The recent crash on October 10 was the largest liquidation event in the history of the cryptocurrency market. According to CoinGlass data, more than $19 billion was liquidated, leading to a $65 billion decline in open interest. This figure dwarfs other memorable liquidation cascades, such as the COVID-19 crash with $1.2 billion, or even the FTX collapse with $1.6 billion in liquidations.
A consensus subsequently emerged among researchers that the event was caused, at least in part, by vulnerable price oracles on the Binance exchange. The collateral value of three pegged crypto tokens, namely USDE, bnSOL, and wBETH, was determined from Binance’s internal order book data rather than an external oracle. This puts users of the “Unified Accounts” feature at risk of liquidation during market irregularities.
It is possible that this vulnerability was exploited in a coordinated attack on October 10, but the evidence remains inconclusive. USDE, in particular, contributed to cascade liquidations with a volume of approximately $346 million, compared to wBETH with $169 million and bnSOL with $77 million. The massive withdrawal of liquidity from the buy-side in a stablecoin pair should be considered especially suspicious.
Using granular data obtained exclusively from our partners at AI-based market analysis firm Rena Labs, Cointelegraph Research analyzes the unusual activity in the USDE/USDT trading pair in this article.
A massive liquidity crisis
Rena’s anomaly detection engine recorded one of the sharpest and most complex market dislocations ever seen in stablecoin trading. This is surprising given that there were no concerns about the strength of the USDE collateral, unlike previous UST and USDC releases. USDE minting and redemptions continued to operate as usual. However, professional market makers withdrew liquidity from the pair on a large scale. Part of this can be attributed to automated risk rating systems, which initiated defensive pullbacks to limit exposure.
Before the crash, the average total USDE liquidity was $89 million with a balanced buy and sell order structure. Between 21:40 and 21:55 UTC, the pair’s liquidity on Binance collapsed by almost 74%, falling to approximately $23 million. At around 21:54, the market depth had almost completely disappeared. Total liquidity fell to just $2 million and market making activity effectively disappeared. As a side effect, bid-ask spreads shot up to 22%.
The market lost its structural integrity in the crisis. Trading volume increased 896 times as demand side depth collapsed by 99%. The imbalance caused the price of USDE to fall to $0.68 on the Binance spot market, while it remained almost flat on other exchanges.
In the 10-minute crisis period, trading intensity increased almost 16 times compared to the normal rate of 108 transactions per minute. It peaked at almost 3,000 trades per minute, of which 92% were sell orders. Many of the orders can be attributed to panic selling, stop-loss triggers and forced liquidations.
Evidence of abnormal market activity.
However, Rena’s anomaly engine detected abnormal activity long before the USDE liquidity crisis occurred. At around 21:00 UTC, it reported 28 anomalies, a rate four times higher than the previous hour. Anomalies recorded by this engine include unusual spikes in volume, prices or trading intensity, and suspicious patterns, specifically bursts, clusters and sequences of transactions. It also involves fingerprinting activity, which is characteristic of various forms of order spoofing.
Three different discharges of large orders just before the crisis can be found in the order book size profile. These orders were placed when BTC had already started to fall on major exchanges, but before USDE entered a liquidity crisis.
The event highlights the fragility and leverage still present in the cryptocurrency market, where cascading liquidations can wipe out what appear to be safe trades. Like the 99% drawdowns in some altcoins during the crisis, the USDE depeg demonstrates that the market for many tokens has little organic demand to support it. In the absence of large market makers like Wintermute, the order books of many crypto assets have shown little resilience.
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