🧐 I spent six hours reading this article: After Inside Binance’s Flash Crash｜Leverage, Liquidity, and the Moment of Systemic Self-Destruction!

Sometimes,

the market collapses not because of panic,

but because it operates too perfectly.

The crash on October 10th

was such a moment:

All mechanisms were "functioning normally,"

all parameters were logical,

yet the entire system self-destructed in milliseconds.

Last time, I wrote an analysis about the decoupling of USDE,

that article focused more on the "phenomenon"—

while @ltrd_'s research (Inside the Flash Crash: What Really Happened on Binance) is one of the few that truly delves into the microstructure of the market.

I was shocked after reading it!

The detailed exploration offers a unique perspective,

revealing things we did not see during the crash!

It does not discuss "who was wrong,"

but reveals how the system collapses internally.

From data, CVD curves, to OI distribution and changes in trading costs,

it presents a clearer picture:

The October 10th crash was not a panic,

but a terrifyingly precise "structural self-destruction."

It fundamentally exposes the current market's excessive leverage,

fragile liquidity, and the real pressure points of leading platforms under extreme conditions.

Here’s the full picture and some of my thoughts—

1️⃣ The starting point of the crash: liquidity withdrawal, not stablecoin decoupling

Many believe that this was caused by USDE decoupling → leading to a crash in altcoins → triggering a market chain reaction.

But the data tells us the opposite is true.

The market collapsed first (the leverage chain broke), which caused assets like USDE and BNSOL to decouple passively.

CVD (Cumulative Volume Delta) shows:

Around 21:00, the active selling pressure of BNSOL-USDT was not strong, but the price plummeted instantly; while the selling pressure of USDE mainly occurred afterward, caused by arbitrageurs liquidating residual positions.

This means:

1) Market depth was first drained (large players withdrew liquidity),

2) Then asset prices lost support,

3) Finally, the so-called "stablecoin event" occurred.

In other words— it was a liquidity vacuum triggered by excessive leverage, not a problem with the stablecoin first.

2️⃣ Binance's core area: the "central pressure" of market structure

From the data, Binance was the main battlefield of this event and the place where the market structure was under the most pressure.

Average price drop: Binance -65%, Bybit -47%;

Extreme tail (10th percentile): Binance -88%, Bybit -80%

OI (Open Interest) averaged a nearly 50% decline, with some contracts (like $KAVA, $IOTX, $PIPPIN) plummeting over 80%.

As the core liquidity pool of the entire ecosystem, when liquidity providers withdraw under extreme conditions, the entire market's price discovery mechanism collapses instantly.

In the charts categorized by the author, we can see:

During the second wave of decline from 21:10 to 21:20, the Bid-Ask spread surged to 200 bps across exchanges;

At the same time, the roundtrip cost of BinancePerp skyrocketed to 500 bps (about 5%), making it impossible to execute even a small order of $500 without incurring huge slippage.

This is not liquidity disappearing: it is liquidity actively avoiding risk.

3️⃣ The precise collapse of mechanisms: the most dangerous when the system is "functioning normally"

This crash is a textbook example of "systemic self-destruction":

Excessive leverage → collateral asset prices drop → automatic deleveraging/liquidation triggers → market depth evaporates → a new round of liquidations is ignited.

Everything operates within the rules, yet collapses within the rules.

As the largest derivatives market, Binance, precisely because of its deep depth and complex structure, became the "epicenter" when the leverage system disintegrated.

4️⃣ Macroeconomic significance: the market's mirror moment

Every round of crash repeats an ancient cycle:

People think liquidity is constant, and leverage is neutral.

But at critical junctures, the market reminds us in the most direct way—

“It’s not the volatility that kills you, it’s the leverage behind it.”

Binance bore the pressure of the system's core layer this time, but also, to some extent, prevented deeper disorder through its matching and liquidation mechanisms.

In other words, it is both the starting point of the collapse and the hub for restoring order.

What I want to say:

Thanks to the author for providing a fresh perspective; this is not an ordinary crash, but an experiment about market structure, leverage limits, and the essence of liquidity.

When leverage is pushed to the limit and depth evaporates in milliseconds, violent price fluctuations are just a symptom; the real cause is the "overheating" of the entire system.

October 10th reminds us: the market does not collapse because it is weak, but because under an "overly powerful" leverage structure, it finally touches its own limits.

5️⃣ The essence of responsibility: not "operational errors," but "systemic leverage tolerance too high"

Binance was indeed the epicenter of this crash, and it certainly has its issues,

but it is not because "someone did something wrong," but because the entire system's leverage mechanism is overly complex and intertwined.

From the data and microstructure perspective:

The Portfolio Margin system allows users to use various assets (USDE, WBETH, BNSOL, etc.) as collateral;

These assets influence each other within the same system, and when one collateral's price plummets, it triggers a chain liquidation (Cascade Liquidation);

The system overly trusts the assumption of "liquidity continuously existing," but when LPs suddenly withdraw, the entire collateral system collapses instantly.

This means: Binance's system design allowed for too many layers of leverage interlock (multi-layer leverage interlock). This structure is extremely efficient during stable periods, but in extreme environments, it mechanically amplifies local risks.

So I believe:

Binance's responsibility lies in:

Not designing enough circuit-breaker mechanisms for "liquidity collapse scenarios," allowing the leverage system to self-destruct during normal operations.

6️⃣ Directions for technical and mechanism improvements

If Binance truly wants to learn from this event, the following directions are crucial:

1) Limit cross-margin risk (Cross-Margin Containment)

Portfolio Margin is Binance's biggest structural innovation in recent years, but it is also the biggest source of risk.

Improvement suggestions:

Gradually isolate high-volatility assets (Altcoins) from core collateral assets (BTC, ETH, USDT);

Implement higher risk weight coefficients for "stablecoin + altcoin" combinations; introduce dynamic haircut mechanisms to automatically increase collateral discounts for high-volatility assets during extreme market conditions.

2) Improve liquidation logic and transparency

During extreme volatility, Binance's liquidation system behaved "too mechanically": the liquidation trigger range was too narrow; the ADL (Automatic Deleveraging) algorithm prioritized closing hedge positions;

This led to more severe market imbalance.

Improvement suggestions:

Implement a tiered liquidation model, first freezing the additional margin range, then reducing positions in batches;

Introduce a public liquidation monitoring panel, allowing market participants to see the entire network's leverage distribution in real-time;

For extreme events, activate latency-aware protection to slow down chain slippage.

3) Enhance liquidity contingency plans under extreme conditions

Binance experienced a sharp drop in liquidity from 21:10 to 21:20, with the bid-ask spread soaring by 200 bps. This indicates that LPs (market makers) collectively went offline during systemic volatility.

Suggestions:

Sign liquidity commitment agreements with core market makers, requiring them to maintain minimum order book depth during extreme market conditions;

Establish an internal market stability fund, similar to traditional market circuit-breakers;

Allow for the temporary shutdown of cross-margin mechanisms during system crashes, retaining only primary collateral trading.

7️⃣ Strategic level: the industry role Binance should assume!

It is well known that Binance is no longer just an "exchange," but a system-level market infrastructure. This crash illustrates:

When Binance's structure shakes, it is not just user liquidations, but the entire industry's trust system is being tested.

Therefore, I believe their future responsibility lies not only in "preventing another crash," but in becoming an industry-level risk buffer layer.

My suggestions:

1) Publish a complete risk transparency report: including the distribution of collateral assets in Portfolio Margin, leverage distribution, and liquidity health.

2) Introduce on-chain liquidation transparency mechanisms.

3) Make part of the liquidation process on-chain, verifiable, and traceable.

4) Promote a unified "stable collateral framework standard" across the industry.

5) Avoid systemic resonance in leverage and margin weights across different platforms.

Conclusion: Binance is not the "culprit," but must become the "system firewall"

The market collapsed at that moment not because someone made a mistake, but because all mechanisms were "functioning normally."

This is precisely the most terrifying aspect.

Binance bore the brunt of the system's leverage flood, also exposing the truth of the industry:

We have been trading in a market built on the illusion of liquidity.

When liquidity recedes, all smart models and perfect margin formulas appear fragile.

I believe this crash is not "the fault of a certain platform," but a warning that the entire crypto market is on the edge of excessive financialization.

Binance bore the most pressure and exposed the deepest structural issues.

Its responsibility is not to argue after the fact, but to make the system more stable, transparent, and controllable in the next storm.

As a traditional quantitative trader once said:

“The first rule of leverage is not how much you can take,

but how fast you can unwind before the others do.”

Binance must learn to "release the grip on leverage" first; otherwise, the next crash may not just be a technical event, but a collapse of trust.

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