This article comes from: The Block

Compiled by Odaily Planet Daily ( @OdailyChina ); Translated by Azuma ( @azuma_eth )

Editor's Note: On October 11, the cryptocurrency market suffered an epic crash (see " 1011 Horror Night: Crypto Market Plunges Instantly, $20 Billion Wiped Out " for details). Although nearly a week has passed, discussions surrounding the causes of the crash and its subsequent impact have not stopped.

On October 15, Evgeny Gaevoy, founder and CEO of Wintermute, the industry's leading market maker (rumors of a crash were circulating online on the day of the crash, but the rumors were later denied), participated in The Block's podcast and gave his views on the "1011" incident.

The following is the main content of the podcast, compiled by Odaily Planet Daily. For the sake of reading fluency, some content has been deleted.

An hour of complete chaos

• Host: Let's get straight to the point. What happened on October 11th was a shock to the entire market. Can you walk us through what exactly happened that day? What triggered the plunge? And how did Wintermute respond in this 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 trigger seems to be a series of Trump-related news, which gradually triggered the largest liquidation event in the history of cryptocurrency.

That day was a truly extraordinary day for everyone—not just for ordinary traders but also for market makers. Within an hour, the market was completely out of control.

We'll discuss the ADL mechanism later (see " A Detailed Explanation of the ADL Mechanism for Perpetual Contracts: Why Your Profitable Trades Were Automatically Liquidated? ") and the differences between this crash and previous market fluctuations. What is certain is that this day was a very difficult and unprecedented one for many people.

It's still unclear who has the biggest losses, perhaps hedge funds

• Host: Public statistics indicate that approximately $19 billion was liquidated that day, but because Binance doesn't fully disclose data (the system only displays one liquidation event per second), the actual number is likely much higher, at least between $25 billion and $30 billion. This means that the recent liquidation was more than five times the size of the next largest liquidation event. Why is this happening? Is it due to excessive leverage in the system? Or is there a failure in some critical infrastructure, preventing market makers like you from intervening in time to prevent a cascading crash?

Evgeny Gaevoy: I think it's a combination of factors. On the one hand, there's definitely more leverage in the system. On the other hand, there's also a wider variety of tokens, more perpetual swaps, and more major platforms trading these swaps. Just three or four years ago, we didn't have so many perpetual swaps with massive open interest and the potential for significant crashes. While the market is certainly more mature and sophisticated overall, this development has also created numerous challenges.

We still don’t know who exactly “went bankrupt” and who suffered the biggest losses, but I suspect that many institutions that suffered heavy losses were actually running a long-short strategy . For example, they might short Bitcoin and go long on certain altcoins. They thought this would hedge their risks, but they were "slapped in the face" by the ADL mechanism.

Furthermore, during extreme market declines, various trading paths often become blocked . This is particularly troublesome for market makers. For example, if you buy on Binance and sell on Coinbase, you may find that your stablecoin holdings on Coinbase are increasing, while you have already received a large amount of tokens on Binance. However, withdrawals on both platforms are blocked, making it impossible to transfer assets.

So, when people say "market makers are withdrawing from the market and unwilling to provide liquidity," it's often not "unwilling" but "simply unable"—no quotes here, no orders there, because the assets are simply immobile. This situation isn't limited to centralized exchanges (CEXs); DeFi is no exception. This is the most problematic aspect—the inability to rebalance assets across platforms.

ADL's lack of transparency leads to confusion

• Host: You mentioned ADL (auto-deleveraging), and I'm guessing 90% of cryptocurrency users are hearing this term for the first time. Can you explain how ADL works and why it caused so much confusion during this incident? Also, what impact does it have on market efficiency when market makers can't be active on multiple exchanges simultaneously?

Evgeny Gaevoy: ADL (Auto-Deleveraging) is essentially an exchange's "last line of defense" mechanism. Generally, if your perpetual contract position is insufficiently margined, the exchange will liquidate your position directly in the market. If the liquidation is unsuccessful, the insurance fund should bear the loss.

The ADL mechanism is typically never triggered, and many exchanges haven't used it in years. It was designed as a last resort. In extreme cases, such as the massive decline and subsequent liquidations seen on October 11, forced liquidations through the order book could drive prices directly to zero, plunging the exchange into insolvency and profiting lavishly for short sellers. Therefore, exchanges will attempt to use ADL to forcibly offset some short positions. This effectively forces the system to artificially match shorts with liquidated longs, creating a "virtual offset" to prevent a complete price collapse.

While this is an elegant solution in theory, it presupposes orderly execution, which was clearly chaotic in this case. The biggest question is how the ADL execution price was determined. This will be the focus of numerous inquiries from trading institutions to the exchange in the days and weeks ahead.

This time, many institutions had their positions liquidated at ridiculously high prices. For example, some ADL prices were completely illogical. While the market price was $1, our short position was forcibly liquidated by the system at $5. This offered no hedging options, leaving us with an immediate and unrealistic loss.

Does the “ADL-free” privilege exist?

• Host: I understand that Ethena has ADL exemption agreements with certain exchanges. Can large market makers like you receive similar protections? Why does Ethena receive such special treatment?

Evgeny Gaevoy: First of all, I'm not entirely sure if Ethena has this privilege. It's also important to note that Ethena primarily trades BTC and ETH, which are mainstream currencies that rarely trigger ADL. ADL is more effective for altcoins and meme coins. If such a protection mechanism exists, we would certainly welcome it.

But should exchanges offer such clauses widely? Not necessarily. If implemented, I believe they must be transparent. Investors need to know which open positions are exempt from ADLs. Otherwise, it will create a toxic market structure. While such protections are certainly welcome, they must be implemented with a highly transparent disclosure mechanism. Otherwise, the so-called privileges become nothing more than conspiracy theories.

Another key point that's rarely discussed is that some exchanges (such as Coinbase and Kraken) have implemented market maker liquidity protection programs. FTX previously had a similar program. These programs allow market makers to take over positions that are about to be liquidated, bypassing the insurance fund and the ADL. This allows the most risk-tolerant market makers to absorb these risks. However, such programs were absent from the major platforms that experienced large-scale liquidations this time. I believe that reinstating such programs would greatly improve market resilience.

Does the market need to introduce a "circuit breaker mechanism"?

• Host: There's a rumor circulating on X that this wave of liquidations is more severe than previous ones, in part because Hyperliquid is now one of the top three exchanges by open interest, and because it offers very transparent data—including information like liquidation prices, which is completely invisible on centralized exchanges like Binance, OKX, and Bybit. Some suggest this may have made it easier for someone to calculate, "We just need to hit the price to trigger these liquidations," thereby artificially triggering a chain reaction of liquidations. Do you think this transparency may have contributed to this wave of liquidations, causing some assets to plummet by 90% or more?

Evgeny Gaevoy: I think if Hyperliquid were the only exchange in the world, then the "targeted attack" conspiracy theory would be more plausible—that someone was specifically targeting Hyperliquid to trigger this chain reaction. However, given the significant amount of open interest still lingers on exchanges where liquidations are not visible, I find this theory less likely.

I think the more interesting point is, is Hyperliquid the future direction of the industry? In other words, can its mechanism of "all liquidation points are publicly visible" become an industry standard?

I personally believe that Hyperliquid should ultimately find a balance between transparency and privacy—the current level of information disclosure is indeed a bit excessive. One solution is to improve privacy; another potential solution is to introduce circuit breakers.

This feature isn't available on all centralized exchanges, and while I understand why, it should be. Especially for stable assets or mainstream tokens, if you see it depegging to $0.6, you should suspend trading or switch to an auction mode, rather than letting it fall indefinitely.

In traditional financial markets, nearly every exchange—whether it's for stocks, futures, or commodities—has a circuit breaker mechanism. These prevent the underlying asset from plummeting too much in a short period of time by automatically suspending trading, entering a bidding process, or a combination of both. However, in the crypto market, no exchange has such a mechanism, which has always puzzled me. A circuit breaker mechanism could actually protect many retail investors from cascading liquidations.

Of course, one might ask—if only one exchange (like Coinbase) implements circuit breakers, while Binance doesn't, will it be effective? After all, much price discovery actually occurs on Binance. Therefore, even if Coinbase halts trading, the price of the coin will continue to fluctuate on other platforms (including on-chain markets). Therefore, if only a single exchange implements a circuit breaker mechanism, its effectiveness may be limited. To be truly effective, the majority of exchanges must adopt it in concert.

It's a trade-off. You have to choose between two risks: allow prices to plummet, liquidating all long positions, or suspend trading to ensure the exchange remains solvent?

For example, if Bitcoin plummets 20% on a particular exchange, as an exchange, you can easily determine that this is an abnormal fluctuation rather than a fundamental collapse, and it is reasonable to activate a circuit breaker. However, if an altcoin drops 50%, this may be a normal fluctuation, and the market can be allowed to clear itself. Therefore, circuit breakers should at least be introduced for specific trading pairs or asset types.

Will the exchange take the initiative to “unplug the network cable”?

• Host: There have been rumors in the past that some exchanges would "fake outages" to artificially trigger circuit breakers. For example, during the 2020 coronavirus crash, BitMEX went offline during the market crash, and the market widely speculated at the time that they did this to prevent a 99% price drop. Do you think this was a genuine circuit breaker? Or was it simply a case of the technical architecture failing? Furthermore, why do exchanges like Binance still experience outages today? Even though they knew there would be a huge surge in trading demand, they still didn't make any changes?

Evgeny Gaevoy: I tend to think the simplest explanation is often the correct one. In my opinion, the reason is simple—the infrastructure of most centralized exchanges is poor, far from the technical standards of traditional financial markets like the Chicago Board of Trade, the New York Stock Exchange, and Nasdaq. While there are historical reasons for this, no one is seriously considering migrating to a Nasdaq-level technical architecture anytime soon.

Precisely because of their backward technology, these platforms often crash under high load. I think this is a more plausible explanation than any conspiracy theory. I don't believe exchanges would deliberately "crash and liquidate retail investors" to profit from their insurance funds; that would be too risky.

From a business perspective, it is far more profitable for exchanges and market makers to allow retail investors to continue trading, repeatedly gamble, and retain them for the long term, rather than "purging retail investors annually." Because once everyone is purged, many will completely leave the market and never return.

Will there be an institutional bankruptcy?

• Host: I still remember the Luna crash. While not as severe as this one, it still had a profound impact. Back then, it took us about two or three weeks to discover that Three Arrows Capital (3AC) was insolvent. This time, the scale of liquidations is five to ten times larger. While there's speculation that some market makers, trading firms, and lenders have been severely impacted, so far, we haven't heard of any complete liquidation or bankruptcy. At most, we've heard of a few trading firms "losing some money." Do you think any institution will be caught in the act next? After all, both open interest and liquidations set records this time.

Evgeny Gaevoy: I think the market is much less interconnected now than it was in 2022. Back then, when Three Arrows collapsed, the entire market was directly dragged down by its long positions.

If a market maker were to fail, who would be affected? How far would the chain of influence extend? The biggest concern is the "contagion effect." Remember what Alameda did? They frantically dumped DeFi assets during the rebound. Everyone could see it; it was obvious.

If a market maker goes bankrupt, like Wintermute—this is just a hypothetical scenario—what happens? We have some loans, which could potentially go to zero. We also have some market making contracts with the protocol, which might still be there. After bankruptcy, we could theoretically sell some of our assets to recover our funds, or simply run away (just kidding). Furthermore, we have settlement counterparties, who might have margin deposits with us, such as BTC or ETH.

Therefore, the true impact primarily includes the protocols that market makers serve and their counterparties who have margin transactions with them. In the worst-case scenario, they might sell their BTC or ETH to cash out, but the scope of this impact is actually very limited.

If some smaller market makers are really "devastated", they may sell some specific tokens in their hands, such as the tokens of the projects they are responsible for market making, but to be honest, this usually does not help because the liquidity of these tokens is limited and the sell-off is too obvious and the market will notice it immediately.

So overall, the scope of this contagion is much more limited than in 2022. Back then, Three Arrows lent money to Genesis, and Genesis borrowed money from Gemini. The entire industry was implicated, and ultimately there was a series of bankruptcies. The current system is much cleaner and the risk isolation is better.

Experiences and lessons learned after extreme market conditions

• Host: After this incident, have you reflected on anything or learned any lessons? For example, are there any areas for improvement in your response strategy, risk control, or hedging mechanisms?

Evgeny Gaevoy: The challenge with these types of events is that they may only occur once every year or two. You can learn a lot from them, but investing a lot of resources in optimizing for these "black swan" events may not be cost-effective.

Many market makers simply exited the market this time, as these extreme conditions simply didn't suit their systems. We're still involved, but only with a very limited position—the aforementioned inventory issues limit our maneuverability. While this isn't the first time we've encountered this situation, it's certainly more challenging than usual. Add in ADL (automatic position deleveraging), and it becomes even more challenging.

We did learn one thing from this experience: we need to better handle ADL events. While our system is highly responsive, detecting changes in open positions and automatically adjusting them, even if you receive 500 ADL emails from Binance, you still have to manually manage them. While you could design a perfect system that automatically trades perfectly in these extreme cases, it wouldn't be worth the investment the other 364 days of the year.

We also held a meeting this morning to discuss further improvements. For example, in our quote system, we have a large number of internal "circuit breakers," which were triggered too frequently this time, causing disconnections almost every minute. We may try to make them less aggressive in future extreme market conditions.

Overall, we're satisfied with our performance. While we experienced some losses on ADL, we also made significant gains due to the high volatility, which offset these losses and resulted in a positive overall performance. While we could certainly do better, overall, we're doing fine.

What's more frustrating is that there's a lot of FUD going on right now, and we're spending a lot of time communicating with counterparties, working out partnership agreements, explaining our inventory status, etc. While this is cumbersome, it's understandable—after all, everyone is nervous.

What are the expectations for the future market?

• Host: So, looking ahead to the next few months, what are your thoughts? This was a record-breaking liquidation, far exceeding the likes of FTX and Luna, but it doesn't seem like anyone is feeling like the world is ending, just that many people are losing a lot of money.

Evgeny Gaevoy: I think the primary impact over the next few months will be that sectors outside of the majors will be impacted , as this blowout was primarily concentrated in altcoins. There are far more altcoins and meme coins in the market now than there were four years ago, and investors have less money and are more cautious, so I think the altcoin market will see a significant decline in interest. Of course, new retail investors are entering the market every day, so the market will eventually recover, but in the short term, I don't expect a major "altcoin season."

What’s noteworthy, however, is that Bitcoin, Ethereum, and even Solana have all performed remarkably well this time around. For example, Cosmos (ATOM) plummeted by 99.9% at one point, while BTC and ETH saw only a moderate drop of 15%.

Liquidity will further converge to BTC, ETH, and SOL

• Host: Does this mean that the maturity of the market and the assets themselves has increased?

Evgeny Gaevoy: I think so. Bitcoin is now an institutional-grade asset. It has ETFs, MicroStrategy's backing, and infrastructure like CME futures. Ethereum is basically approaching this status, and Solana is also getting closer.

So I am not worried about a huge flash crash in BTC unless we encounter a very strange black swan event, such as a quantum computing attack.

This is actually a positive sign, indicating that some mainstream assets are now "safe enough to hold long-term." The more ETFs there are and the wider the access channels, the more limited their volatility will be. This also means you can hold BTC, ETH, and even SOL with greater confidence and higher leverage. In the future, we will also see increasing leverage and liquidity concentrated in these assets.

Wintremute's emergency response mechanism

• Host: Your team is primarily based in London, right? While you do have offices overseas, I'm assuming the majority of your trading team and core members are based in London. This market move occurred quite late in the evening, almost in the wee hours. So, how do you handle this kind of emergency when your traders are asleep? Do you have teams in other countries immediately take over? How automated is your trading today? How do you handle these unexpected events if they occur at the worst possible time in your time zone?

Evgeny Gaevoy: Yes, in fact we have to thank the "Trump rallies" for this. We have long been accustomed to this situation - extreme market trends often occur on weekends or late Friday night London time.

So even though it was a bit of a shock, we were actually prepared. Of course, to be honest, this is terrible for the trader's life balance, but this is true in any trading company.

Our typical division of labor is a relay between the London and Singapore offices. Around 10-11 PM London time, the Singapore team takes over, and the London team begins to relax. However, this time, the market exploded right before the handover, so we were all swept up in the action before we could even relax. That night was truly hectic.

• Host: I spoke with another market maker, and they said they have a system that wakes up traders at night if there's significant market volatility. I imagine that's because they're not as large as you and don't have a global team to run the show. Do you do the same? For example, if an asset suddenly plummets 15%, will anyone be woken up by the system? Or are you now widely distributed enough that you can sleep soundly?

Evgeny Gaevoy: Basically, I was woken up only when things were really bad and we were losing a lot of money, so I actually slept pretty well that night.

I woke up at 8am the next morning and saw a bunch of people on Twitter asking "Are you dead?" and things like that, and that's when I started to process the FUD. The team barely slept that night, but I slept well.

This is also the "luxury" of running a large, prop trading firm - you have enough traders to take over, so you can sleep well and deal with the problem the next day.

So if I get woken up at 3am, something's seriously wrong. So far, that hasn't happened.

Views on DeFi performance

• Host: Have you noticed anything special about on-chain DeFi during this incident? While your DeFi activity isn't extensive, you've still made some progress. Were there any issues or surprises this time? For example, I noticed that Aave performed very well during this crash, with very few liquidations and a very robust system. Compared to the past, DeFi has actually been quite resilient this time.

Evgeny Gaevoy: We've seen a terrible situation in DeFi. We've also encountered the same problem in DeFi as in CeFi: insufficient inventory.

Our positions are on Binance, but we can't transfer them out. So, we've sold everything we can on DeFi and bought everything we can on Binance, but we can't transfer our assets there. We can only wait for our inventory to return. Of course, we could borrow assets to make markets, but that's very risky and could lead to liquidation. Another option is to quote different prices for USDC in different markets (such as DeFi and Binance) and engage in cross-market arbitrage, but that's also difficult to implement.

This kind of extreme event only happens once a year, and you can't build a system specifically for it. We saw that most competitors simply stopped DeFi transactions during this incident, perhaps because their risk control circuit breakers were triggered.

I'm pretty happy with our performance. We could have made more money, but we simply ran out of inventory.

About FUD

• Host: Last question - Wintermute (WM) has become a virtual scapegoat in the crypto community. Every market turmoil is blamed on you. For example, when someone discovered you were depositing hundreds of millions of dollars on Binance during the market crash, they immediately started accusing you of a market crash. I know it was just a delta neutral trade, but the rumors still spread. Do you still care about this kind of publicity? While you don't rely on retail investors or Twitter, you're more focused on your liquidity providers (LPs) and partnership agreements. How do you personally deal with this? Do you get angry? Or have you become indifferent?

Evgeny Gaevoy: Honestly, I've completely let it go. I'm just sad that someone could be so foolish as to piece together unrelated pieces of data and come up with ridiculous conclusions with such confidence.

For example, some people saw us deposit $700 million into Binance that day and started shouting "Wintermute is going to crash the market," but they didn't even notice that we withdrew a similar amount that same day. These people were actually retail investors betting on altcoins—and we happened to be the ones making money from them.

So it's kind of an "ecosystem relationship"—they're spouting nonsense on crypto Twitter, and we profit from their stupidity . It's a bit sad, but if they all got smarter, our trading volume might actually go down.

We have been net long

• Host: Will you consider expanding beyond market making in the future? For example, proprietary trading, investing, or something else?

Evgeny Gaevoy: We have been doing other businesses, but there is a misunderstanding that we are shorting every day. In fact, we are almost always net long.

We've been bullish since 2022, or even earlier. We have a venture capital arm that has invested in numerous projects, resulting in a significant amount of locked tokens. We also hold significant amounts of core assets like BTC, ETH, HYPE, and SOL. We can't possibly crash the market, as that would directly impact our own holdings.

We have clear risk management rules: Our long positions will not exceed 25% of our net assets. Even if the market crashes tomorrow, we will only lose 25% at most and will not go bankrupt. We also do not hold more than 35% of our net assets on a single platform. So even if Binance collapses tomorrow like FTX did, we will still be able to survive.

That’s why we survived the FTX crash, and we survived the hack. Unless the top five exchanges disappear at the same time, we can all survive.