreted as “short-term profit-taking” and “normal fluctuations.” However, as the decline continued to expand and information about on-chain addresses being liquidated began to circulate, the discussion quickly shifted to “whale liquidation” and “health ratio in crisis.” What started as confusion and observation evolved into collective panic regarding Venus's risk control, XVS liquidity, and the safety of the BNB Chain DeFi ecosystem, with emotions shifting dramatically within a few hours.
The Self-Reinforcing Betting Table of Whale Circular Leverage
● Operational Chain: The whale employed a typical DeFi circular leverage path: first, it collateralized a large amount of XVS on Venus to obtain a borrowing limit, then borrowed USDT and returned to the secondary market to buy more XVS, re-collateralizing the newly acquired tokens, and repeating this cycle. On the surface, this closed loop continuously amplified utilization through “collateral-borrow-increase-recollateralize,” appearing like a self-reinforcing money printing machine during a unidirectional price rise, but fundamentally it was stacking chips with the same high-volatility asset, eliminating any safety margin.
● Leverage Multiple: According to on-chain data, the whale collateralized 532,000 XVS, valued at approximately $2.81 million at the time, and borrowed $1.4 million USDT based on this. The ratio of collateral value to borrowing scale indicates that this position was already at a relatively aggressive leverage level: once the XVS price experienced a rapid pullback of over 20%-30%, the health ratio would approach the liquidation line. This method of using the same high-volatility asset as collateral and then leveraging to buy the same asset essentially has no real risk hedging, merely amplifying the amplitude of price fluctuations.
● Magnifying Profits and Drawdowns: During the previous relatively strong market for XVS, this type of circular loan allowed the whale to gain multiple long exposures with the same amount of capital. For every 10% increase in price, the unrealized gains or losses under leverage could be several times that of ordinary spot traders. However, the same logic also applies in reverse: when market liquidity is already limited and sentiment slightly reverses, drawdowns will feedback to the account health ratio at the same or even faster multiples. Any misstep could directly trigger a chain liquidation, turning previously accumulated unrealized gains into significant losses in a very short time.
Walking the Tightrope of Health Ratio: Liquidation Triggers and Instant Gains and Losses
● Critical State: Some community observers cited on-chain monitoring and third-party tools indicating that the whale's position had a health ratio that once approached 1.07, describing its fragile state as “walking a tightrope”—this statement is still marked as pending verification, but the fact that partial liquidation was ultimately triggered shows that the position indeed operated long-term within a very narrow safety buffer. As long as the price experienced slight unexpected fluctuations or liquidity slightly contracted, the health ratio would instantly drop from “barely safe” to the liquidation range.
● Liquidation Profit and Loss Structure: According to data from PANews, during this flash crash, the whale's position was liquidated for 287,000 XVS, valued at approximately $930,000 at the time, corresponding to an unrealized loss of about $1.09 million. This means that at the moment of liquidation trigger, the system sold part of the collateral at a discount to repay the loan, forcibly locking in the amplified losses from leveraging. For such high-leverage circular positions, once they enter the liquidation process, players effectively lose the initiative to “bet on a rebound” or “self-rescue by reducing positions,” and can only passively bear the portion of losses cut off by the system.
● Ambiguity of Trigger Parameters: Mechanically, there is a clear formulaic relationship between Venus's health ratio and liquidation threshold: when the health ratio falls below a certain specific value, liquidation bots can execute partial or full liquidation of the position. However, in this event, parameters such as exact trigger price, real-time health ratio values, and the speculated $3.2 further liquidation reference price lack authoritative disclosure from official sources, and existing external statements mostly come from community tools and individual tweets, which may contain deviations. Therefore, in discussions, it can only be emphasized that the position operated long-term under high pressure close to the liquidation line, and specific parameters should not be rigidly stated, especially not reconstructed in detail without first-hand data.
The Fragile Collision of Small-Cap Assets and Large Leverage
● Size Contrast: From a protocol perspective, Venus is one of the largest lending platforms on the BNB Chain, holding significant systemic importance in terms of overall TVL and business scale; however, its governance token XVS had a total market cap of only approximately $160 million before the event, which presents a clear contrast between the protocol's scale and the liquidity of the token compared to concentrated large leverage positions represented by whales. This mismatch of “large protocol, small asset” planted the seeds of inherent fragility for this flash crash.
● Depth and Selling Pressure: In a trading pair with already thin order books, any large sell order exceeding the daily scale can produce far greater than expected price impacts. For small-cap tokens like XVS, when whales choose to frequently cycle collateralize and increase long exposure at high prices, if even a portion of the position is forcibly liquidated due to deteriorating health ratios, it will create concentrated, mechanical selling pressure in the secondary market. Due to limited buying depth, liquidation sell orders will be matched at extremely poor transaction prices, further driving down prices, which in turn drags down the health ratios of other high-leverage positions, triggering more passive liquidations and forming a typical negative feedback loop of “selling pressure - decline - further liquidation.”
● Structural Risk Sample: As pointed out by Odaily, “the fragility of circular loans on small-cap assets” is one of the core lessons from this event. XVS is not an isolated case but a typical sample: when a token's market cap and liquidity cannot support massive circular leverage, any seemingly clever structural play will expose its systemic weaknesses in extreme market conditions. For DeFi lending protocols and high-leverage participants, such events should not be viewed as “black swans,” but rather as essential questions of design and risk control.
This Is Not the First Time: Lessons from ALPHA and CAKE
● Historical Echo: In the BNB Chain and the broader multi-chain DeFi ecosystem, similar flash crash scripts have played out multiple times before. Tokens like ALPHA and CAKE, during past bull-bear transitions and periods of extreme volatility, have experienced short-term crashes and chain liquidations against a backdrop of concentrated high-leverage funds and insufficient liquidity. Rather than viewing this XVS event as an isolated incident, it is more accurate to say it is a re-enactment of an existing pattern on a new asset.
● Common Factors: A horizontal comparison of these historical cases reveals some common danger factors: first, the large holders/whales with highly concentrated chips and positions; second, the high-leverage circular positions that were continuously increased during price rises; third, the liquidity environment with thin depth on exchanges and on-chain; and fourth, the liquidation mechanisms preset by lending protocols that produce amplifying effects in extreme market conditions. When these four factors come together, it only takes one trigger point to plunge an otherwise relatively calm market into a chain reaction.
● Ecological Issues: From a more macro perspective, the XVS event also once again exposed the vacuum in risk control, transparency, and external constraints within the BNB Chain DeFi ecosystem. On one hand, protocols, in pursuit of scale and profit, tend to relax certain parameters to attract high-leverage players; on the other hand, the lack of stronger constraints in risk disclosure and regulatory frameworks means that systemic risks often only manifest passively through painful liquidation data after the fact. How to find a balance between encouraging innovation and preventing on-chain “minefields” is clearly far from resolved.
Moving Beyond the Shadow of XVS: Risk Self-Rescue for DeFi Participants
The primary lesson that can be distilled from this XVS flash crash and whale liquidation is that the combination of circular leverage + critical health ratio operations + small-cap assets is almost equivalent to walking a tightrope on a powder keg. As long as the market experiences even slight headwinds, the health ratio can instantly drop below the safety threshold, and liquidation bots can deliver a fatal blow at any moment before sentiment has a chance to react. For all players treating the same high-volatility token as both collateral and leveraged asset, this “self-reinforcing” play is structurally a high-risk design, rather than merely a funding management issue.
For different roles, future risk management also needs to have a clearer sense of boundaries. For borrowers and whales, there should be a reassessment of the safety buffer of health ratios, avoiding long-term positions lingering in narrow ranges close to the liquidation line, and keeping circular leverage within a range of manageable systemic risk, rather than treating “maximum utilization” as the norm. For protocols, including lending platforms like Venus, there may need to be more refined parameter adjustments regarding collateral thresholds, single asset exposure limits, liquidation discount rates, and warning mechanisms, imposing stricter risk control weights on small-cap assets, and more straightforwardly indicating the potential chain liquidation effects of circular loans in UI and documentation. For ordinary participants, it is essential to understand that when you see an extremely lucrative leverage story on an asset, you may also be standing at the early stage of the next “textbook-level liquidation case,” where position control and diversified allocation are far more important than chasing a single high-leverage opportunity.
Looking ahead, as similar events are continuously amplified and reviewed, Venus and other mainstream lending protocols are likely to make adjustments in dimensions such as collateral whitelist standards, liquidation parameter transparency, and health ratio warning tools to reduce the probability of individual "table collapses" transmitting to systemic risks. The DeFi industry is unlikely to return to a completely conservative, non-leveraged world, but it can implement more mature risk control frameworks that allow participants to bear risks within manageable boundaries, gradually shrinking the high-risk "tightrope walking" plays to a self-selected choice of individual speculators, rather than an invisible bomb that the entire ecosystem must collectively bear.
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