Wintermute Founder on "1011" Crash: Market Needs Circuit Breaker, No Altseason in the Short Term

Original Title: Wintermute CEO breaks down crypto's record breaking $20B+ liquidation event

Original Source: The Block
Original Translation: Azuma, Odaily Planet Daily

On October 11, the cryptocurrency market experienced an epic crash. Nearly a week has passed since then, but discussions regarding the reasons behind the crash and its subsequent impact have not ceased.

On October 15, Evgeny Gaevoy, the founder and CEO of Wintermute, one of the industry's major market makers (which was rumored to have suffered a major loss on the day of the crash but has since debunked the rumor), participated in The Block's podcast to share his insights on the "10/11" event.

An Hour of Complete Chaos

Host: Let's dive right in. The events of October 11 were truly shocking for the entire market. Could you take us back and explain 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 details of this crash, but one thing is clear—the catalyst seems to have been a series of news related to Trump, which gradually led to the largest liquidation event in the history of the cryptocurrency market.

That day was extremely unusual for everyone—not only for regular traders but also for market makers. Within an hour, the market went completely haywire.

Later, we will discuss the ADL mechanism and talk about how this crash differs from previous market fluctuations. What can be certain is that for many, this day was very challenging and unprecedented.

It's Still Unclear Who Suffered the Most Losses, Perhaps Hedge Funds

Host: Publicly available data shows that approximately $19 billion was settled on-chain that 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 was over five times the size of the previous second-largest settlement event. Why is this the case? Is it because there was excessive leverage in the system? Or did some key infrastructure fail, preventing market makers like yourselves from intervening in time to stop a chain reaction?

Evgeny Gaevoy: I believe this is the result of a combination of multiple factors. On one hand, there is indeed more leverage in the system; on the other hand, the market has also seen more token categories, more perpetual contract products, and larger platforms trading these perpetual contracts. Looking back three to four years, we didn't have this many perpetual contract products with huge open interest that posed significant systemic risk. In terms of market maturity, while it is indeed more sophisticated and refined overall than in the past, this development has also brought forth many issues.

Currently, we are still unsure who exactly got "liquidated," who suffered the most significant losses, but I suspect many heavily losing institutions were actually running a long-short strategy, for example, they might have been shorting Bitcoin while longing some altcoins, thinking this would hedge their risks, only to be "liquidated" by the ADL mechanism.

In addition, when the market experiences an extreme downturn, various trading paths often get stuck. This is especially troublesome for market makers. For example, you buy on Binance, sell on Coinbase, only to find your stablecoins on Coinbase increasing while holding a bag of tokens on Binance—and at that moment, both withdrawals are jammed, making asset transfers impossible.

So, when people say "market makers are exiting the market, unwilling to provide liquidity," most of the time it's not out of "unwillingness" but rather "impossibility"—they can't quote here, nor place orders there, because assets are simply not moving. This situation occurs not only on centralized exchanges (CEXs) but also in DeFi. This is the most challenging issue—you simply can't rebalance across platforms.

Opaque ADL Triggers Chaos

Host: You mentioned ADL (Automatic Deleveraging). I'd guess that maybe 90% of cryptocurrency users are hearing this term for the first time. Could you explain the principle of ADL and why it caused so much chaos in this event? Also, when market makers cannot be active on multiple exchanges simultaneously, what impact does it have on market efficiency?

Evgeny Gaevoy: ADL (Auto-Deleveraging) is essentially an exchange's "last line of defense" mechanism. In general, when the margin of your perpetual contract position is insufficient, the exchange will directly liquidate your position in the market; if the liquidation is not successful, the loss should be covered by the insurance fund.

The ADL mechanism is usually never triggered, as many exchanges have not used it for years. It was originally designed as a measure of last resort. In extreme situations, such as a massive market crash like 1011 and a chain of liquidations, if continued forced liquidation through the order book, the price may directly drop to "zero," causing the entire exchange to become insolvent, while the short side reaps enormous profits. Therefore, the exchange will attempt to use ADL to forcibly offset some of the short positions, which is equivalent to artificially matching the short positions with the liquidated long positions, forming a "virtual offset" to prevent a complete price collapse.

In theory, this is an "elegant" solution, but the prerequisite is that the execution should be orderly, which was clearly very chaotic this time. The biggest issue is — how is the ADL execution price determined? This will become the focus of inquiries from many trading institutions to the exchange in the coming days and even weeks.

Many institutions' positions were 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, but our short position was forcibly liquidated by the system at a price of $5. This cannot be hedged, and we could only incur instantaneous losses.

Does the "ADL-Free" Privilege Exist?

Moderator: As far as I know, Ethena has an ADL-free clause with certain exchanges. Can large market makers like you receive similar protection? Why does Ethena receive such special treatment?

Evgeny Gaevoy: Firstly, I'm not entirely sure if Ethena enjoys this privilege. Also, it's worth noting that Ethena mainly trades BTC and ETH, which are less likely to trigger ADL. ADL is more applicable to various altcoins and meme coins. If there is such a protection mechanism, we would certainly welcome it,

but should exchanges broadly offer such terms? Not necessarily. I believe that if implemented, it must be done so openly and transparently; investors need to know which open contracts are entitled to ADL-free privileges, or else it will create a detrimental market structure. We certainly welcome such protection, but the prerequisite is to establish a highly transparent disclosure mechanism; otherwise, the so-called privilege is just a conspiracy theory.

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. The former 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 allows the most risk-tolerant market makers to absorb these risks. However, in this recent widespread liquidation event on mainstream platforms, such programs were collectively absent. I believe that restarting such programs would greatly improve market resilience.

Does the Market Need to Introduce a "Circuit Breaker" Mechanism?

Host: There is a circulating view that this recent liquidation crisis was more severe than in the past in part because Hyperliquid is now one of the top three exchanges by open interest on the entire network, and much of its data is very transparent—including liquidation prices and other information that would be entirely invisible on centralized exchanges like Binance, OKX, and Bybit. Some believe that this may have made it easier for some to estimate "if we just push the price to this level, we can trigger these liquidations," thus artificially triggering a chain reaction of liquidations. Do you think this transparency could have actually exacerbated this liquidation crisis, causing some assets to plummet by 90% or even more?

Evgeny Gaevoy: I think that if Hyperliquid were the only exchange in the world, the conspiracy theory of such "targeted sniping" might make more sense—meaning that indeed someone was specifically targeting Hyperliquid to trigger this chain of liquidation. However, in reality, a significant amount of open interest still exists on exchanges where liquidation points are not visible, so I think the likelihood of this theory holding water is relatively low.

I find it more interesting to consider whether Hyperliquid represents the future direction of the industry. That is, could this mechanism of "all liquidation points being publicly visible" become an industry standard?

On a personal note, Hyperliquid should ultimately find a balance between transparency and privacy—currently, the level of information disclosure is indeed a bit "excessive." One solution is to enhance privacy; another potential solution is to introduce circuit breaker mechanisms.

This feature is absent from all centralized exchanges, although I can roughly understand the reasons behind it, but it should indeed exist. Especially for some stable assets or mainstream tokens, when you see it de-peg to $0.6, trading should be paused or switched to an auction mode, instead of letting it endlessly plummet.

In the traditional financial markets, almost every exchange — whether for stocks, futures, or commodities — is equipped with a circuit breaker mechanism. It prevents the underlying asset from experiencing excessive rapid declines, automatically pausing trading or initiating a call auction, 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 cascading liquidations.

Of course, some may ask — if only one exchange (like Coinbase) adopts a circuit breaker, while Binance does not, would that be effective? After all, much price discovery actually occurs 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, its effectiveness may be limited. For it to be truly effective, the majority of exchanges would need to cooperatively adopt it.

This is actually a trade-off issue. You have to choose between two risks: allowing prices to plummet, triggering the liquidation of 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 entirely assess this as an abnormal fluctuation rather than a fundamental collapse. In this scenario, activating a circuit breaker would be reasonable; however, if it were a meme coin dropping by 50%, that might be considered a normal fluctuation, and the market could be left to self-correct. Therefore, circuit breakers should at least be introduced for specific trading pairs or asset types.

Would Exchanges Actively "Pull the Plug"?

Host: There have also been rumors in the past that some exchanges would "pretend to experience an outage," actually triggering a circuit breaker artificially. For instance, during the pandemic-induced crash in 2020, BitMEX went offline amidst the collapse, with many speculating that they did so to avoid a 99% price crash. Do you think that was a genuine circuit breaker action at that time? Or was it merely due to the technical infrastructure being unable to handle the situation? Furthermore, why do exchanges like Binance still experience outages even now? Knowing there will be a massive surge in trading demand, why haven't they made improvements?

Evgeny Gaevoy: I tend to believe the simplest explanation is often correct. In my view, the reason is quite simple — the infrastructure of most centralized exchanges is quite poor and far from the technical standards of traditional financial markets (such as the Chicago Mercantile Exchange, the New York Stock Exchange, or NASDAQ). Despite there being historical reasons, in the short term, no one will really move to a NASDAQ-level tech stack.

It is precisely because of such a low 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 "shut down to liquidate retail traders" 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 traders to continue trading, engaging in repeated games, and remaining in the market long-term is far more profitable than "liquidating retail traders once a year." Once everyone is wiped out, many people will completely exit and never return.

Will There Be an Institutional Blowup?

Interviewer: I still remember the Luna crash, although it was not as severe as this one, the impact was profound. 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 have been speculations that some market makers, trading firms, and lending institutions have been severely affected, so far, no one has heard of any complete blowups or closures, at most we've heard of a few trading firms "losing some money." Do you think any institution will be found to have blown up next? After all, both the open interest and liquidation scale this time have reached record levels.

Evgeny Gaevoy: I believe that compared to 2022, the level of market interconnectedness has decreased significantly. At that time, when Three Arrows went down, the entire market was directly dragged down by its long positions.

Now, if a market maker really collapses, you should ask who it will affect? How long is the impact chain? 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, and everyone could see it, very clearly.

If a market maker really goes bankrupt, for example, let's say it's Wintermute—this is just a hypothesis—what would the result be? We have some loans that could all turn to zero; we have some market-making contracts signed with protocols, which may still be in effect; after bankruptcy, theoretically, we can sell off some assets to recover funds or just run away (joking); additionally, we have settlement counterparts, who may have collateral with us, such as BTC or ETH.

So, the real impact area mainly includes the protocols served by the market maker and counterparties who have collateral dealings with the market maker. The worst-case scenario is them selling off the BTC or ETH in hand to cash out, but the impact of this scenario is actually very limited.

If some smaller-scale market makers are really in dire straits, they may sell off some specific tokens they hold, such as the project tokens they provide liquidity for. However, this approach is usually futile because these tokens have limited liquidity, and any sell-off would be immediately noticed by the market.

So overall, the scope of contagion this time is very limited compared to 2022. Back then, entities like Three Arrows lent to Genesis, Genesis borrowed from Gemini, and the whole industry was interconnected, leading to a chain of bankruptcies. The current system is much cleaner and has better risk isolation.

Lessons Learned from an Extreme Market Event

Host: After this event, do you have any reflections or lessons learned? For example, are there any areas to improve in terms of response strategy, risk management, or hedging mechanisms?

Evgeny Gaevoy: The challenge with events like this is that they may only happen once every year or two. You can learn a lot from them, but it may not be cost-effective to invest heavily in optimizing for such a "black swan" event.

Many market makers simply exited the market this time because extreme market conditions are not suitable for their systems at all. We are still here, but we are participating with very limited positions—the inventory issue mentioned earlier has restricted our operating space. Although we have encountered such situations before, this time was indeed more challenging than ever. If you add in ADL (auto-deleveraging), it becomes even more tricky.

We did learn a bit from this experience, particularly about handling ADL events better. While our system responds quickly and can immediately detect changes in open positions and automatically adjust, when you receive 500 ADL emails from Binance, you still need manual management. Of course, you could design a perfect system to trade automatically in such extreme situations, but it would be irrelevant for the other 364 days of the year and not worth the investment.

This morning, we had a meeting to discuss next steps for improvement. For example, in our pricing system, we have a lot of internal circuit breakers, and they triggered too frequently this time, with alarms going off 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 from ADL, we also made a good amount from high volatility, offsetting each other, resulting in an overall decent outcome. Of course, there is always room for improvement, but overall, it's fine.

What's particularly annoying is the abundance of FUD now. We've spent a lot of time communicating with the counterparties, explaining our inventory situation, and discussing partnership agreements. Although troublesome, this is understandable—after all, everyone is quite nervous.

What Is the Outlook for the Future?

Host: So, looking ahead to the next few months, what are your thoughts? This liquidation was on a historic scale, far surpassing events like FTX and Luna, but this time it seems like no one thinks it's the "end of the world," just that many people have suffered heavy losses.

Evgeny Gaevoy: I believe the main impacts in the coming months will be that segments outside of the major coins will be affected because this liquidation mainly focused on meme coins. Currently, there are many more meme coins and meme coin investors than four years ago. Investors have less money and are more cautious, so I think the market hype around meme coins will significantly decrease. Of course, new retail investors enter the market every day, so the market will eventually recover. However, in the short term, we won't see a large-scale "meme coin season."

Interestingly, the performance of Bitcoin, Ethereum, and even Solana has remained stable this time. For example, Cosmos (ATOM) once dropped by 99.9%, while BTC and ETH only saw a maximum drop of 15%, which is very mild.

Liquidity Will Further Consolidate Toward BTC, ETH, SOL

Host: Does this mean that the market and the assets themselves have matured?

Evgeny Gaevoy: I think so. Bitcoin is now considered an institutional-grade asset. It has ETFs, the blessing of MicroStrategy, and infrastructure such as CME futures. Ethereum is also close to this status, and Solana is approaching it too.

So, I'm not worried that BTC will experience a significant flash crash, unless it encounters a very strange black swan event, such as a quantum computing attack at that level.

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 more widespread the on-ramps are, the more limited their volatility becomes. This also means that you can hold BTC, ETH, and even SOL with more confidence and higher leverage. In the future, we will also see more leverage and liquidity concentrating on these assets.

Wintremute's Emergency Response Mechanism

Host: Your team is primarily based in London, right? Although you have overseas offices as well, I assume most of your trading team and core members are in London. The market movement occurred late in London's time, almost at night or even early morning. When your traders are all asleep, how do you deal with such a sudden event? Do you have teams in other countries taking over immediately? How automated is your trading process now? If such an event were to happen at the worst time in your time zone, how do you handle it?

Evgeny Gaevoy: Yes, in this regard, we actually have to thank the "Trump rallies." We are used to this kind of situation—extreme market movements often happen on weekends or late Friday nights in London time.

So, although this time was still 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.

Usually, our setup is like this—London office and Singapore office relay. Around 10 to 11 pm in London time, the Singapore team takes over trading, and the London team begins to "relax." However, this time the market movement occurred before the handover, so we didn't have time to relax, and everyone was swept into it. That night was indeed very busy.

Host: I have spoken to another market maker, and they mentioned they have a system that wakes up traders at night if there is a severe market movement. I think it may be because their scale is not as large as yours, and they don't have a global team relay. Do you do the same? For example, if an asset suddenly drops by 15%, are people woken up by the system? Or are you distributed widely enough now to sleep peacefully?

Evgeny Gaevoy: Basically, I am only woken up when the situation is really bad, and we are losing a lot of money. So, that night, I slept quite well.

The next morning, waking up at 8 a.m., seeing a bunch of people on Twitter asking if "you guys are dead" and such, I started addressing that FUD. The team hardly slept that night, but I slept well.

This is also the "luxury" of running a large proprietary trading firm—you have enough traders to relay, so you can sleep soundly and deal with the issues the next day.

So if I'm woken up at 3 a.m., it means something big is happening. So far, that hasn't happened.

View on DeFi Performance

Host: From this recent event, did you notice any particular phenomena on the blockchain (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 well during this sharp drop, with not many liquidations and a fairly robust system. Compared to the past, DeFi actually held up pretty well this time.

Evgeny Gaevoy: We observed some pretty bad situations on the DeFi side. However, we also encountered issues in DeFi similar to traditional finance (CeFi): inventory issues.

Our assets were on Binance but couldn't be moved out, so everything that could be sold on DeFi was sold off completely. Meanwhile, everything that could be bought on Binance was bought up, but assets couldn't be transferred, so we had to wait for the inventory to return. Of course, we could have borrowed assets to provide liquidity, but that carries a high risk of 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 is also very difficult to execute.

Such extreme events actually only occur once a year, and you can't possibly build a system specifically for them. We saw that most competitors simply stopped DeFi trading during this event, perhaps due to their risk control circuit breakers being triggered.

I am quite satisfied with our performance. Although we could have made more money, our inventory indeed ran out.

Regarding FUD

Host: One last question—Wintermute (WM) has almost become a "scapegoat" in the crypto community's eyes. Whenever there is a stir in the market, everyone blames you. For example, when someone noticed that you deposited hundreds of millions of dollars into Binance before the crash, they immediately started spreading rumors that you were dumping the market. I know it was actually a delta neutral trade, but rumors were flying everywhere. 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 have completely come to terms with it. I'm just really saddened by how someone can be so foolish. They piece together unrelated data fragments, draw absurd conclusions, and are full of unwarranted confidence.

For example, someone saw that we deposited $700 million into Binance on that day and started yelling "Wintermute is going to dump the price," but they completely overlooked the fact that we also withdrew a similar amount on the same day. These people are basically the gamblers of altcoins—and we happen to be the ones profiting from their foolishness.

So this is a kind of "ecosystem," right—they blabber on Crypto Twitter, and we profit from their foolishness. It's a bit sad, but if they all became smarter, our trading volume might actually decrease.

We Have Always Been Net Long

Host: Would you consider expanding into businesses beyond market making in the future? Such as proprietary trading, investments, or something else?

Evgeny Gaevoy: In fact, we have always engaged in some other businesses, but there is a misconception among outsiders that we are always shorting. In reality, we have been almost consistently net long.

Since 2022 or even earlier, we have been overall bullish. We have a venture capital department, invested in many projects, and consequently hold a lot of vested tokens. We also hold significant amounts of BTC, ETH, HYPE, SOL, and other core assets. We cannot 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 our net assets, so even if the market crashes tomorrow, we would lose at most 25% and not go bankrupt. We also do not allocate more than 35% of our net assets on a single platform, so even if Binance were to collapse tomorrow like FTX, we would still survive.

This is why we were able to withstand the FTX collapse and also survive the hack. Unless the top five exchanges disappear simultaneously, we can survive.

Original Article Link