Written by: Wu Says Blockchain
In this episode of Wu Says Podcast, we invited Adam, a macro researcher from Greeks.live, Conley Wang, an institutional business researcher from CoinEx, and Albert Luxon, a PM from a macro hedge fund, to conduct a detailed review and discussion of the "1011 Incident" that occurred on October 11 (Beijing time) in the crypto market. This conversation was prompted by Cathie Wood's recent comments attributing Bitcoin's high-level retreat to Binance's technical failures and deleveraging events. The guests recounted the market's panic moments, analyzed the causes of USDe circular loans, the ADL mechanism, and API outages, and compared the similarities and differences between the events of March 12, May 19, and this incident.
The views of the guests do not represent those of Wu Says. Readers are advised to strictly adhere to the laws and regulations of their respective locations.
The audio transcription was completed by GPT and may contain errors. Please listen to the complete podcast on Xiaoyuzhou, YT, etc.
Opening Background: Cathie Wood's Accusations and Binance's "Delayed" Response
Maodi: Welcome everyone to this episode of Wu Says Podcast, which is a deep review of the "1011 Incident." On October 11 (or October 10 in some regions), Bitcoin fell by about 14%, and altcoins suffered devastating blows, with some momentarily going to zero. A few days ago, Cathie Wood accused Binance's software failure of triggering the deleveraging event on October 11, leading to Bitcoin's high-level retreat. This statement sparked a huge reaction in the European and American communities, raising questions about Binance's transparency and fairness of strategy. In response, Binance recently converted its SAFU fund into Bitcoin reserves and released a technical report.
First, let's have each guest introduce themselves.
Adam: Hello everyone, I am Adam. I am the chief researcher at Greeks.live. Greeks.live is currently the largest Chinese options trading tool and also operates the largest Chinese options trading community. I'm glad to be here on Wu Says Podcast today.
Conley WANG: Good afternoon, everyone. I am Conley, currently responsible for institutional business at CoinEx and ViaBTC, and I also work on some listing matters.
Albert Luxon: Hello everyone, I am Albert. I am currently a PM at a multi-strategy, multi-asset macro hedge fund in Singapore. I mainly oversee the Crypto-related Option Desk and some businesses related to precious metals. I'm glad to be invited by Wu Says to discuss with industry colleagues.
Albert's Review: Delta One Anomalies and Options Alerts
Maodi: Let's talk about the day of October 11. When did you realize that the drop was unusual? Was it due to group messages, price fluctuations, or margin alerts?
Albert Luxon: In fact, we noticed anomalies as early as August. Although Ethereum was surging at that time, the options skew was severely inverted, indicating that the rise was speculative rather than investment-driven. A more dangerous signal was that we observed the accumulation speed of Delta One (contracts) was extremely fast, indicating that the price was entirely driven by high leverage rather than spot buying. In a situation with limited liquidity, this increase in leverage would inevitably lead to a collapse.
Therefore, we started buying put options in batches from that time. By the eve of October 11, although the price had surged, we monitored that the market's tail risk pricing was actually rising, and the system had already issued alarm signals. We anticipated that any small trigger could lead to a chain liquidation, so before the incident, we had opened all hedging positions, including cross-exchange hedges, and adjusted our strategy to a fully defensive state.
The earliest trigger for October 11 was Trump's comments about the "trade war." Although market sentiment rebounded later, it did not alleviate the accumulated liquidation pressure. Around 5 AM, due to API delays and market outages, some dynamic hedging orders we intended to place were not successfully executed. At that time, altcoins plummeted, while BTC and ETH remained relatively stable. Thanks to our experience with "312" and "519," we had disaster recovery preparations in our strategy. Although our hedging was obstructed, it did not cause substantial negative impacts. In contrast, many newly entered funds and retail investors suffered heavy losses due to panic and lack of experience.
Maodi: So did you incur losses that day?
Albert Luxon: No losses, we can only say we made a little less profit. Although the exchange's lag caused some hedging orders to fail, the puts we had arranged in advance effectively covered the risk. Overall, the investment portfolio was still profitable, but due to technical failures, we did not achieve the perfect hedging effect.
Maodi: You just mentioned that you also experienced outages. Which platform had the outage?
Albert Luxon: It was the largest platform (referring to Binance). When we were doing dynamic hedging (DDH), we clearly felt the lag and order failures. I believe the core reason was that under extreme market conditions, the order book experienced a liquidity vacuum, compounded by traffic congestion leading to slower responses. However, because we held a large number of puts, we established hard profit and stop-loss boundaries, so the overall impact was very limited.
Conley's Perspective: Momentum Exhaustion and Liquidity Drying Up
Maodi: What is Conley WANG's perspective on this?
Conley WANG: Before October 11, I observed that market momentum had shown marginal decline. First, MicroStrategy seemed to be "unable to buy," with rising debt costs and declining mNAV leading to ATM deterioration, indicating a state of capital scarcity; secondly, the BTC ETF in the US stock market entered a platform period starting in July, with a noticeable slowdown in capital inflow; additionally, the liquidity of major exchanges was visibly deteriorating.
October 11 was very dramatic. Social media showed severe polarization; apart from a few traders flaunting huge profits, the vast majority were lamenting losses. Essentially, this was a large-scale deleveraging. I personally had no pain at that time because I was flat, so I could view this crash from a relatively objective perspective.
Adam's Analysis: Meme Frenzy and Divergence in Volume and Price, Similar to the Eve of May 19
Maodi: What about you, Adam?
Adam: My personal view is that the situation at that time was very similar to "519." First, there was a depletion of funds, with ETF and US stock market capital ceasing to flow in. Secondly, the sentiment was extremely fervent, with meme coins emerging one after another, resembling the "zoo" market of May 19, where this lack of value support in a game of musical chairs is usually a signal of a market top.
More critically, there were data alerts: first, the put options in the options market were accumulating rapidly during the price rise; second, there was a severe divergence between volume and price, with trading volume decreasing by about 30% while prices reached new highs. These combined signals made us sense that a collapse was imminent.
On October 11, I was awakened by a friend. Although the decline was fierce, it had limited personal impact on me. I mainly held ETH spot, and the drop was within an acceptable range, plus I did not hold high-risk altcoins. As an options seller, although I incurred some floating losses due to the spike in IV (implied volatility), these losses could be recovered as IV later fell.
Analysis of Affected Groups: Medium-Sized Coins and Quantitative Hedge Funds as Hard-Hit Areas
Maodi: After October 11, although some KOLs flaunted huge profits, most people should have incurred losses. What is the real situation around you?
Adam: I later communicated with many friends and believe that the heaviest losses were likely among those doing quantitative hedging, especially teams involved with medium-sized coins.
Currently, the quantitative competition for mainstream coins like BTC and ETH is particularly fierce, making it difficult to achieve returns. Therefore, many hedge funds choose medium-sized coins ranked around 30 to 50, thinking they are also relatively mainstream currencies with decent liquidity, and the excess returns from trading these coins are higher. However, this time, those people suffered the most losses.
On October 11, many cryptocurrencies in that ranking fell by as much as 90% or even 95%. Especially on Binance, there were a few minutes when orders could not be placed. If you are running a quantitative fund, you generally use leverage. In this case, stop-loss orders could not be triggered, and the priority for initiating orders was weaker than that for forced liquidation orders. All orders could not be placed, leading to significant losses for some quantitative traders.
In contrast, those purely trading mainstream coins or not using high leverage mainly faced spot losses, which I think were manageable.
USDe Crisis: Collapse of Circular Loans and Double Whammy of Arbitrage
Conley WANG: The most severely affected were the USDe (Ethena) circular loan users. At that time, Binance and Ethena launched high-interest activities, with many users adding 3-5 times leverage. After the crash, the supply of USDe on Binance shrank by $4 billion, which is staggering.
But there were also "winners": HLP holders of Hyperliquid rose about 20% against the trend. The reason is that the HLP pool took over a large number of cheap liquidation orders and sold them at high prices to shorts through the ADL (Auto-Deleveraging) mechanism, passively achieving a perfect "buy low, sell high."
I also agree with Adam that the biggest losses were also among those doing carry trades (arbitrage). They may have closed positions at very poor prices, and when they wanted to open positions to hedge, they ended up with poor orders due to matching engine or system issues, suffering a double hit.
How the ADL Mechanism Harvests "Smart Money"
Albert Luxon: First of all, many small funds doing funding fee arbitrage do not thoroughly understand the ADL (Auto-Deleveraging) mechanism. Previously, when mainstream coin yields were poor, they took risks to leverage altcoins. As a result, in this wave of market, their short positions were originally profitable, but due to the market crash, the ADL mechanism forcibly liquidated their shorts.
Ultimately, this led to a sudden break in the Delta Neutral state. The strategy was forced to hold a naked long position in illiquid assets, resulting in huge losses. Cross-exchange arbitrage was equally disastrous. Under extreme market conditions, price differences expanded irregularly, compounded by ADL causing one-sided positions to disappear, leaving the other side completely exposed. With 3-5 times leverage, it was impossible to reduce positions in time.
Therefore, many strategies that were severely affected by the ADL mechanism saw significant declines in net value. Those that survived relatively steadily were mainly teams that strictly avoided altcoins and had experience dealing with extreme market conditions. I estimate that about 30% to 40% suffered severe losses, with many facing fund liquidation or net values that would take six months to a year to recover. About one-third of people suffered some losses but can recover, while the remaining one-third performed relatively well.
USDe Circular Collateral and the Liquidity Mismatch Risk of Underlying Assets
Maodi: Apart from the decline in mainstream coins, were the abnormal prices of assets like USDe, WBETH, and BNSOL the culprits behind the large-scale liquidation of altcoins? Why did they show abnormalities first?
Albert Luxon: I strongly agree with this statement. Taking USDe as an example, it is essentially not a stablecoin with hard collateral, but rather a money market fund built on derivative strategies, with returns primarily coming from long-short arbitrage and funding fees. If this product is simply held, there is not much issue, but the fatal flaw is that many people use it as collateral for circular lending on exchanges. Since the underlying short positions of USDe are always at risk of ADL (Auto-Deleveraging), once the underlying positions are passively handled, USDe will inevitably face devaluation and decoupling.
A significant part of this drop was due to the collective liquidation of USDe circular lending strategies. This strategy, which had been widely promoted and even used for fundraising, caused a severe run on USDe under extreme market conditions, leading to a sudden devaluation of collateral and triggering a chain liquidation. WBETH and BNSOL also faced similar issues; they belong to "derivatives of derivatives," with each layer of nesting adding new risks, and their fragility was fully exposed in extreme markets, which many investors had not adequately considered beforehand.
Conley WANG: My observation has another aspect: the price of USDe on AAVE is actually anchored to 1 USDT, but on Binance, the liquidation price is directly read from the spot order book. From this perspective, this is also a fundamental reason for triggering liquidations.
In contrast, mechanisms like Aave might be somewhat better. Aave feeds the oracle's quotes or provides pricing to institutions, effectively incorporating Proof of Reserves. If the price is determined by directly reading the order book to assess whether collateral is bankrupt, it can easily lead to problems when there is insufficient depth.
Especially when USDe and Binance were running promotions, everyone was accumulating high leverage. At around 5 AM, USDe quickly decoupled on Binance, and the system would rapidly determine that positions were going bankrupt, leading to a vicious cycle of frantic asset sell-offs, while also increasing the risk of outages or issues with the matching engine.
Additionally, at that time, Binance lacked a direct mint and redeem mechanism for USDT. Coupled with soaring on-chain gas fees and withdrawal suspensions, arbitrage traders were unable to enter the market to smooth out price differences. WBETH and BNSOL were similar; these assets, which should have been anchored, were leveraged by users to seek double returns (funding fees + staking rewards), which exacerbated the severity of liquidations under extreme market conditions.
Editor’s Note: For the relationship between USDe and the 1011 market, please refer to this article.
Maodi: Can it be understood that you believe Binance has significant issues with risk control?
Conley WANG: The risk control may indeed not be rigorous enough, but in the crypto space, many extreme situations are indeed difficult to predict in advance.
Adam: Behind this is the dilemma faced by exchanges regarding whether to price assets "mark to market" or "mark to peg." Assets like USDe are the main targets for circular lending and are of substantial volume. If a forced 1:1 peg is implemented, once the underlying assets collapse like LUNA, the exchange will face arbitrage attacks and bottom risk; therefore, the exchange chose to price based on market value.
Unfortunately, the crisis broke out before the rule changes took effect. This led to what was originally considered a medium-low risk circular lending product evolving into a high-risk asset similar to high-leverage futures under the mechanism's loopholes, and it is even possible that some people exploited this loophole to exacerbate the situation.
Liquidity Paradox: The Larger the Volume, the More Severe the Liquidation
Maodi: Why did USDe drop the most on Binance? It is generally believed that Binance has the best liquidity; why did it drop the lowest instead? Do other exchanges have similar situations?
Adam: It's like BitMEX during "312"; the larger the volume, the harder it falls. Binance accumulated a large number of liquidation orders and API orders due to outages. When the system resumed matching and processed the backlog of orders, it formed a "longs killing longs" situation—liquidations led to selling, which drove prices lower, triggering more liquidations. The inherent mechanism of derivative exchanges is that the larger the volume, the more accumulated liquidation orders there are, the more aggressive the risk control (the higher the leverage given to users), and the greater the impact faced. Smaller exchanges, because they do not have as many people leveraging for circular lending, actually have lower liquidation intensity.
Maodi: The liquidation data from Binance is around $1.9 billion, which is not as much as Hyperliquid. Do you think this data is credible?
Adam: I think the data has some discrepancies. Hyperliquid has high intensity due to pure machine liquidations. Binance, on the other hand, may have some VIP loans that did not face direct liquidation that day.
Survivorship Bias of Small and Medium Exchanges
Maodi: Conley, why did the decoupling happen first on Binance, and why was the drop much more severe than on other platforms? Meanwhile, have you observed similar mechanism failures or price anomalies on other exchanges?
Conley WANG: I have been observing small exchanges for a long time and found that on October 11, many coins on small exchanges not only did not drop but actually rose significantly, especially in the mining coin sector. This is interesting because small exchanges did not have market makers withdrawing orders and did not face large-scale leveraged chain liquidations.
As for why Binance was so severe, it is because assets like USDe dropped from 0.95 to 0.92, then instantly to 0.81 (the 5x leverage line), and then to 0.66, dropping too quickly. The system determined that violent liquidations were necessary, with no buffer whatsoever.
Additionally, USDe was first launched on Bybit, which is also their strategic partner. The lowest USDe on Bybit was around 0.92 because Bybit has redeem and mint mechanisms, allowing the arbitrage mechanism to function. But in an environment like Binance, with circular lending compounded by system outages, it led to a more violent situation.
Albert Luxon: The core issue is risk mismatch; the inherent risk of USDe is higher than that of USDT/USDC and should have strict limits on collateral amounts. However, at that time on large exchanges (Binance), "circular lending" tutorials were rampant, and users, in pursuit of over 10% APY, ignored the underlying risks, mistakenly believing it was as stable as hard-collateralized stablecoins. The exchange's risk control also failed to effectively limit positions, leading to highly concentrated risks.
This triggered a liquidity paradox: everyone thought the liquidity here was good, so they all came to do circular lending. As a result, when something went wrong, panic selling directly breached the smaller, non-hard-collateralized USDe. This shock led to all related strategies (margin, interest earning) facing chain liquidations. Conversely, those small and medium exchanges that had stricter collateral reviews or were smaller in scale survived due to not having these high-leverage exposures, which is indeed very darkly humorous.
Evaluating Binance's Report: High Leverage is a Powder Keg, Outages are the Fuse
Maodi: What do you think of the 1011 report released by Binance today?
Albert Luxon: I just read this report. I think the biggest problem is still that market leverage is too high. Even without this report, or if Binance had not encountered issues, under excessive leverage, any trigger, such as problems at another exchange, would ignite this powder keg.
The USDe circular lending has already buried hidden dangers. The market is like being sprinkled with gunpowder; as long as there is a spark, it will explode. This time the spark was at Binance, but next time it could be elsewhere. For exchange risk control, assets like USDe, which have high underlying risks, should have limits on their use as collateral and should not be encouraged for circular lending.
Conley WANG: This report came out a bit late. The best PR is to solve problems in advance, and the second best is to quickly review and compensate after an incident occurs. Now that 100 days have passed, it only came out in response to the uproar in the European and American communities, which has diminished its significance.
Adam: As an outsider, I support the release of the report; transparency is always better than concealment. The core of the report mentioned outages and decoupling, which basically aligns with the facts. But indeed, as Brother Wang said, it came a bit late; it would have been better if it had been released a few days after the incident.
Truth Behind the Market Slump: Innovation Exhaustion and Liquidity Gaps
Maodi: Cathie Wood attributes the current market slump to the 1011 incident. What do you think?
Adam: The correlation is limited; it can be said that the decline in November is related, but the current market is struggling primarily due to a lack of innovation in this cycle. There is nothing substantial to showcase, whether from a technological or financial perspective. Hyperliquid and Polymarket are performing well because they are excellent internet products, more a result of regulatory arbitrage than a significant contribution from crypto itself.
As for the European and American communities' condemnation of Binance, it is more an irrational emotional outburst. Although Binance bears some responsibility, it is clearly unreasonable to attribute all current market issues simply to the 1011 incident.
Conley WANG: The 1011 incident indeed caused substantial harm, leading to a significant decline in market liquidity by about 30%, and the FDV (Fully Diluted Valuation) of newly launched projects has shrunk significantly, with frequent occurrences of new financial products breaking even. However, the accusations from the European and American communities are essentially a "gambler's mentality" breaking down in comparison to the rise of US stocks and gold. Fairly speaking, in terms of product experience, Chinese exchanges are still far superior to European and American exchanges.
Albert Luxon: Regarding Cathie Wood, the industry jokingly refers to her as the "American version of Cathie Wood." The ARKK fund is essentially a marketing-driven fund chasing hot trends rather than a stable investment. While Bitcoin is reaching new highs, the net value of ARKK has nearly halved, and she urgently needs to find a scapegoat for poor performance, so Binance and the 10.11 incident became the perfect excuse. But in reality, the essence of 10.11 is the market's excessive leverage clearing; even without Binance, there would be other triggers, and she merely amplified the emotions using her influence.
However, behind this incident, there is a deep structural aftereffect that many have overlooked. With the adjustment of Trump's policies, the friendliness of US stocks towards crypto companies has reached a new high, which will lead quality crypto projects to directly seek IPOs on NASDAQ rather than issuing tokens on exchanges (ICOs).
Listing on US stocks means gaining support from top market makers globally, with fundraising targets being the entire market's USD funds rather than just the crypto circle's USDT. This will trigger a vicious cycle: investors and VCs will find US stocks to have better liquidity and compliance, leading funds to flow towards US stocks; quality projects will also prioritize listing to cater to the funds. Ultimately, the altcoin market of CEX may shrink, leaving only inferior projects. The next "altcoin season" may occur in US stocks rather than in the crypto circle, which is a more frightening structural change than liquidity exhaustion.
Finally, from an institutional perspective, European and American exchanges (like Kraken) resemble pure financial infrastructure, focusing on compliant fiat deposits and withdrawals and bank connections; while Chinese exchanges resemble extreme internet products, excelling in user experience. The positioning of the two is different, but the industry's biggest concern lies in the aforementioned diversion of quality assets.
Historical Comparison: From "Survival Crisis" to "Leverage Clearing"
Maodi: Finally, let's compare 1011 with 312 and 519. After the 312 incident, BitMEX went down, and Binance quickly seized the market. Will the 1011 event change the landscape of the crypto market again, especially in terms of competition among exchanges?
Albert Luxon: The 312 incident was triggered by Covid-19, leading to a global liquidity crisis, with US stocks experiencing consecutive circuit breakers, causing all assets to be knocked down; crypto was just one part of it, and it was truly a "leave it to fate" situation. Although the 10.11 event had external triggers, the core issue was the excessive leverage within the crypto market leading to liquidations. The US stock market did not crash; as long as positions are reasonable, it won't fall into a dire situation.
During the 3.12 era, the market was primarily Bitcoin-based, with collateral being Bitcoin. The drop in Bitcoin's price led to a simultaneous shrinkage in the value of collateral, and after forced liquidations, collateral was sold off, triggering a severe "death spiral." Now, the market is predominantly US dollar-based, with collateral being stable-value USD stablecoins, so the selling pressure and spiral effect are much smaller than they were back then.
Conley WANG: The 312 incident was an external storm impacting a small pool, while 1011 was an internal implosion triggered by external factors, but the infrastructure's resilience has significantly improved. Regarding the exchange landscape, although the approval of ETFs and CME's dominance in BTC trading volume and open interest shows significant changes at the compliance and institutional levels, Binance's network effect remains extremely strong in the native crypto space, and traditional brokers like Robinhood are still unable to challenge its dominant position.
Adam: During the 312 incident, Bitcoin dropped to a few thousand dollars, and the fear was whether "Bitcoin would go to zero," which would have been a devastating blow to the industry. If BitMEX hadn't "pulled the plug" at that time, the entire industry might have faced a major reset.
The drop on 1011 was only 15%, which falls within normal market fluctuations. Although the "largest liquidation" amount now looks frightening, that's because the market size has increased, and its impact is far less than it was back then. Unless a crisis arises that threatens Bitcoin's fundamental existence, such as quantum computing breaking Bitcoin, mere price fluctuations are not enough to be compared with 312.
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