The air in trading rooms went cold on October 10. A sudden, brutal crash swept through the crypto markets. Billions vanished in hours. It was the biggest liquidation event the industry had ever seen.
- The crypto market experienced a massive liquidation event on October 10, with over $20 billion in borrowed funds vanishing rapidly due to magnified positions and weak infrastructure.
- While centralized finance (CeFi) platforms struggled with liquidity drying up, decentralized finance (DeFi) protocols remained stable, highlighting DeFi’s maturation.
- Key fixes proposed include reducing leverage, improving price oracles to reference multiple venues, and increasing transparency in exchange operations and reserves to prevent hidden risks.
This wasn’t just a bad day for a few traders. Over $20 billion, and perhaps much more, in borrowed funds positions evaporated. The speed of the selloff left everyone stunned. It showed just how fragile our market structure remains.
I spoke with several crypto venture capitalists, the folks who fund the next big thing. I wanted to know what really triggered this cascade. What fixes do they see coming? And what, exactly, happens next?
Most investors agreed. This wasn’t about headlines from President Trump or tariff news. The real culprits were magnified positions and weak infrastructure. Rob Hadick, a general partner at Dragonfly, put it plainly.
Open interest, which is a good way to measure borrowed funds, had hit record highs. “There was simply more money that could be liquidated,” Hadick explained. When prices began to slip, a key problem emerged.
Liquidity, the ease with which assets can be bought or sold without affecting their price, dried up. This happened especially on exchanges like Binance. Binance acts as a main pricing hub for the market.
Its thinning order books triggered forced liquidations across many other platforms. These platforms relied on Binance’s prices. “It highlights a broad fragility in market structure and a need to continue to professionalize our systems as an industry,” Hadick told me.
It was a stark reminder. Our digital financial plumbing still needs work. Losses spread quickly. Traders, market makers, and centralized exchanges all felt the sting.
The heaviest damage likely hit those using high amounts of borrowed funds. Funds running “basis” or other neutral strategies also suffered. These positions were forcibly unwound.
Joscha Kuplewatzky, an investment manager at Wintermute Ventures, noted a common pattern. Hidden losses often surface weeks after such events. But this time, he and others expect less widespread contagion.
It won’t be like the FTX or Terra/Luna collapses. Anirudh Pai, a partner at Robot Ventures, agreed. He called this liquidation event more technical than existential.
He even sees a silver lining. Improving macro conditions, like easing inflation and stronger growth signals, could create a “goldilocks moment” for crypto. This might allow it to outperform in the coming years.
Here’s a curious twist. Decentralized finance platforms, or DeFi, held up remarkably well. This was the consensus among the VCs I spoke with.
Protocols like Aave, Morpho, and Ethena remained stable. They stayed transparent throughout the chaos. Mathijs van Esch, a general partner at Maven 11, saw this as a clear sign.
DeFi has matured significantly. This happened even as its centralized counterparts, CeFi, struggled. It’s like watching a new building withstand a storm better than an older one.
The crash laid bare deep flaws. Especially in how crypto markets handle borrowed funds and risk. The first fix, many investors said, is quite simple: use fewer borrowed funds.
Beyond that, the focus shifts to better technology and clearer operations. Exchanges need better price oracles. These are systems that feed price data to smart contracts.
VCs suggest these oracles should pull information from many venues. They shouldn’t just rely on an exchange’s own order books. Hadick from Dragonfly offered a concrete example.
“If Binance’s liquidation engine had referenced multiple other venues, instead of just its own order book, many of the initial collateral liquidations would not have happened,” he said.
He also pointed to solutions like Ethena’s USDe. Features allowing direct minting and redeeming of this stablecoin could have helped. They might have replenished order books faster.
This could have prevented USDe’s price from dipping below $0.66 on Binance. Ray Hindi, co-founder of L1D AG, and Pai from Robot Ventures, called for a serious overhaul.
They want exchanges to fix their opaque auto-deleveraging systems. These systems can be a black box. Brandon Potts, a partner at Framework Ventures, added another idea.
He suggested “smarter liquidation engines that unwind positions gradually.” He also spoke of liquidity buffers. These buffers would adjust to market volatility and depth. Such measures could prevent similar downward spirals.
But the biggest problem, according to van Esch, remains a lack of transparency. “This event showed how hidden risk and leverage can build up,” he noted. “More transparency is the best way to fix that fragility.” It’s hard to fix what you can’t see.
What Comes Next for the Market
On the regulatory front, most investors lean towards self-regulation. They prefer it over stricter government oversight. Some expect renewed scrutiny, of course. But few believe investigations are the real answer.
Pai suggested that only another crisis on the scale of FTX would trigger a broad investigation. Hindi had a more proactive view. He believes the community should “force CeFi to auto-regulate.” How? By shifting assets to transparent DeFi systems.
Van Esch went further. He argued that real-time, provable audits of CeFi exchange reserves “would do more to solve the core problem of hidden risk than any regulation probably could.” It’s about showing your work, not just telling.
Most VCs anticipate a cautious recovery. Liquidity needs time to rebuild. Many investors and traders lost money. They will need time to re-enter the market. They will also need time to take on more risk at the same scale. Hadick pointed this out.
Bitcoin and Ether showed remarkable resilience during the crash. Investors saw this as proof of a maturing market. Both assets held up well. This is because long-term institutions own them, not just high-magnified-position traders.
Altcoins, however, took the deepest hit. Van Esch from Maven 11 expects market makers will need time to return. This is especially true for smaller tokens. Potts of Framework Ventures observed something important.
The strength of Bitcoin and Ether signals genuine spot demand. It’s not just speculative trading fueled by borrowed funds. Hindi offered a word of caution. Macroeconomic factors, specifically credit risk, could still impact Bitcoin negatively.
“The DAT [digital asset treasury] bid is gone and nowhere to be seen,” he stated. This means a significant source of buying power is absent. He warned that unforeseen balance sheet shifts could ignite more volatility.
This would happen especially without very active market makers. But he also added a hopeful note. Such volatility will likely present a buying opportunity. Every cloud, as they say.
For most VCs, this crash was a reminder. It wasn’t a complete reset. Hadick said it reinforced a core principle. Stay focused on the long term. Look for what is durable. Don’t react to every short-term market swing.
Hindi, for his part, made a personal commitment. The event showed him why CeFi can’t be trusted at scale. He plans to move “more aggressively into DeFi.” He saw decentralized systems hold strong while centralized ones faltered. It seems some lessons are learned the hard way.