Nearly $20 billion got liquidated overnight: Black Swan or liquidity crisis? Where does the risk actually come from?

Original Title: Nearly $20 Billion Get Liquidated Overnight: Black Swan or Liquidity Crisis? Where Does the Risk Actually Come From?

Original Author: HashKey Exchange

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Reprint: Daisy, Mars Finance

The past weekend was undoubtedly the darkest moment for many. According to public reports, the chain liquidation triggered by the market crash in the early hours of October 11 resulted in a single-day liquidation amount exceeding $19 billion, over 10 times the previous single-day peak in crypto history. The collective crash from CEX to Perp Dex, the withdrawal of liquidity by market makers, and the de-pegging of stablecoins, all occurred within just one hour, far beyond anyone's imagination.

Some say this is a black swan event, others say it is an exchange malfunction, and some say it is a liquidity liquidation that should have happened long ago. Looking back, the situation is more complex than it seems.

Fuses: Tariffs and trade wars are not the first time, why is the market reacting so strongly?

Historical black swan events are mostly caused by a project getting liquidated or a severe shock from an external macro variable. Although this time, the trigger stems from the China-U.S. trade conflict and Trump's declaration of tariff escalation.

In fact, the factors mentioned above are not “sudden events”; the return of tariffs and trade wars is not particularly surprising. In terms of the extent of the decline, both the US stock market and BTC are far from a historically significant crash, not to mention that Bitcoin quickly recovered to above 110,000 USD after the drop.

As we analyzed earlier, since the interest rate cuts took effect in September, although the market is certain that the subsequent interest rate cut path will continue, the persistent weakness in the U.S. labor market has led to a re-emergence of recession trading. Rising inflation, declining employment, increasing debt burdens, and a reversal in fiscal policy are structural risks that are continuously compressing the market's resilience.

More importantly, if we observe the Federal Reserve's net liquidity indicators, the interest rate cuts have not significantly increased market liquidity, but the market's optimistic sentiment continues to be overdrawn.

In this context, a “not-so-new” negative narrative can be enough to become the last straw that breaks the market. The problem is not how significant the bearish news is, but rather that the market itself is already extremely fragile.

Risk Resonance: The Transmission Chain Behind Liquidity Cliff, Decoupling, and Chain Liquidation

Although the market downturn was expected, no one anticipated the decline and liquidation of altcoins. The depth of the drop and the intensity and breadth of the liquidations far exceeded imagination.

On October 11th (Beijing time), around 5 AM, the Asian market had not yet opened, and the European and American markets were nearing closing, resulting in relatively weak liquidity. Bitcoin and US stocks both corrected, but the market reaction was still within a normal range.

The real disaster began with the high-density liquidation tide of altcoins at 5:20, and the simultaneous de-pegging and plummeting of the three major assets (USDe, wBETH, BNSOL) at 5:40.

If we look at the sequence of the timeline, this kind of plunge and liquidation is not due to a problem with the asset itself, but rather the leverage structure and platform mechanism embedded within it have become the target of the attack.

In other words, this is not a collective sell-off caused by synchronous panic, but a system-level liquidation chain reaction triggered by falling prices, where specific assets are hit first due to their position and parameter settings within the platform structure, thereby amplifying the market's resonance.

A possible transmission path is:

1. When the first wave of a sharp decline hit, the positions of market makers were the first to be impacted. Since this round of decline occurred during a period of already thin liquidity, many market makers failed to hedge tail risks in time and had to urgently withdraw from the liquidity pool. This step directly weakened the market's buffer.

2. Subsequently, the liquidity of altcoins dried up, and the spot prices began to plummet, especially for assets with weak liquidity, leading to a rapid decoupling of marked asset prices and an accelerated depreciation of collateral value.

3. If these assets are used in a unified account as margin, the platform will automatically trigger a series of liquidations. Users will not only lose their positions, but other held assets will also be liquidated, further creating widespread selling pressure.

4. The market's承接能力 has completely collapsed, triggering a liquidity踩踏, with localized issues evolving into systemic risks.

It must be pointed out that there is an important background behind this kind of crash: during this cycle, multiple exchanges have launched a unified account margin model, allowing users to mix various assets as margin to open positions.

At first glance, it greatly enhances capital efficiency, but in extreme market conditions, its negative effects can be more lethal. Once the price of an asset falls below the liquidation line, it will force liquidate other assets in the entire account; if multiple assets are simultaneously embedded in a high-collateral, low-depth liquidity structure, an attack or volatility can trigger a chain reaction of getting liquidated.

Taking USDe as an example, on the surface it is pegged to USDT at a 1:1 price, exhibiting trading characteristics similar to stablecoins, but its price peg is not based on real reserve support; instead, it is achieved through financial derivatives structures, essentially serving as a hedge derivative of a quasi-stablecoin.

This mechanism is highly dependent on the liquidity and hedging efficiency of the derivatives market. Once the market experiences severe fluctuations, if the contract hedging encounters slippage, delays, or mismatches, it may lead to large-scale decoupling.

What is more dangerous is that, if there is a lack of effective dynamic risk management mechanisms, it could be treated as a stablecoin and thus be widely used for circular lending, margin trading, or liquidity mining, amplifying its leverage risk exponentially.

In this event, many users and market makers used USDe as a high collateral weight asset for contract margins. When its price became unpegged, the position value was directly halved, equivalent to a sudden doubling of leverage, resulting in indiscriminate Get Liquidated for users even if the contract leverage multiplier was very low.

The liquidation crisis itself is a macro-level overstretch of sentiment, compounded by the structural fragility of market leverage, which in turn creates an extremely rare resonance effect.

Lessons and Outlook: Aftershocks Persist, Variables Remain

Risk is never transmitted linearly. In a highly coupled market, it often ignites through emotions, accelerates through leverage, amplifies through liquidity, and ultimately evolves into a systemic collapse of the entire chain.

In the traditional financial world, such cases are not uncommon, which is why the traditional financial world places greater emphasis on strict compliance frameworks and risk control standards. Any financial innovation, if lacking corresponding risk constraints, will not be a black swan but rather a gray rhino that is destined to arrive. Financial efficiency and systemic safety are always two sides of the same coin; one lesson is enough.

Returning to the events themselves. As analyzed at the beginning, tariffs and trade wars are sudden but not unexpected. In a scenario where the benefits of cooperation far outweigh those of confrontation, the narrative of trade confrontation is bound to gradually ease, which undoubtedly plays a significant role in alleviating market sentiment.

However, the impact of the chain liquidation on the market has not yet ended, and the extent of its influence has created uncertainty in the restoration of market confidence. If we look at the positive side, under such thorough liquidation, as long as there are no significant negative shocks to external macro liquidity, the market may find it easier to recover upward.

If we extend our perspective further, against the backdrop of a persistently weak global economic fundamental, the gradual warming of liquidity remains the main theme, and crypto assets are still firmly on the path of mainstream adoption, institutionalization, and compliance.

After the storm, what is more worth pondering is: Have we truly reserved enough buffer mechanisms for the complexity of the market? Have we built a solid infrastructure for users' trust?

It is foreseeable that the future market will place greater emphasis on the clarity of regulations, mechanisms for protecting user rights, and the transparency of information disclosure.