Tom Lee: The sharp drop on October 11 was triggered by an abnormal decline of USDE on a trading platform, leading to automatic liquidation

Tom Lee, in an interview with CNBC, explained to the host why the crypto market experienced a sharp decline: "The crypto market has a lot of automated processes. Among them, ADL (Automatic Deleveraging) is a typical example—when the asset or collateral price of a user's account drops, the system will trigger forced liquidation just like a margin call in traditional markets. While USDE maintains a price of 1 dollar on other trading platforms, the internal quote on one trading platform plummeted to 0.65 dollars. Due to the lack of liquidity on that trading platform, the ADL mechanism was triggered, leading to a large number of accounts being automatically liquidated, and this chain reaction eventually spread to the entire market. Because of this, thousands of crypto accounts were wiped out in minutes—even though they were profitable just moments before."

As for who exactly is responsible? While I know the specific names of the institutions, I prefer not to name them. Essentially, this is a systemic risk caused by a code vulnerability: the trading platform should have collected cross-platform price data to set stablecoin valuations but mistakenly relied on its internal quoting system. This incident led to a significant reduction in the capital of market makers and trading institutions. More seriously, when the trading volume shrinks and causes a decline in coin prices, these institutions need to prepare more capital to maintain operations, forcing them to further shrink their balance sheets—this creates a vicious cycle that continuously erodes the foundation of the market. The essence of the 2009 crisis was the loss of control over real estate and subprime mortgage collateral. Although Wall Street established mechanisms like CDOs to cope, the subsequent over-regulation had negative effects. Today, the ADL code vulnerability and price mechanism flaws in the crypto space will also eventually be corrected. Fortunately, we will not repeat the mistakes of over-regulation, but we must face the impacts brought by the liquidation mechanism. The massive liquidation that lasted for eight weeks in 2022 is still fresh in our minds; this is the essence of DeFi: code will inevitably have vulnerabilities, and leverage is the real source of risk. Investors should not misuse leverage in the crypto market.