Original Title: Wintermute CEO breaks down crypto's record breaking $20B+ liquidation event
Original Source: The Block
Original Translation: Azuma, Odaily Planet Daily
On October 11, the cryptocurrency market experienced an epic crash. Although nearly a week has passed, discussions surrounding the reasons for the crash and its subsequent impacts have not ceased.
On October 15, Evgeny Gaevoy, the founder and CEO of Wintermute (which was rumored to have faced a crisis on the day of the crash but has since refuted those claims), participated in The Block's podcast to share his views on the "1011" incident.
Complete Chaos in One Hour
Host: Let's get straight to the point. What happened on October 11 was shocking for the entire market. Can you walk us through what exactly occurred that day? What triggered the crash? How did Wintermute respond in such a situation?
Evgeny Gaevoy: To be honest, we still need more time to fully understand the ins and outs of this crash, but one thing is clear—the trigger seems to have been a series of news related to Trump, which gradually led to the largest liquidation event in the history of cryptocurrency.
That day was extremely unusual for everyone—not just for ordinary traders, but also for market makers. The market was completely out of order within an hour.
We will later discuss the ADL mechanism (you can refer to “Why Your Position Might Be Liquidated Suddenly in Extreme Market Conditions”) and how this crash differed from past market fluctuations. One thing is certain: this day was very difficult and unprecedented for many.
Still Unclear Who Suffered the Most Losses, Possibly Hedge Funds
Host: Public statistics show that about $19 billion was liquidated that day, but since Binance did not fully disclose the data (the system can only display one liquidation event per second), the actual number could be much larger, possibly between $25 billion and $30 billion. This means that the recent liquidation scale is more than five times larger than the previous second-largest liquidation event. Why is that? Is it due to excessive leverage in the system? Or did some key infrastructure fail, preventing market makers like you from intervening in time to stop the chain reaction?
Evgeny Gaevoy: I believe this is the result of multiple factors. On one hand, there is indeed more leverage in the system; on the other hand, the market has more types of tokens, more perpetual contract products, and more large platforms trading these perpetual contracts. Looking back three or four years, we didn't have so many perpetual contract products with huge open interest and hidden risks of collapse. In terms of market maturity, while it is indeed more refined and sophisticated than in the past, this development has also given rise to many problems.
We still do not know who exactly "blew up" or who suffered the most losses, but I suspect that many of the severely loss-making institutions were actually running long-short strategies. For example, they might have shorted Bitcoin while going long on certain altcoins, thinking this would hedge their risks, only to be "slapped in the face" by the ADL mechanism.
Moreover, when the market experiences extreme declines, various trading paths often get stuck. This is particularly troublesome for market makers. For instance, if you buy on Binance and sell on Coinbase, you might find that your stablecoins on Coinbase are increasing while you have received tokens on Binance—but at this point, withdrawals on both sides are blocked, making it impossible to transfer assets.
So, when people say "market makers are exiting the market and unwilling to provide liquidity," it is often not a matter of "unwillingness," but rather "impossibility"—they cannot quote here or place orders there because the assets simply cannot move. This situation occurs not only on centralized exchanges (CEX) but also in DeFi. This is the most troublesome issue—you simply cannot adjust positions across platforms.
Lack of Transparency in ADL Causes Confusion
Host: You mentioned ADL (Auto-Deleveraging), and I guess about 90% of cryptocurrency users are hearing this term for the first time. Can you explain how ADL works and why it caused so much confusion during this event? Also, what impact does it have on market efficiency when market makers cannot be active on multiple exchanges simultaneously?
Evgeny Gaevoy: ADL (Auto-Deleveraging) is essentially the "last line of defense" mechanism for exchanges. Generally, when the margin for your perpetual contract position is insufficient, the exchange will directly liquidate your position in the market; if liquidation fails, the insurance fund should theoretically bear the loss.
The ADL mechanism is usually not triggered at all; many exchanges have not used it for years. It was designed as a "last resort" measure. In extreme cases, such as a large-scale drop and chain liquidations like on 1011, if liquidation continues through the order book, prices could drop directly to "zero," and the entire exchange would become insolvent, while short sellers would profit immensely. Therefore, exchanges attempt to use ADL to forcibly offset some short positions, effectively matching shorts with liquidated longs, creating a kind of "virtual offset" to prevent prices from collapsing completely.
In theory, this is an "elegant" solution, but the execution must be orderly, which was clearly not the case this time. The biggest question is—how is the execution price of ADL determined? This will become the focus of many trading institutions questioning exchanges in the coming days or even weeks.
Many institutions had their positions liquidated at extremely unreasonable prices. For example, in our case, some ADL prices were completely illogical; the market price was $1, while our short position was forcibly liquidated by the system at $5. This cannot hedge at all and results in an instant loss.
Is There an "ADL Exemption" Privilege?
Host: As far as I know, Ethena has signed ADL exemption agreements with certain exchanges. Can large market makers like you obtain similar protections? Why does Ethena have such special treatment?
Evgeny Gaevoy: First, I am not entirely sure if Ethena enjoys this privilege. Additionally, it is important to note that Ethena primarily trades BTC and ETH, which are mainstream coins that rarely trigger ADL. ADL is more applicable to various altcoins and meme coins. If such protection mechanisms exist, we would certainly welcome them,
but should exchanges widely offer such terms? Not necessarily. I believe that if implemented, it must be transparent; investors need to know which open positions enjoy ADL exemption privileges, otherwise, it would create a detrimental market structure. We certainly welcome such protections, but the prerequisite is a highly transparent disclosure mechanism; otherwise, the so-called privileges are merely conspiracy theories.
Another key point that is rarely discussed is that some exchanges (like Coinbase and Kraken) have previously implemented market maker liquidity protection plans, and the former FTX had a similar design. This plan allowed market makers to take over positions that were about to be liquidated, bypassing the insurance fund and ADL. It allowed the most risk-tolerant market makers to absorb these risks. However, on mainstream platforms that faced large-scale liquidations this time, such plans were collectively absent. I believe that restarting such plans would greatly improve market resilience.
Does the Market Need to Introduce a "Circuit Breaker" Mechanism?
Host: There is also a saying circulating on X that the reason this liquidation wave was more severe than before is partly due to Hyperliquid now being one of the top three exchanges by open interest, and its many data points are very transparent—including liquidation prices and other information, which are completely invisible on centralized exchanges like Binance, OKX, and Bybit. Some people believe this may have made it easier for certain individuals to estimate, "If we just push the price down to here, we can trigger these liquidations," thus artificially triggering a chain reaction of liquidations. In your view, could this transparency have actually fueled this liquidation wave, causing some assets to plummet by 90% or more?
Evgeny Gaevoy: I think if Hyperliquid were the only exchange in the world, then this conspiracy theory of "targeted attacks" might hold more water—meaning that there are indeed people specifically watching Hyperliquid to trigger this chain liquidation. But in reality, a large amount of open interest still exists on exchanges where liquidation points are not visible, so I think the likelihood of this claim being valid is low.
I find it more interesting to consider whether Hyperliquid represents the future direction of the industry. In other words, could its mechanism of "making all liquidation points visible" become an industry standard?
Personally, I believe that Hyperliquid should ultimately find a balance between transparency and privacy—currently, the information disclosure is indeed a bit "excessive." One solution is to enhance privacy; another potential solution is to introduce circuit breakers.
This feature is absent in all centralized exchanges, and while I can roughly understand the reasons, it should definitely exist. Especially for some stable assets or mainstream tokens, when you see it depeg to $0.6, trading should be paused or switched to auction mode, rather than allowing it to drop endlessly.
In traditional financial markets, almost every exchange—whether for stocks, futures, or commodities—has a circuit breaker mechanism. It prevents the underlying asset from plummeting too much in a short time; the system automatically pauses trading or enters bidding mode, or a combination of both. But in the crypto market, no exchange has this mechanism, which has always puzzled me. If there were a circuit breaker, it could actually protect many retail investors from being liquidated in a chain reaction.
Of course, some might ask—if only one exchange (like Coinbase) adopts a circuit breaker while Binance does not, would that be useful? After all, much of the price discovery actually happens on Binance. In this case, even if Coinbase stops trading, the price will continue to fluctuate on other platforms (including on-chain markets). So if only a single exchange adopts a circuit breaker mechanism, its effectiveness may be limited. To be truly effective, most exchanges need to adopt it in coordination.
This is actually a trade-off issue. You have to choose between two risks: allowing prices to plummet and liquidating all long positions? Or choosing to pause trading to ensure the exchange maintains solvency?
For example, if Bitcoin drops 20% on a certain exchange, as an exchange, you can completely determine that this is an abnormal fluctuation rather than a fundamental collapse, and it would be reasonable to activate a circuit breaker; but if an altcoin drops 50%, that might belong to normal fluctuations, and the market can clear itself. So circuit breakers should at least be introduced for specific trading pairs or asset types.
Will Exchanges Actively "Pull the Plug"?
Host: There have been rumors in the past that some exchanges would "pretend to go offline," actually triggering a circuit breaker. For example, during the pandemic crash in 2020, BitMEX went offline during the collapse, and there was widespread speculation that they did this to avoid a 99% price drop. Do you think this was a genuine circuit breaker action at that time, or was it just because their technical infrastructure couldn't handle it? Furthermore, why do exchanges like Binance still experience outages today, knowing there will be a massive wave of trading demand, yet they still haven't improved?
Evgeny Gaevoy: I tend to believe that the simplest explanation is often the correct one. In my view, the reason is simple—most centralized exchanges have terrible infrastructure that falls far short of the technical standards of traditional financial markets (like the Chicago Exchange, New York Stock Exchange, or NASDAQ). While there are historical reasons for this, no one is really going to migrate to NASDAQ-level technology in the short term.
Because of this technological lag, these platforms often crash under high load. I think this is a more reasonable explanation than any conspiracy theory. I do not believe exchanges would intentionally "go offline to liquidate retail investors" to profit from the insurance fund; the risks of doing so are too high.
From a business perspective, it is far more profitable for exchanges and market makers to keep retail investors trading continuously, engaging repeatedly, and retaining them long-term than to "clean out retail investors every year." Because once everyone is wiped out, many will leave for good and not return.
Will Institutions Face Liquidations?
Host: I remember during the Luna crash, although it wasn't as severe as this time, the impact was still profound. It took us about two to three weeks to realize that Three Arrows Capital (3AC) had actually gone bankrupt. This time, the scale of liquidations is 5 to 10 times larger than that. While there are speculations that some market makers, trading firms, and lending institutions have been severely impacted, so far, I haven't heard of any that have completely blown up or gone bankrupt; at most, I've heard of a few trading firms "losing some money." Do you think any institution will be discovered to have faced a crisis next? After all, this time the open interest and liquidation scale have set records.
Evgeny Gaevoy: I believe that compared to 2022, the interconnectedness of the market has decreased significantly now. Back then, when Three Arrows collapsed, the entire market was directly dragged down by its long positions.
Now, if a market maker were to truly go bankrupt, you should ask who it would affect? How long is the chain of impact? What everyone is most worried about is actually the "contagion effect." Do you remember how Alameda acted back then? They started dumping DeFi assets like crazy during the rebound, and everyone could see it very clearly.
If a market maker really went bankrupt, say Wintermute—this is just a hypothetical—what would happen? We have some loans, and those could all turn to zero; we also have some market-making contracts with protocols, which might still be intact; theoretically, after bankruptcy, we could sell off some assets to recover funds, or just run away (joking); additionally, we have settlement counterparties who might have margin with us, like BTC or ETH.
So, the real scope of impact mainly includes the protocols served by the market maker and the counterparties that have margin dealings with the market maker. The worst-case scenario is that they sell off their BTC or ETH to cash out, but the scope of this situation is actually quite limited.
If it were some smaller market makers, they might indeed be "wiped out," and they might sell off specific tokens they are responsible for making markets in, but honestly, this usually doesn't help much because the liquidity of these tokens is limited, and the sell-off would be too obvious, and the market would immediately notice.
Overall, the contagion this time is very limited compared to 2022. Back then, for example, Three Arrows lent to Genesis, and Genesis borrowed from Gemini, leading to a chain of bankruptcies across the industry, while the current system is much cleaner and has better risk isolation.
Lessons and Experiences from Extreme Market Conditions
Host: After this event, do you have any reflections or lessons learned? For instance, are there areas for improvement in your response strategies, risk control, or hedging mechanisms?
Evgeny Gaevoy: The challenge with these types of events is that they may only happen once a year or every two years. You can learn a lot from them, but if you invest a lot of resources specifically to optimize for such "black swan" events, it may not be cost-effective.
Many market makers actually exited the market this time because such extreme conditions are simply not suitable for their systems. We are still here, but we are only participating with very limited positions—previously mentioned inventory issues have restricted our operational space. Although this is not the first time we've encountered such a situation, it was indeed more difficult than before. Adding ADL (Auto-Deleveraging) makes it even trickier.
We have indeed learned something from this experience, which is to better handle ADL events. Although our system reacts quickly and can immediately detect changes in open interest and automatically adjust positions, when you receive 500 ADL emails from Binance, it still requires manual management. Of course, you could design a perfect system that automatically trades perfectly in such extreme situations, but that would be meaningless for the other 364 days of the year, and not worth the investment.
We had a meeting this morning to discuss the next steps for improvement. For example, in our quoting system, we have a lot of "circuit breaker" protections internally, but this time they were triggered too frequently, almost disconnecting every minute. We may allow them to trigger less aggressively in future extreme market conditions.
Overall, we are satisfied with our response performance. Although there were some losses on ADL, we also made quite a bit due to high volatility, which balanced out overall. Of course, it could be better, but overall, it's fine.
What’s frustrating is that there is a lot of FUD now, and we spend a lot of time communicating with counterparties and partner protocols, explaining our inventory situation, etc. While this is troublesome, it is also understandable—after all, everyone is quite nervous.
What Are the Market Expectations?
Host: So, looking ahead to the next few months, what do you think? This liquidation scale has set a historical record, far exceeding events like FTX and Luna, but it seems that no one feels like "the end of the world" this time; it's just that many people have suffered heavy losses.
Evgeny Gaevoy: I believe the main impact in the coming months will be: sectors outside of major coins will be affected because this round of liquidations is mainly concentrated in altcoins. There are now far more altcoins and meme coins in the market than four years ago, and investors' money is scarcer and more cautious, so I think the market heat for altcoins will noticeably decline. Of course, new retail investors enter the market every day, so the market will eventually recover, but in the short term, there won't be a major "altcoin season."
Interestingly, Bitcoin, Ethereum, and even Solana have performed quite steadily this time. For example, Cosmos (ATOM) dropped 99.9% at one point, while BTC and ETH only saw a maximum drop of 15%, which is very mild.
Liquidity Will Further Concentrate in BTC, ETH, and SOL
Host: Does this mean that the maturity of the market and the assets themselves has improved?
Evgeny Gaevoy: I think so. Bitcoin is now an institutional-grade asset. There are ETFs, support from MicroStrategy, and infrastructure like CME futures. Ethereum is basically approaching this status, and Solana is also getting closer.
So I am not worried about BTC experiencing any massive flash crashes unless something very strange happens, like a quantum computing attack.
This is actually a positive signal, indicating that some mainstream assets are now "safe enough to hold long-term." The more ETFs there are and the broader the access channels, the more limited their volatility will be, which also means you can hold BTC, ETH, or even SOL with more confidence and higher leverage. In the future, we will also see more leverage and liquidity concentrating in these assets.
Wintermute's Emergency Response Mechanism
Host: Your team is mainly in London, right? Although you have overseas offices, I guess most of your trading team and core members are in London. The timing of this market event was quite late for London, almost at night or even early morning. So how do you respond to such sudden events when your traders are all asleep? Do you have teams in other countries that can immediately take over? How automated is your trading now? If these sudden events occur at the worst times in your time zone, how do you handle it?
Evgeny Gaevoy: Yes, we actually have to thank the "Trump rallies" for this; we are already used to such situations—extreme market conditions often occur on weekends or late Friday nights in London.
So while this time was still quite shocking, we were actually prepared. Of course, to be honest, this is terrible for the work-life balance of traders, but this is the case in any trading company.
Generally, we divide the work this way—the London office and the Singapore office take turns. Around 10 to 11 PM London time, the Singapore team takes over trading, and the London team starts to "relax" slowly, but this time the market event erupted before the handover, so we didn't have time to relax, and everyone got pulled in. That night was indeed particularly busy.
Host: I spoke with another market maker, and they said they have a device that wakes traders up at night if there are severe market fluctuations. I think that might be because they are not as large as you and don't have a global team to take over. Do you do that as well? For example, if an asset suddenly drops 15%, will someone be woken up by the system? Or are you now distributed enough that you can sleep soundly?
Evgeny Gaevoy: Basically, I would only be woken up if the situation is really bad and we are losing a lot of money. So actually, I slept quite well that night.
I woke up the next morning at eight to see a bunch of messages on Twitter asking, "Are you guys dead?" and started dealing with that FUD. The team hardly slept that night, but I slept fine.
This is also the "luxury" of running a large proprietary trading company—you have enough traders to take turns, so you can sleep soundly and deal with issues the next day.
So if I were woken up at three in the morning, it would mean something serious has happened. So far, that hasn't happened.
Views on DeFi Performance
Host: From this event, did you notice any particular phenomena on the on-chain (DeFi) side? Although your activities in DeFi are not extensive, you do have some operations. Was there any part that had issues or surprised you this time? For example, I noticed that Aave performed very well during this crash, with not many liquidations, and the system was quite robust. Compared to the past, DeFi has actually held up quite well this time.
Evgeny Gaevoy: We saw some terrible situations in DeFi. But indeed, we encountered the same issues in DeFi as in CeFi: inventory issues.
Our positions are on Binance, but we can't transfer them out, so we sold everything we could in DeFi, and bought everything we could on Binance, but we couldn't move the assets over and could only wait for the inventory to flow back. Of course, we could also borrow assets to make markets, but that carries a lot of risks and could lead to liquidation. Another way is to quote different prices for USDC in different markets (like DeFi and Binance) to engage in cross-market arbitrage, but that is also difficult to operate.
Such extreme events happen only once a year, and you can't really build a system specifically for them. We saw that most competitors simply stopped DeFi trading during this event, possibly because their risk control circuit breakers were triggered.
I am quite satisfied with our performance. Although we could have made more money, we simply ran out of inventory.
About FUD
Host: One last question—Wintermute (WM) has almost become the "scapegoat" in the eyes of the crypto community. Whenever there is any market fluctuation, everyone blames you. For example, when people noticed you deposited hundreds of millions into Binance before the crash, they immediately spread rumors that you were dumping, even though I know that was just a delta neutral trade, but the rumors still flew around. Do you care about this kind of public opinion? Although you don't rely on retail investors or Twitter sentiment, focusing more on LPs (liquidity providers) and partner protocols, how do you personally deal with it? Do you get angry, or have you already become indifferent?
Evgeny Gaevoy: To be honest, I have completely let it go. I just feel sad that some people can be so foolish. They piece together unrelated data fragments to draw absurd conclusions and do so with great confidence.
For example, when someone saw that we deposited $700 million into Binance on that day, they shouted, "Wintermute is going to dump," but they didn't even notice that we withdrew almost the same amount on the same day. These people are essentially betting on retail investors in altcoins—and we just happen to be the ones making money off them.
So this is a kind of "ecological relationship"—they are shouting nonsense on crypto Twitter, and we profit from their foolishness. It's a bit sad, but if they all became smart, our trading volume might actually decrease.
We Have Always Been Net Long
Host: Will you consider expanding into businesses beyond market making in the future? For example, proprietary trading, investments, or others?
Evgeny Gaevoy: Actually, we have always been doing some other businesses, but there is a misunderstanding in the outside world that we are shorting every day. In reality, we have been almost entirely net long.
We have been bullish overall since 2022 or even earlier. We have a venture capital department that has invested in many projects, and as a result, we have obtained a lot of locked tokens. We also hold a large amount of core assets like BTC, ETH, HYPE, and SOL. We cannot dump the market because that would directly harm our own holdings.
In terms of risk management, we have clear rules: our long positions will not exceed 25% of our net assets, so even if the market crashes tomorrow, we would only lose a maximum of 25% and would not go bankrupt. We also do not put more than 35% of our net assets on a single platform, so even if Binance were to collapse like FTX tomorrow, we would still survive.
This is why we were able to withstand the FTX collapse and also endure hacker attacks. Unless the top five exchanges disappear simultaneously, we can survive.
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