Author: JAE

On October 11, 2025, the crypto market experienced an unprecedented liquidation of leverage, marking the most dramatic correction of this bull market cycle. The total market capitalization of the crypto industry evaporated by over $500 billion, with total 24-hour liquidations exceeding $19 billion. Industry insiders estimate the actual liquidation volume could be as high as $30-40 billion. This figure far exceeds the liquidation record of any previous market crash, with over 1.6 million traders' positions forcibly liquidated. In this article, PANews will provide an in-depth analysis of the causes of this market crash, offering insights for the industry and helping investors formulate their next response strategies.

Macroeconomic shockwaves: Trump's 100% tariffs trigger a global sell-off in risky assets

A conspiracy theory circulating in the crypto market regarding this recent crash is that it stems from a targeted attack on a vulnerability in Binance's pricing mechanism. On October 6th, Binance issued an announcement adjusting the WBETH and BNSOL price indices, effective October 14th. This inevitably raises the suspicion that this was a preemptive attack.

However, according to the timeline compiled by crypto KOL Jiang Zhuoer, the transmission chain of the plunge is actually traceable.

This suggests that the trigger for this epic plunge was most likely escalating geopolitical risks. US President Trump announced via Truth Social that, in retaliation for China's expanded export restrictions on rare earth elements, the US would impose an additional 100% tariff on all Chinese imports starting November 1st. His tough trade policy statement instantly ignited panic in global capital markets.

Various crypto assets suffered severe losses during this period. BTC plummeted to $102,000, a drop of nearly 16%. ETH plummeted to $3,635, dropping by over 20% at one point. Long-tail altcoins experienced an even more brutal liquidity vacuum, experiencing sudden price spikes and drops ranging from 20% to 90%. The intense sell-off caused 24-hour trading volumes for BTC and ETH to surge by 145% and 148%, respectively, demonstrating panic-driven deleveraging in the market.

This recent plunge demonstrates the crypto market's deep embeddedness in the global macro narrative. Geopolitical friction is no longer a distant external factor; it can directly trigger a massive sell-off in the crypto derivatives market through risk aversion in traditional markets. Institutional investors' de-risking behavior was first manifested in a concentrated sell-off of the most liquid assets (BTC/ETH), which in turn triggered the threshold for cascading liquidations in the derivatives market. For the first time, macro uncertainty, through geopolitical factors, has permeated and triggered a crypto market crisis with such immense force.

CEX pricing mechanism risks: Decoupling of anchored assets triggers a series of liquidations

Although macroeconomic shocks are the trigger, the key structural problem lies in the chain transmission risk of CEX.

During the previous bull market, USDe's explosive growth was driven in part by its acceptance as margin collateral for futures trading on major CEXs, creating a significant liquidity entry point and application scenarios. The cross-margin mechanism utilizes all available funds and collateral in an account to maintain a trader's position, mitigating the risk of premature liquidation of a single position. However, during periods of extreme market volatility, losses in a position can quickly deplete the full margin, triggering a forced sell-off of all collateral by the CEX liquidation mechanism.

When a global market sell-off caused BTC/ETH derivatives positions to trigger Binance’s margin calls, the automated liquidation system kicked in. To quickly repay the debt, the system had to sell off collateral from traders’ accounts on a massive scale.

Since USDe was used as the main collateral, the clearing system became a huge selling pressure on USDe. Because its scale far exceeded the market's real-time acceptance capacity for USDe, the trading price of USDe on Binance was decoupled and plummeted to US$0.65 at one point.

Guy Young, founder of Ethena Labs, posted on the X platform that the oracle system attempts to identify two distinct scenarios: a temporary price dislocation in the secondary market and a permanent impairment of collateral. The latter has never occurred with USDe. As he noted, USDe depegging primarily occurred in the Binance spot market; other CEXs and on-chain DEXs have not experienced significant depegging.

The reason for USDe's decoupling may be the combined effect of the USDe reward product and price feed mechanism on Binance Wealth Management. According to the announcement, the USDe wealth management product on Binance, which offered an APY of 12%, was originally scheduled to run until October 21st but has now been removed.

It is obvious that in pursuit of extreme returns, a large number of users (including professional institutions/market makers/large investors, etc.) may implement high-leverage revolving lending strategies by depositing USDe into Binance Loans and other channels to obtain more USDe and then deposit them into Binance wealth management products, thereby amplifying annualized returns.

However, the USDe price used by Binance is based on internal market quotes, not a weighted average across the entire market. Therefore, once USDe depegged, the leverage of all users implementing a circular lending strategy would be shattered. Starting with the liquidation of highly leveraged users, the degree of USDe depegging continued to deepen until all leveraged users were completely eliminated.

Some users in the market reported that when USDe plummeted, it took about an hour to withdraw their assets from Binance. The lack of arbitrage trading may also be another reason why USDe has not been able to reduce its decoupling or immediately return to its peg.

When USDe hit its lowest point, risks in another link were also triggered. Two types of Liquid Staking Certificates (LSTs), WBETH and BNSOL, are crypto assets unique to the Binance ecosystem. In addition to users implementing revolving lending strategies with USDe, a large number of investors also pledged their ETH/SOL to obtain WBETH/BNSOL. They pledged LSTs to revolvingly lend stablecoins and then redeem them for more USDe, while also earning staking interest to offset some of the lending interest.

LSTs like WBETH and BNSOL should theoretically be closely tied to the value of their underlying assets (ETH and SOL), determined by the official staking exchange rates provided by the CEX or underlying protocol. However, the liquidity of LST spot trading pairs like WBETH/USDT and BNSOL/USDT is generally lower than that of their underlying asset trading pairs.

Binance's announcement regarding adjustments to its WBETH and BNSOL price indices exposed flaws in their pricing mechanisms. CEXs typically use an "index price" to calculate the "mark price" of perpetual contracts—the final valuation used to trigger margin calls and liquidations. Prior to the adjustments, 20% of the WBETH price index's weighting was derived directly from the WBETHUSDT spot price on Binance; 30% of the BNSOL price index's weighting was derived from the BNSOLUSDT spot price. This meant that even if the official collateral-to-exchange ratio for LSTs remained unchanged, a depegging of the underlying asset, USDe, would trigger a massive sell-off of illiquid LSTs in the spot market, rapidly depressing the index price in the CEX derivatives system and, consequently, affecting the mark price used for liquidations, leading to large-scale liquidations within a short period of time.

"Post-disaster reconstruction": what improvements does the industry need

Following the crash, Binance, the epicenter of this round of liquidations, proactively assumed responsibility for its price feed mechanism errors and pledged to compensate users who suffered losses from the three types of pegged assets. Additionally, Binance issued an announcement in the early morning of October 12th, announcing adjustments to relevant parameters. These included: adding redemption prices to the price index weights of BNSOL, WBETH, and USDe; adding a minimum price limit to the USDe index to enhance price stability; and increasing the frequency of risk control parameter reviews to ensure dynamic adjustments based on market conditions.

OKX founder Star wrote that the industry should take time to reflect on the deeper structural issues at play in this recent crash. Crypto.com's CEO also called on regulators to investigate the exchanges with the largest liquidations. However, rather than being investigated, it's better to conduct your own investigation.

This crash was a high-intensity stress test of CEX's risk control capabilities, exposing that CEX failed to fully isolate the structural risks of anchored assets as collateral in the cross-margin margin system while pursuing trading volume and user growth.

CEXs should implement stricter classification and haircut management for assets used as collateral. For fiat stablecoins, segregated margin should be mandatory or haircuts should be raised to near zero to prevent CEX pricing mechanisms from becoming a source of market contagion again.

The market should demand greater transparency and resilience for all stablecoins fully collateralized by non-fiat currencies. Investors should carefully weigh high returns against structural risks and fundamentally abandon the belief in "high returns without risk." To optimize risk models, protocols like Ethena should adjust their collateral allocation strategies, control the collateral chain, and increase their allocation to more liquid, lower-risk assets when the market enters a bear market or experiences negative funding rates.

This incident also exposed the pain points of the tight coupling between CEXs and DeFi. Despite DeFi's commitment to decentralization, to achieve efficient and low-slippage derivatives hedging, the protocol relies on the liquidity and clearing efficiency of CEXs. Consequently, the security boundaries of DeFi protocols are still defined by the pricing mechanisms of CEXs. The future market must seek a decentralized derivatives infrastructure that can both provide deep liquidity and fundamentally eliminate the risks of CEX price feeds.

Crypto practitioners also actively put forward suggestions for the direction of industry development after this round of plunge.

Conflux co-founder Forgiven stated that the liquidation feed prices for some anchored assets should be hard-floored, rather than directly using the spot market price. If USDe were used as margin for a unified account, a more rational design for CEX would be to flexibly constrain the maximum position size supported by margin based on market liquidity.

Nothing Research partner 0xTodd believes that self-hosted LSTs within the CEX ecosystem, such as WBETH and BNSOL, do not have any third-party risks and should be directly anchored to their underlying assets, which will not only help their peg stability but also promote the use of LSTs.

F2Pool & Cobo co-founded Shenyu and proposed three system design principles: 1) Do not design "critical state reachable" structures at the system level; 2) Avoid homogenization of collateral; 3) Maintain physical diversity of negative feedback loops.

The "1011 Crash" was not only a dramatic market sell-off, but also a profound interrogation of the crypto industry's infrastructure and risk management. When CEX pricing mechanisms become amplifiers of systemic risk, and when high-yield products harbor unrecognized structural weaknesses, the industry must confront a fundamental question: while pursuing efficiency and scale, have we truly built a system capable of withstanding cascading shocks?