Wintermute Founder Discusses "1011" Flash Crash: Market Needs Circuit Breaker, No Altcoin Season in the Short Term

Blockbeats2025-10-20

Original Title: Wintermute CEO breaks down crypto's record breaking $20B+ liquidation eventOriginal Source: The BlockOriginal Translation: Azuma, Odaily Planet DailyOn October 11, the cryptocurrency ...

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On the one hand, there is indeed more leverage in the system; on the other hand, the market also has more token categories, more perpetual contract products, and more large platforms trading these perpetual contracts. Thinking back three or four years ago, we simply did not have this many perpetual contract products with massive open interest volume, harboring significant meltdown risks. 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Nearly a week has passed since then, but discussions surrounding the reasons for the crash and its subsequent impacts have not ceased.On October 15, Evgeny Gaevoy, the founder and CEO of Wintermute, the market's primary market maker (which was rumored to have been hit hard during the crash but later clarified the situation), participated in The Block's podcast to share his perspective on the \"1011\" event.An Hour of Complete ChaosHost: Let's dive right in. The events of October 11 were extremely shocking for the entire market. Could you take us through what happened that day? What triggered the crash? How did Wintermute respond in such a situation?Evgeny Gaevoy: To be honest, we still need more time to fully understand the ins and outs of this crash, but one thing is clear — the spark seems to have been a series of news related to Trump, gradually leading to the largest liquidation event in the history of cryptocurrency.That day was extremely unusual for everyone — not only for regular traders but also for market makers. Within an hour, the market went into complete chaos.We will discuss the ADL mechanism later (you can refer to \"In Extreme Market Conditions, Why Was Your Position Suddenly Liquidated?\"), and we will also talk about how this crash differs from past market fluctuations. What can be certain is that for many, this day was very difficult and unprecedented.It's Still Unclear Who Has Suffered the Most Losses, Perhaps Hedge FundsHost: Publicly available data shows that about $19 billion was settled on the same day, but due to Binance not fully disclosing data (the system can only display one settlement event per second), the actual number may be much larger, at least between $25 to $30 billion. This means that the recent settlement scale is more than five times that of the previous second-largest settlement event. Why is this the case? Is it because the leverage ratio in the system is too high? Or is it due to some key infrastructure failure? This has made market makers like you unable to intervene in time to prevent a chain reaction meltdown.Evgeny Gaevoy: I believe this is the result of a combination of multiple factors. On the one hand, there is indeed more leverage in the system; on the other hand, the market also has more token categories, more perpetual contract products, and more large platforms trading these perpetual contracts. Thinking back three or four years ago, we simply did not have this many perpetual contract products with massive open interest volume, harboring significant meltdown risks. In terms of market maturity, although it is indeed more sophisticated and refined than in the past, this development has also brought about many problems.Currently, we still do not know who exactly \"got liquidated,\" who suffered the most significant losses, but I suspect many institutions that incurred heavy losses were actually running a long-short strategy, for example, they might be shorting Bitcoin and longing some altcoins, thinking this could hedge their risks, but they were \"rekt\" by the ADL mechanism.In addition, when the market experiences an extreme downturn, various trading paths often get stuck. This is particularly troublesome for market makers. For instance, you buy on Binance, sell on Coinbase, only to find that your stablecoins on Coinbase keep increasing, while on Binance, you are left holding a token—yet withdrawals on both sides are blocked, rendering asset transfers impossible.Therefore, when people say \"market makers are exiting the market, unwilling to provide liquidity,\" more often than not, it is not that they \"don't want to,\" but that they simply \"can't do it\"—they cannot quote prices here, nor place orders there, because assets are completely stuck. This situation is not only happening on centralized exchanges (CEX), but DeFi is not immune either. This is the most challenging dilemma—you simply cannot rebalance across platforms.Lack of Transparency in ADL Leads to ChaosHost: You mentioned ADL (Auto-Deleveraging). I guess maybe 90% of cryptocurrency users are hearing this term for the first time. Could you explain the principle of ADL and why it has caused so much chaos in this event? Also, when market makers cannot be active on multiple exchanges simultaneously, what impact does this have on market efficiency?Evgeny Gaevoy: ADL (Auto-Deleveraging) is essentially the exchange's \"last line of defense\" mechanism. In general, when your margin for a perpetual contract position is insufficient, the exchange will liquidate your position directly in the market; if the liquidation is unsuccessful, the loss should ideally be covered by the insurance fund.The ADL mechanism is usually not triggered at all, and many exchanges have not used it for years. It was designed as a \"last resort\" measure. In extreme situations, such as a massive market crash like the one in 1011 and a chain of liquidations, continuing to forcefully liquidate through the order book could drive the price directly to \"zero,\" causing the entire exchange to become insolvent, while the short side would profit immensely. Therefore, the exchange will attempt to use ADL to forcibly offset some of the short positions, essentially artificially matching shorts with the liquidated longs to create a \"virtual offset,\" preventing a complete price collapse.In theory, this is an \"elegant\" solution, but the precondition is that the execution must be orderly, which was obviously very chaotic this time. The primary issue is—how is the execution price of ADL determined? This will be the focus of inquiries from numerous trading institutions to the exchange in the coming days or even weeks.Many institutions had their positions forcibly liquidated at extremely unreasonable prices this time. For example, in our case, some ADL prices were completely illogical; the market price was at $1, and our short position was forcibly liquidated by the system at $5. This cannot be hedged against; we could only incur an instantaneous loss.Does the \"ADL-Free\" Privilege Exist?Host: As far as I know, Ethena has an ADL-free clause with certain exchanges. Can large market makers like your company receive similar protection? Why does Ethena receive such special treatment?Evgeny Gaevoy: First, I am not entirely sure if Ethena enjoys this privilege. Additionally, we need to note that Ethena mainly trades BTC and ETH, which are less likely to trigger ADL. ADL is more targeted at various altcoins and meme coins. If such a protection mechanism exists, we would certainly welcome it,but should exchanges widely offer such clauses? Not necessarily. I believe that if implemented, it must be done openly and transparently; investors need to know which open positions are entitled to ADL-free privileges; otherwise, it will create a detrimental market structure. Of course, we welcome such protection, but the prerequisite is to establish a highly transparent disclosure mechanism; otherwise, these so-called privileges are merely conspiracy theories.Another key point that has been rarely discussed is that certain exchanges (such as Coinbase and Kraken) have previously implemented Market Maker Liquidity Protection Programs. Formerly, FTX also had a similar design. This program allows market makers to take over positions that are about to be liquidated, bypassing the insurance fund and Auto-Deleveraging (ADL) process. It lets the most risk-tolerant market makers absorb these risks. However, in the case of the recent widespread liquidation event on mainstream platforms, such programs were collectively absent. I believe that reinstating such programs would greatly enhance market resilience.Does the Market Need to Introduce a \"Circuit Breaker\" Mechanism?Host: There is also a circulating notion that this recent cascade of liquidations was more severe than before partly because Hyperliquid is now one of the top three exchanges in terms of open interest across the network. Moreover, much of its data is very transparent—including information like liquidation prices—which is typically not visible on centralized exchanges like Binance, OKX, and Bybit. Some people argue that this may have made it easier for some to estimate, \"If we just push the price here, we can trigger these liquidations,\" thereby artificially causing a chain reaction of liquidations. In your opinion, has this transparency truly exacerbated this wave of liquidations, leading to assets plummeting by 90% or even more?Evgeny Gaevoy: I think that if Hyperliquid were the only exchange in the world, the conspiracy theory of this \"targeted sniping\" might make more sense—that is, indeed, someone deliberately targeted Hyperliquid to trigger this chain of liquidations. However, in reality, a significant amount of open interest still exists on those exchanges where liquidation points are not visible, so I believe the likelihood of this theory being valid is relatively low.I find it more interesting to consider whether Hyperliquid represents the future direction of the industry. In other words, could its mechanism of \"all liquidation points publicly visible\" become an industry standard?Personally, I think that Hyperliquid should ultimately find a balance between transparency and privacy— the current level of information disclosure is indeed a bit \"overwhelming.\" One solution could be to enhance privacy, while another potential solution could be to introduce circuit breakers.This feature is absent from all centralized exchanges, although I can roughly understand the reasons why, it should indeed be present. Especially for some stable assets or mainstream tokens, when you see it de-anchor to $0.6, trading should be paused or switched to an auction mode, rather than letting it plummet endlessly.In the traditional financial markets, almost every exchange—whether it's for stocks, futures, or commodities—is equipped with a circuit breaker mechanism. It prevents the underlying asset from experiencing excessive drops in a short period of time, where the system automatically halts trading, enters into a price discovery mode, or a combination of both. However, in the crypto market, none of the exchanges have such a mechanism, which has always puzzled me. If there were circuit breakers, it could actually protect many retail investors from being liquidated in a cascade.Of course, some might ask—would it be effective if only one exchange (like Coinbase) adopts a circuit breaker while Binance does not? After all, much of the price discovery actually takes place on Binance. In this case, even if Coinbase halts trading, the coin's price would still fluctuate on other platforms (including on-chain markets). So if only a single exchange implements a circuit breaker mechanism, its effectiveness might be limited. For it to be truly effective, the majority of exchanges would need to coordinate its adoption.This is actually a trade-off issue. You have to choose between two risks: letting the price crash and liquidating all long positions, or suspending trading to ensure the exchange maintains solvency.For example, if Bitcoin were to plummet by 20% on an exchange, as the exchange, you could very well determine that this is an anomalous swing and not a fundamental collapse. At this point, implementing a circuit breaker would be justified. However, if it were a meme coin that dropped by 50%, that might fall within the realm of normal volatility, and the market could be left to clear itself. So the circuit breaker mechanism should at least be introduced for specific trading pairs or asset types.Would Exchanges Proactively \"Pull the Plug\"?Host: There have also been rumors that some exchanges would \"pretend to be down,\" actually triggering a circuit breaker artificially. For instance, during the pandemic-induced crash in 2020, BitMEX went offline during the meltdown, and at that time, the market widely speculated that they did so to prevent a 99% price crash. Do you think this was a genuine circuit breaker action back then? Or was it simply because the technical infrastructure couldn't handle it? Furthermore, why are exchanges like Binance still experiencing downtime even now? Knowing that a massive surge in trading demand is expected, why haven't they improved?Evgeny Gaevoy: I tend to believe that the simplest explanation is often correct. In my view, the reason is quite simple—most centralized exchange infrastructures are quite poor and are far from the technological standards of traditional financial markets (such as the Chicago Mercantile Exchange, the New York Stock Exchange, or NASDAQ). Although there are historical reasons, in the short term, no one will really move to a technological architecture on par with NASDAQ.It is precisely because of their backward technological level that these platforms often crash directly under high load. I think this is a more reasonable explanation than any conspiracy theory. I do not believe exchanges would intentionally \"crash to liquidate retail investors\" to make money from the insurance fund, as the risk would be too great.From a business perspective, for both exchanges and market makers, allowing retail investors to continue trading, engaging in repeated games, and remaining long-term in the market is far more profitable than \"clearing out retail investors every year.\" Once everyone is wiped out, many people will completely exit and not return.Will There Be an Institutional Blowup?Host: I still remember the Luna meltdown, although it wasn't as severe as this one, the impact was significant. It took us about two to three weeks to discover that Three Arrows Capital (3AC) had actually gone bankrupt. And the scale of this liquidation is 5 to 10 times larger than back then. Although there is speculation in the public domain that some market makers, trading firms, and lending institutions have been severely hit, so far, there is no news of any institution completely going bankrupt or collapsing, at most we hear of a few trading firms \"losing some money.\" Do you think which institution will be found to have blown up next? After all, this time the open interest and liquidation scale have broken records.Evgeny Gaevoy: I think that compared to 2022, the current market's interconnectedness has decreased significantly. Back then, when Three Arrows went down, the entire market was directly dragged down by its long positions.If a market maker really goes bankrupt now, you should be asking who it will affect. How long is the chain of impact? What everyone is most worried about is actually the \"contagion effect.\" Do you remember what Alameda did back then? They started selling DeFi assets like crazy during the rebound, everyone could see it, very clearly.If a market maker really goes bankrupt, let's say it's Wintermute—this is just a hypothesis—what would the result be? We have some loans that may all turn into zero; we also have market-making contracts signed with protocols, which may still be in effect; after bankruptcy, we theoretically could sell off some assets to recover funds, or just run away (joking); in addition, we have clearing counterparties who may have margin deposits with us, such as BTC or ETH.Therefore, the real scope of the impact mainly includes the protocols the market maker serves and the counterparties transacting margin with the market maker. The worst-case scenario is that they sell off the BTC or ETH in hand to cash out, but the impact of this scenario is actually quite limited.If it's some smaller-scale market makers, they may indeed be \"wiped out.\" They may sell off some specific tokens they hold, such as the project's token they provide liquidity for, but honestly, this usually doesn't help much because these tokens have limited liquidity. If the sell-off is too obvious, the market will immediately notice.So overall, the scope of contagion this time is very limited compared to 2022. Back then, for example, Three Arrows lent to Genesis, Genesis then borrowed from Gemini, the entire industry was interconnected, and it ended in a chain of bankruptcies. The current system is much cleaner and has better risk isolation.Learnings and Experience After an Extreme Market EventHost: After this event, do you have any reflections or lessons learned? For example, are there any areas such as response strategies, risk control, or hedging mechanisms that need improvement?Evgeny Gaevoy: The challenge with events of this nature is that they may only happen once a year, once every two years. You can learn a lot from them, but it may not be cost-effective to invest heavily in optimizing specifically for such \"black swan\" events.Many market makers simply exited the market this time because such extreme market conditions were simply not suitable for their systems. We are still here, but we are also only participating with a very limited position—our inventory issues mentioned earlier have restricted our maneuverability. Although it's not the first time we've encountered such a situation, this time was indeed more challenging than before. If you add in ADL (automatic deleveraging), it becomes even more tricky.We did learn a bit from this experience, which is to better handle ADL events. Although our system reacts quickly, detecting changes in open interest immediately and adjusting positions automatically, when you receive 500 ADL emails from Binance, you still have to manage it manually. Of course, you could design a perfect system to trade automatically in such extreme conditions, but it doesn't make sense for the other 364 days of the year; it's not worth investing in.This morning, we also had a meeting to discuss the next steps for improvement. For example, in our quoting system, we have a lot of circuit breakers internally set up. They triggered too frequently this time, almost every minute. We may make them trigger less aggressively in future extreme market conditions.Overall, we are satisfied with our response performance. Although there were some losses in ADL, we also made a lot of money due to high volatility, which offset each other, resulting in an overall decent outcome. Of course, there is room for improvement, but overall, it's fine.It's quite annoying that there is currently a lot of FUD. We have spent a lot of time communicating with counterparties, explaining our inventory status, and discussing partnership agreements. Although troublesome, it is understandable — after all, everyone is very nervous.What Is the Market Outlook?Host: So, looking ahead to the next few months, what is your view? This liquidation was on a record scale, far exceeding events like FTX and Luna, but this time it seems like no one thinks it's the \"end of the world\"; it's just that many people suffered heavy losses.Evgeny Gaevoy: I believe the main impact in the coming months will be that sectors outside of major coins will be affected because this liquidation mainly focused on altcoins. There are many more altcoins and meme coins on the market now compared to four years ago, investors have less money and are more cautious, so I think the market hype around altcoins will significantly decline. Of course, new retail investors enter the market every day, so the market will eventually recover, but in the short term, we won't see a big \"altcoin season\".On the contrary, what is worth noting is that Bitcoin, Ethereum, and even Solana have shown resilience this time. For example, Cosmos (ATOM) once dropped by 99.9%, while BTC and ETH only experienced a maximum drop of 15%, which is very mild.Liquidity Will Further Consolidate into BTC, ETH, SOLHost: Does this mean that the market and the assets themselves have matured?Evgeny Gaevoy: I believe so. Bitcoin is now an institutional-grade asset. It has ETFs, the support of MicroStrategy, and infrastructure like CME futures. Ethereum is also close to this status, and Solana is getting there.So, I'm not worried about Bitcoin experiencing a major flash crash unless something very strange like a quantum computing attack happens.This is actually a positive sign, indicating that some mainstream assets are already \"safe to hold for the long term.\" The more ETFs there are, the wider the access channels, the more limited their volatility, which means you can hold BTC, ETH, or even SOL with more confidence and leverage. In the future, we will also see more leverage and liquidity concentrating into these assets.Wintremute's Emergency Response MechanismHost: Your team is mainly based in London, right? Although you have overseas offices, I assume that most of your trading team and core members are in London. The market movement occurred quite late for London, almost late at night or even early morning. When your traders are all asleep, how do you deal with such unexpected events? Will teams from other countries take over immediately? How high is the current level of trading automation? How do you handle these unexpected events if they happen at the worst possible time in your time zone?Evgeny Gaevoy: Yes, in this regard, we actually owe it to the \"Trump rallies.\" We were already accustomed to this situation—extreme market movements often happen over the weekend or late Friday night London time.So, even though this time was quite shocking, we were actually prepared. Of course, to be honest, this is very detrimental to the work-life balance of traders, but this is the case in any trading firm.Typically, we divide work like this—London office and Singapore office take over in shifts. Around 10 to 11 PM London time, the Singapore team takes over trading, and the London team starts to slowly \"relax.\" However, this time the market movement erupted before the handover, so we didn't have the chance to relax; everyone was swept up in it. That night was indeed very busy.Host: I've spoken to another market maker, and they said they have a system that will wake up traders at night if the market experiences significant volatility. I think maybe it's because they are not as large-scale as you and don't have a global team to take over. Do you do the same? For example, if an asset suddenly drops by 15%, will someone be woken up by the system? Or are you distributed widely enough now to sleep soundly?Evgeny Gaevoy: Basically, I will only be woken up when the situation is really bad, and we have lost a lot of money. So, actually, I slept quite well that night.The next morning, waking up at eight o'clock, seeing a bunch of people on Twitter asking if \"you guys are dead\" and such messages, that's when I started to address that FUD. The team hardly slept that night, but I slept soundly.This is also the \"luxury\" of running a large proprietary trading firm—you have enough traders to take over, so you can sleep soundly and deal with the issues the next day.So if I get a 3 a.m. call, it means something really big is happening. So far, that hasn't happened.Thoughts on DeFi PerformanceHost: From this event, have you noticed any particular phenomenon on the on-chain (DeFi) side? Although your activity in DeFi is not extensive, you have been involved to some extent. Was there any part of this event that went wrong or surprised you? For example, I noticed that Aave performed quite well during this crash, with not many liquidations, and the system remained quite robust. Comparatively, DeFi was quite resilient this time.Evgeny Gaevoy: On our end, we saw a rather dire situation in DeFi. However, we also encountered issues in DeFi similar to those in CeFi: an inventory issue.Our positions were on Binance, but we couldn't transfer them out, so all the assets that could be sold in DeFi were sold out, and all the assets available for purchase on Binance were bought, but we couldn't transfer the assets over, so we had to wait for the inventory to flow back. Of course, we could have borrowed assets to make the market, but that carries a high risk of liquidation. Another approach is to quote different prices for USDC in different markets (such as DeFi and Binance) to engage in cross-market arbitrage, but that is also challenging to execute.Such extreme events only occur once a year, and you simply cannot build a system specifically for it. We saw that most of our competitors simply halted DeFi trading during this event, perhaps because their risk control circuit breakers were triggered.I am quite satisfied with our performance. Although we could have made more money, our inventory indeed ran out.Regarding FUDHost: One last question—Wintermute (WM) has almost become the \"scapegoat\" in the crypto community's eyes. Any slight market movement, and everyone blames you. For example, when someone found out that you deposited hundreds of millions of dollars into Binance before the crash, rumors immediately started flying that you were dumping the market, when in reality, I know it was just a delta neutral trade, but the rumors were rampant. Do you still care about this kind of public opinion? Although you don't rely on retail investors or Twitter sentiment, focusing more on LPs (liquidity providers) and partnership agreements. How do you personally deal with it? Do you get angry? Or have you become indifferent?Evgeny Gaevoy: To be honest, I've completely come to terms with it. I'm just really sad that someone could be so foolish. They piece together completely unrelated data fragments, come to absurd conclusions, and are so confident about it.For example, someone saw that we deposited $700 million into Binance that day and started yelling, \"Wintermute is going to dump the price,\" but they didn't bother to see that we also withdrew a similar amount that same day. These people are essentially gambling retail shitcoiners—and we happen to be the ones making money off of them.So it's a kind of \"ecosystem,\" right? They're making noise on Crypto Twitter, and we're profiting from their foolishness. It's a bit sad, but if they all became smart, our trading volume might actually decrease.We Have Always Been Net LongHost: Will you consider expanding beyond market making in the future? Such as proprietary trading, investments, or something else?Evgeny Gaevoy: We've actually always engaged in some other businesses, but there's a misconception outside that we short every day. In fact, we've almost always been net long.We've been bullish since 2022 or even earlier. We have a venture capital department, invested in many projects, and as a result, have received a lot of vested tokens. We also hold a significant amount of BTC, ETH, HYPE, SOL, and other core assets. We can't dump the market because that would directly harm our own holdings.In terms of risk management, we have clear rules: our long positions will not exceed 25% of net assets, so even if the market crashes tomorrow, we will lose at most 25% and not go bankrupt. We also won't have over 35% of net assets on a single platform, so even if Binance were to collapse tomorrow like FTX, we would still survive.That's why we survived the FTX collapse and the hack. Unless the top five exchanges disappear simultaneously, we can survive.Original Article Link\nWelcome to join the official BlockBeats community:\nTelegram Subscription Group: https://t.me/theblockbeats\nTelegram Discussion Group: https://t.me/BlockBeats_App\nOfficial Twitter Account: https://twitter.com/BlockBeatsAsia","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0,"need_auth":false,"code":"91000000","status":"200"},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"tenantId":"TBGLOBAL","deviceId":"web-server-community-laohu8-v3","version":"4.36.2","shortVersion":"4.36.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2576884637","isCrawlerRequest":true}