Q: What's the limit of human vision? Some say it's the end of the world, because they can see the sun, moon, and stars; others say it's just a stone's throw away, because a single leaf can obscure our vision. Looking at things from different perspectives can always offer unexpected insights and surprises. Today, let's explore what happened on October 11th from the perspective of the "leverage and liquidation" mechanisms.

This article has no conclusions, no sides, only different perspectives. If you're ready, give me 10 minutes.

statement:

• I can empathize with everyone's dissatisfaction. This article will be discussed in the form of a casual article, trying to put it into this context.
• This article doesn't advocate for or against anyone, nor does it take sides. It simply approaches the issue from a different perspective—a mechanistic one—providing a dialectical analysis of the underlying mechanisms. The examples and figures are unimportant; using Binance as an example, the focus is on the logic and principles.

1. Market Makers’ Financial Techniques and Leverage

In the 31st year of the Daoguang reign, I wrote an article about how market makers (using call options) use the coins borrowed from project parties to make markets. (Portal: https://x.com/agintender/status/1946429507046645988

I calculated that it was probably time to update the version.

As mentioned above, due to the call option setting and the market environment where the listing of a coin is the peak, one of the optimal solutions for market makers is to obtain the borrowed coins from the project party, sell the borrowed coins at the beginning of the listing, when liquidity is the highest (keeping some for market making), and then buy them back at a low point.

This model has two conditions: the first is sufficient liquidity; the second is no third-party supervision, that is, the exchange has no responsibility.

Everyone knows what happened next. The market (spot trading) took a sharp downturn, liquidity was insufficient, and Binance's scrutiny meant that this relatively easy path gradually faded, or perhaps even became less aggressive. But did these actions leave market makers helpless? Clearly not. They set their sights on futures trading.

The problem is, they only have a lot of tokens in their hands, but the contract trading of altcoins only recognizes U. What should they do?

So, they've set their sights on (using Binance as an example) cross-margin leverage, wealth management, and unified accounts. We can ignore all of these features and focus solely on collateral utilization. This collateral module allows market makers and large traders to pledge nearly 200 assets listed on Binance as margin for spot, futures, and options trading. Different altcoins have different collateral ratios, which we'll discuss in the examples below.

So how do we do it specifically?

Take ATOM (full margin) as an example

I borrowed 1 million ATOMs from the ATOM Foundation, 1 ATOM = 5u.

For example, let's say you keep 200,000 ATOMs for daily market making and stake the remaining 800,000 ATOMs ("collateral"). Assuming the market price is 4 million U, the available amount is 1,120,000 (200,000 * 100% + 200,000 * 80% + 200,000 * 70% + 200,000 * 50% + ....)

Let’s use the official (unified account) example to illustrate:

There are two variables here, one is the change in the value of the collateral, and the other is the change in the value of the transaction item.

The rest of the operations depend on each person's ability. Trader A will open a short position in the contract and then make a profit by controlling the spot supply; Trader B will open a long position in the contract and then control the contract price to make a profit, and so on.

Why is the pledge rate so low? — This is similar to the principle behind contract margin: the larger the amount, the exponentially higher the risk. Furthermore, collateral liquidation is calculated based on the "mark price," not the market price.

Binance’s official statement on contract liquidation:

2. How does collateral trigger liquidation and position closing?

The collateral for a unified account/wealth management/leverage is not settled based on the value of a single underlying asset/collateral, but rather based on the equity to margin ratio of the entire account/position.

Here we use a unified account as an example for demonstration:

UniMMR = UniMMR Adjusted Equity / UniMMR Maintenance Margin

The specific calculation method is quite complicated, but in essence, the value of all collateral/positions must be greater than the margin requirement. I will not elaborate on other liquidation/forced liquidation methods for cross-margin leverage/wealth management, but will only introduce the key points here:

If the unified account maintenance margin ratio is less than or equal to 1.2, the account will enter "rigid mode" (unable to open positions), and if it is less than or equal to 1.05, the position will be forcibly closed. (This information is very critical! It will be tested later)

Similarly, cross-margin leverage/wealth management also has similar procedures during liquidation.

Regardless of the type of collateral, there are two main ways to close a position: trade at the market or cancel an existing order.

3. The Capital Efficiency Hammer of Large Investors and Whales

In addition to market makers, institutions, whales and large investors also adopt this financial management/full-position leverage/unified account model.

Imagine you were a firm believer in ATOM. What would you do with 10 million ATOM? Would you stake it, take out a revolving loan, open contracts, and buy the dips, constantly buying the dips? Perhaps you'd buy more than just ATOM, but also projects within the ATOM ecosystem, and even hedge your position. And then you'd hold on until the dream altcoin bull market arrives, making you a star?

This is not some fable, this is a real OG story (now a tragedy)

But unfortunately, your position has become terminally ill due to constant tossing, and at this time heavy rain and landslides have arrived.

IV. 1011 Review

Now let’s go back to that dark and windy night of October 11th (taking ATOM spot as an example)

The price of ATOM started to fall from 5 o'clock, and the volume chart below also began to increase, but the price basically stabilized at around 3.7-3.8, proving that there is still liquidity.

The market began to decline at 5:13 AM, with significant volume. The next bar followed the previous one's end, a sign that the arbitrage liquidation bots had begun operating. Large traders/whales' collateral began to be liquidated (which explains why the spot and futures markets move in roughly the same direction). The liquidation bots directly executed the large traders' collateral (ATOM) through market orders (takers) until the liquidation was complete.

How did we come to the conclusion that the liquidation robot was the culprit?

As of 5:19, there was still liquidity in the orderbook (and high volume), but at 5:20, the orderbook was essentially empty, with the price dropping to 0.001.

 ATOM spot chart 

 ATOM futures chart

However, the lowest price for futures trading here at 5:20 AM was 1.4. For a futures-spot arbitrage order, the futures and spot prices should be close, and 0.01 ATOM is a price a rational trader wouldn't trade at. Only a ruthless liquidation bot could pull it off. (The liquidation bot handles the "collateral," which is the spot.)

In other words, it was the unwillingness and greed of big players/whales that created this situation, and the liquidation robots completed the killing.

As for why there was a brief “liquidity vacuum” in Binance’s ATOM spot?

I irresponsibly speculate that this is probably because the leverage/wealth management/unified account maintenance margin ratio of the main market maker account fell below the threshold (it was liquidated and unable to open new positions), triggering the account's "rigid" state, forcing the cancellation of the original order book orders, and thus being unable to provide liquidity normally.

Attached: Price charts of WBETH and BNSOL

The liquidity vacuum occurred mostly between 5:43 and 5:44. It is speculated that the main market maker for these two currency pairs was the same account, and that at this time, the wealth management/leverage/unified account fell into a "liquidation/rigidity" state and was unable to provide liquidity normally.

 WBETH price chart 

 BNSOL price chart

postscript

I actually hesitated for a long time whether to publish this article. After all, publishing it at this time would be adding fuel to the fire. It is very likely to be targeted, and even labeled as a "traitor", "BNx dog", "whitewasher", or "payee". But I also feel that all parties involved in this matter are so wronged.

I thought about it for a long time before writing this colloquial and sloppy article for your reference.

Attached is a chart of ATOM's risk insurance fund. On October 11th alone, the risk insurance fund lost $150 million (based on 5x leverage, the nominal value is $750 million). Exchanges are only guaranteed to make profits when liquidity is sufficient; in extreme circumstances, exchanges can also suffer significant losses. Motivated by this, there's really no need for them to deliberately cut off liquidity.

Finally, I am also a victim and am still seeking redress, but I haven’t received any compensation yet.

I wrote this article just to be a rational rights defender and give everyone another perspective.

If it is right, I will not accept it; if it is wrong, I will not give in even an inch.