Crypto Liquidation Catastrophe: Post-Crash Analysis - Who Profited Amid the Chaos?

Edited by Wu Blockchain

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On October 11, the crypto market suffered one of the largest liquidation events in history, with many altcoins even briefly hitting zero. Binance is reportedly preparing the largest compensation plan in its history. As the dust settled the next day, community discussions began to intensify.

In an article published on October 12, Jiang Zhuoer analyzed that the crash originated from a Truth Social post by Donald Trump on the evening of October 10, threatening new tariffs, which triggered a sharp sell-off in U.S. equities (Nasdaq -3.56%) and spilled over to crypto markets. Jiang noted that although the liquidation scale was unprecedented, the price drop of BTC/ETH was smaller than during the May-19, 2021 crash (BTC -16% vs -30%, ETH -21% vs -44%), showing increased capital inflows and lower volatility — but much higher leverage, making the system fragile.

The contagion chain was clear: external geopolitical risk triggered spot price declines, which then liquidated leveraged users. Specifically, at around 5:20 a.m., users chasing Binance’s 12% annual yield on USDe swapped idle USDT for USDe and panic-sold during the crash, causing USDe to depeg (low of $0.65 at 5:44 a.m.). This in turn wiped out recursive borrowers using USDe leverage loops (up to 4.45×).

Jiang disagreed with Vida, founder of Equation News, who argued that USDe’s depeg preceded BTC/ETH’s fall. He said the sequence was the opposite: price collapse hit USDe later, around 5:43 a.m., followed by wBETH (to 0.1045 ETH) and bnSOL (to 0.2488 SOL). The depegging, Jiang added, was not caused by major market makers but by collateralized borrowers — those staking ETH/SOL to mint wBETH/bnSOL, borrowing USDT, and swapping for USDe in yield loops. When USDe collapsed, collateral ratios fell below Binance’s 91% liquidation threshold, triggering full-account liquidations.

He illustrated: staking 100,000 ETH and borrowing 60,000 USDT could reduce the annual rate from 5.5% to 1.35% (after offsetting wBETH’s 2.49% PoS yield), but even borrowing 11,300 USDT more would trigger liquidation — showing that “every yield comes with a cost.”

Jiang also refuted the “attack on Binance and its market maker” theory, saying analysts like Vida misread the timeline: altcoins crashed around 5:20 a.m., while USDe/wBETH collapsed at 5:43 a.m., two separate events. The root cause, he said, was poor wBETH liquidity (daily depth only 2,000 ETH), not an external attack. As the issuer of wBETH/bnSOL (yielding 2.89% PoS, users receiving 2.39%), Binance bears responsibility for maintaining the peg, yet allowing rates to fall to 0.1× was a failure. The later adjustment of collateral weights (from 80% USDT + 20% ETH to 100% ETH) was minor and insufficient to prevent future depegs. Jiang praised Binance’s plan to compensate users based on price gaps from 8 a.m. Oct 11, but advised implementing hard floors (e.g., 0.8) for ETH/SOL exchange rates and basing collateral valuation on spot depth.

According to Lookonchain, over 1,000 wallets on Hyperliquid were completely wiped out during the crash, with 6,300+ wallets overall in loss and total 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.

While retail and institutional traders suffered heavy losses, protocols and trading platforms profited significantly. DeFiLlama data shows that on the largest liquidation day ever, Uniswap captured $15.59 million in fees — the second-highest in history after May 19, 2021 ($17.93 million). Founder Hayden Adams said daily trading volume reached $9 billion, far above normal. Flashbots also hit a record $18.59 million in block proposer fees, while Solana aggregator Jupiter earned $16.15 million, another all-time high. After the crash, Tether and Circle minted a combined $1.75 billion in new stablecoins, and HLP vaults posted record profits.

By contrast, Lighter, one of the worst-performing perpetual DEXs, reported that as of 4 p.m. EST, its LLP pool fell 5.35% — the third-worst performance on record — and logged its largest absolute loss. The team said a detailed post-mortem and compensation plan for LLP holders would follow. Historically, the LLP has shown a Sharpe ratio of 5.59 and a projected APR of 48.4%.

@Haoskionchain commented that, when reviewing the recent stable-asset depeg incident and its aftermath, the pattern mirrors all past chain-reaction liquidation cycles: the root cause is overleveraged long positions whose losses exceed their collateral value, forcing unified margin accounts to liquidate collateral to repay debts.

Under an isolated margin setup, losses from futures positions are contained and do not spill over to spot holdings because accounts are separated. However, under cross margin, futures losses create liabilities that are offset against spot collateral within the same account. While this structure normally improves capital efficiency and trading flexibility, in volatile markets it amplifies liquidation contagion, which is exactly what happened in last night’s event — one of the most devastating cascading liquidations in years, hitting mid-sized institutions and retail whales harder than ever before.

First, regarding asset diversity and altcoin liquidity:

Compared with a few years ago, the number of listed altcoins — both spot and futures — has multiplied. When liquidity exits during major downturns, it’s normal that no one wants to catch falling knives. Previously, providing liquidity for $1 million might require only 10 contracts; now it requires liquidity across 30 pairs. This exponentially raises the operational and technical demands on traders and exchanges. Under such high stress, if system performance fails to scale accordingly, outages worsen liquidity collapse — limited funds spread thinner, order books disappear, and buyers vanish entirely, to an unprecedented degree.

Second, the cross-margin liquidation without buffer mechanism:

This essentially means “dump whatever you have directly onto the market.” When collateral is liquidated, there’s no algorithmic pricing buffer — assets like USDE, wBETH, and BnSOL were blindly sold off at market prices. Even a basic smoothing mechanism could have prevented such deep holes. This design caused both users and the insurance fund to lose money — both forcibly liquidated together — selling $1 assets for $0.50. Retail traders went negative, insurance pools filled the gap, while bottom buyers effectively profited from Binance’s loss coverage.

Third, pricing based on spot market anchors:

This not only wiped out trading accounts but even affected earn/yield accounts, since collateral values were directly pegged to volatile spot prices. In reality, assets like wBETH did not fundamentally depeg; they were mispriced due to lazy oracle design, triggering wrongful liquidations. Binance has since updated its anchoring mechanism to stronger pegs, but that only patches the symptom — what if the wBETH smart contract itself is rug-pulled? The fix doesn’t address the root cause.

A more robust approach, @Haoskionchain said, involves system expansion and redesign:Centralize and process bankrupt positions together before liquidation. Rebuild the spot liquidation system to prevent uncoordinated dumping. For price anchoring, derive valuations from on-chain staking ratios multiplied by underlying asset prices, consistent with how derivatives are priced — ensuring transparency and resilience.

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