10.11 Market Crash Review: Who Will Build a Safety Net for the Crypto Market?

At 5:30 AM, the USDe price was smashed down to $0.65.

On the screen, it was all red. The numbers poured down like a waterfall. BTC dropped from $122,000 to $104,000, and ETH fell from $4,360 to below $3,500. The candlestick charts of some small tokens turned into vertical lines, with some even going to zero directly.

In the early hours of October 11, the global crypto market evaporated $300 billion. Over 1.6 million people were liquidated, with a forced liquidation scale of $19.1 billion.

Traditional finance has mechanisms like circuit breakers, margin calls, and investor protection funds. Most of the time, Web3 users can only watch helplessly as the liquidation line is breached.

A Free Fall Without a Safety Net

On the evening of October 10, Trump announced on Truth Social: an additional 100% tariff on all Chinese goods, with some products having a total tax rate exceeding 130%. He also threatened to cancel the APEC meeting with Xi Jinping.

Once the news broke, U.S. stocks plummeted, and the dollar index soared by 1.8%, with funds rushing into safe-haven assets.

The crypto market was hit first. The tariff threat became the ignition fuse, and the market's bubble was instantly burned away. By early Saturday morning, Asian traders were asleep, U.S. stocks had already closed, and Western market makers had also gone offline.

The market was empty, with no one to take over. The sell-off began to snowball.

How Leverage Killed the Bulls

In the past few months, contract leverage and DeFi circular loans pushed the market to the edge of a cliff.

Binance and Bybit offered 100x leverage. Many people went all in on long positions. It was even crazier in DeFi: using Ethena's USDe, WBETH, and BNSOL as collateral to borrow stablecoins, then buying tokens, then re-collateralizing, creating infinite loops.

Once the price fell below support, one round of forced liquidations triggered the next, starting a chain reaction of mutual liquidation.

Within 24 hours, long positions were liquidated for $16.68 billion, accounting for 87% of total liquidations. The emerging platform Hyperliquid saw liquidations exceeding $10.2 billion, far surpassing Bybit ($4.6 billion) and Binance ($2.3 billion).

The largest single liquidation occurred on Hyperliquid's ETH-USDT contract, worth $203 million.

If on-chain leverage liquidations are included, the actual deleveraging scale could reach $30-40 billion.

Why Did USDe Decouple?

At 5:30 AM, the USDE/USDT trading pair on Binance collapsed. The price dropped to as low as $0.65, and the on-chain price also fell to $0.97.

Many people recalled the death spiral of UST.

The Ethena protocol supports USDe with over-collateralization, holding spot long positions and perpetual contract short positions for hedging. During the crash, the short positions profited, which actually strengthened the collateral protection. The protocol itself continued to operate normally, without entering a death spiral.

The breaking point was in the secondary market.

A large number of users used USDe for circular loans or margin trading. During the panic sell-off, market makers were unable to maintain prices, buy orders dried up, and exchange interfaces lagged. Prices collapsed in an instant.

The protocol itself had no issues; the truth was that liquidity was squeezed. As emotions calmed, USDe quickly stabilized above $0.99.

Wrapped assets like WBETH and BNSOL also experienced similar decoupling, but then returned to normal.

The Vertical Plunge of Small Tokens

Even worse were the small-cap tokens. Many tokens' prices were directly smashed down to near zero.

The reason is simple: no one was there to take over.

Since the exit of established market makers, the depth of small and medium tokens mainly relied on a few active market makers, with limited funds prioritizing top tokens, leaving small projects unsupported. When the market crashed, market makers had to prioritize protecting top assets, withdrawing liquidity from small tokens. The result was that small and medium tokens faced immense selling pressure, yet there were no buy orders.

The price of the IoT token IOTX was once driven down to $0.00000. Many altcoins experienced short-term declines of 90%-99%, with 1-minute candlesticks showing vertical drops.

All of this happened from late Friday night to early Saturday morning, during the non-working hours of Western traders. The market depth was already thin, and with no one monitoring, prices went uncorrected.

Ethereum gas fees soared to hundreds of Gwei, and some exchanges (like Kraken and Backpack) experienced outages or delays. Users were unable to transfer and trade in time, further amplifying losses.

Binance Also Went Down

As the world's largest crypto exchange, Binance also exposed issues during this turmoil.

Due to a flood of incoming orders, Binance experienced lag and even outages. Many users reported that during the most critical minutes, they were unable to log into their accounts or place orders, missing the opportunity to close positions and stop losses.

Many discovered that tokens listed on Binance dropped even more sharply. When Binance went down or had limited functionality, related tokens fluctuated more violently due to the freezing of the main trading pool.

The technical bottlenecks of this giant exchange have become a systemic risk; extreme market conditions are not coincidental but a necessary lesson in the market's maturation process.

Web3 Needs Its Own Safety Net

In the face of these structural flaws, the market needs a more mature protection mechanism. The answer lies in mechanism design.

The crypto market can indeed design its own insurance system under the premise of decentralization. Technically, all of this is feasible.

Smart contracts can automatically execute compensation logic when liquidations occur, without the need for manual review; code is the rule. A portion of each transaction enters an insurance pool, and when extreme market conditions lead to user losses, the fund pool automatically compensates, with transparency on-chain.

When user losses exceed a certain threshold, the system provides computing power or token subsidies. These subsidies continuously generate returns, offsetting current losses with future gains. During extreme volatility, the protocol can also automatically reduce leverage ratios, giving users time to react.

All insurance funds are held on-chain, with compensation conditions executed by smart contracts. Trust can be written into code, and rules can become protection.

Replacing Regulation with Design

Some worry that insurance mechanisms will undermine the free nature of cryptocurrencies. But true freedom requires a safety net.

Climbers tie safety ropes to climb higher, and skydivers wear parachutes to enjoy free falls.

Insurance mechanisms provide a safety net for users after they make choices about their risks.

Web3 insurance can be code-level, transparent, and automatically executed, without the complex review processes and trust endorsements of traditional finance. This is decentralized insurance.

On the night of October 11, many wondered: if there had been insurance backing, would it have been so disastrous?

The answer is likely yes.

Who Will Build This Safety Net?

Such mechanisms exist to provide a point of trust and to set boundaries on risk.

In the narrative of Web3, we have talked many times about "paradigm shifts," "decentralization," and "value return." But when $19.1 billion evaporated overnight and 1.6 million people were liquidated simultaneously, these grand narratives seemed pale.

What users need is tangible protection.

The technology is already mature. Smart contracts can achieve automatic claims, on-chain fund pools can operate transparently, and computing power subsidies can continuously generate returns. What remains is a matter of willingness: who is willing to write user protection into the underlying protocol?

The mark of Web3's maturity is having a real safety net that supports users during extreme market conditions.

After October 11, the industry should remember more than just the numbers.

When the next waterfall comes, who can truly support the users?