BlockBeats news, on November 23, Tom Lee, in an interview with CNBC, explained to the host why the crypto market experienced a big dump on October 11: “There are a lot of automated processes in the crypto market. Among them, ADL (automatic deleveraging mechanism) is a typical representative—when the user's account assets or collateral prices fall, the system will trigger liquidation like a traditional market's margin call. While USDE maintains a $1 pricing on other platforms, the internal quotes on a certain trading platform plummeted to $0.65. Due to the lack of liquidity on that platform, the ADL mechanism was triggered, leading to a large number of accounts being automatically liquidated, and this chain reaction ultimately spread to the entire market. Because of this, thousands of crypto accounts were wiped out in minutes—even though they were profitable just moments before.” As for who specifically? Although I know the names of specific institutions, I can't name them. Essentially, this is a systemic risk caused by code vulnerabilities: trading platforms should collect cross-platform price data to set stablecoin valuations but mistakenly relied on internal pricing systems. This incident caused a significant shrinkage of capital for market makers and trading institutions. More seriously, when the volume shrinks, causing the coin price to experience downward movement, these institutions need to prepare more capital to maintain operations, forcing them to further shrink their balance sheets—this is like a vicious cycle, continuously eroding the foundation of the market. The essence of the 2009 crisis was the out-of-control real estate and subprime loan collateral. Although Wall Street established mechanisms like CDOs to cope, the resulting excessive regulation caused negative impacts. Today, the ADL code vulnerabilities and price mechanism flaws in the crypto space will also eventually be corrected. Fortunately, we will not repeat the mistakes of overregulation, but we must face the impacts brought by the liquidation mechanism. The large-scale liquidation that lasted eight weeks in 2022 is still fresh in our minds; this is the essence of DeFi: code will inevitably have vulnerabilities, and leverage is the real source of risk. Investors should not abuse leverage in the crypto market.
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