The chain liquidation triggered by extreme leverage using altcoins as collateral is a systemic risk ignited by external shocks during times of structural market fragility. This article will analyze the underlying mechanisms from the perspective of market makers and large holders pledging altcoins to borrow stablecoins.

In Greek mythology, there is a story about a young man who died chasing the sun.

Icarus is a young man in Greek mythology who died while pursuing the sun. He and his father, Daedalus, were imprisoned by the King of Crete, and Daedalus made two pairs of wings from wax and feathers, allowing them to escape the island. Daedalus warned his son not to fly too high, but Icarus, in his pride, flew too high, causing the wax on his wings to melt in the sun, ultimately leading to his drowning in the sea.

In analogy, the wings represent leverage in the financial world, while flying too high is a form of original sin.

Catalyst for the crash on October 11: The "black swan" of macroeconomics appearing before the powder keg

On October 11, 2025, the market faced an unexpected macroeconomic downturn: Trump announced high tariffs on Chinese goods. This news instantly ignited risk-averse sentiment in global markets, leading investors to sell off stocks, cryptocurrencies, and other risk assets, flocking to safe-haven assets like the dollar and gold.

For a crypto market that had already accumulated significant leverage and fragile positions, this was akin to a spark thrown into a powder keg.

First Perspective: Imbalance in Market Makers' "Neutral Strategy"

Market makers play a key role in providing liquidity in the market. Theoretically, they earn the bid-ask spread through a "market-neutral strategy" (holding both long and short positions to hedge risks) rather than betting on a one-sided market.

• Pursuit of capital efficiency: Market makers do not invest millions of dollars in real cash to provide liquidity for every trading pair. Exchanges allow them to pledge their held crypto assets (including a large number of altcoins) to borrow stablecoins (such as USDT, USDC), which they then use to execute market-making strategies. For example, by pledging an altcoin worth $1 million at a 50% collateralization rate, they can borrow $500,000 in stablecoins.
• Hidden risk exposure: In this model, while market makers may appear "neutral" in the contract market, their balance sheets are not. The collateralized positions themselves represent a significant risk point.
• The triggering process on October 11:

Market upheaval: Trump's tariff announcement triggered a panic sell-off, causing all altcoin prices to plummet alongside Bitcoin and Ethereum.

• Collateral value shrinkage: The value of the altcoins pledged by market makers rapidly declined, leading to a sharp deterioration in the health of their collateral positions, approaching the liquidation line.
• Dual pressure: Simultaneously, their market-making positions in the contract market (which may include some long positions to maintain balance) also faced losses or even liquidation due to the price crash.
• Liquidation initiation: When market makers could not add margin, the exchange's liquidation system would forcibly take over their pledged altcoins and sell them at any cost in the spot market to repay the borrowed stablecoins.
• Formation of a death spiral: The massive selling pressure in the spot market further drove down altcoin prices. As contract prices closely followed spot prices, this directly led to another crash in contract prices, triggering more contract positions, including those of the market makers themselves and other traders in the market.

This created a vicious cycle: Contract liquidation → Price decline → Collateral value decrease → Collateral liquidated in the spot market → Spot prices further decline → Triggering more contract liquidations.

During the flash crash on October 11, many altcoin prices instantly dropped to zero or near zero, precisely because the liquidity protection mechanisms of market makers completely failed under the impact of chain liquidations.

Second Perspective: The "Yield Farming" Predicament of Altcoin Whales

Altcoin whales face a dilemma similar to that of market makers, but their intentions and position structures differ.

• Sunk costs and impatient capital: Many whales bought large amounts of altcoins in the later stages of a bull market, expecting hundredfold returns. However, the market failed to meet their expectations, and their funds were long locked in these illiquid assets (e.g., Wbeth, Bnsol).
• Seeking additional returns: To generate returns on their stagnant funds, they adopted the same strategy: pledging their held altcoins on exchanges or DeFi protocols to borrow stablecoins, then using these stablecoins for contract trading, short-term speculation, or investing in other projects.
• Already unhealthy positions: After a prolonged period of sideways movement or decline, many whales' pledged positions were already in a "sub-healthy" state. They may have become accustomed to hovering near the liquidation line, maintaining their positions through small margin additions.

The last straw on October 11:

• External shock: The widespread decline triggered by the tariff event put their already fragile positions in jeopardy.
• Threat of dual variables: They faced the squeeze of two core variables:

1. Losses in contract positions: The contracts opened with borrowed stablecoins (likely long positions) were rapidly losing value.
2. Plummeting collateral value: This was more fatal; even if their contract positions could temporarily hold, the underlying collateral was being eroded. Once the collateral value fell below a certain threshold, regardless of whether the contract positions were profitable, the entire pledged position would be liquidated.

• The same spiral, different protagonists: When liquidation occurred, the mechanism was similar to that of market makers: contract positions were closed in the contract market, while the pledged altcoins were sold in the spot market. Each whale's liquidation became a heavy bomb dropped on the market, accelerating the price collapse and triggering the next whale's liquidation. This was akin to two liquidation lines occurring simultaneously, one from the market makers' arbitrage bots and the other from the liquidation engine.

Conclusion: A Structural Avalanche Triggered by Extreme Leverage

The crypto market crash on October 11 was superficially driven by macroeconomic news, but its deeper cause lay in the extreme leverage accumulated within the market, using high-risk altcoins as collateral. This model tightly binds the spot and contract markets through collateralized lending, creating a highly fragile system.

• Resonance of risk: Risks in a single market (such as contract losses) can quickly transmit and amplify to another market (spot sell-offs), and vice versa, creating a powerful resonance effect.
• Liquidity evaporation: Under the stampede of chain liquidations, the buying power in the altcoin spot market was instantly drained, leading to a cliff-like price drop, even briefly reaching zero.

In the current structure of the crypto market, even market makers without directional risk and long-term holders can find themselves and the entire market on the brink of systemic collapse due to the pursuit of extreme capital efficiency and leveraged returns. A seemingly unrelated external shock is enough to trigger the entire avalanche.

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