The recent crash on Oct. 10 marked the largest liquidation event in the history of the crypto market. Over $19 B was liquidated, according to CoinGlass data, resulting in a $65 B downturn in open interest. This scale is monumental compared to other significant liquidation events, such as the COVID-19 crash at $1.2 B or the FTX collapse at $1.6 B.
Following the incident, investigators agreed that the event was at least partly attributed to flawed pricing oracles on the Binance exchange. The collateral value of three pegged crypto tokens—USDE, bnSOL, and wBETH—was derived from Binance’s internal order book data rather than an external oracle, posing risks to users of the “Unified Accounts” feature during market irregularities.
There is a possibility that this vulnerability was exploited in a coordinated attack on Oct. 10, though the evidence remains unclear. USDE specifically contributed to cascading liquidations with an approximate volume of $346 M, compared to wBETH at $169 M and bnSOL with $77 M. The wholesale withdrawal of buy-side liquidity on a stablecoin pair raises significant concerns.
Utilizing exclusive, detailed data from our partners at the AI-driven market analytics firm Rena Labs, Cointelegraph Research analyzes the unusual activity surrounding the USDE/USDT trading pair in this article.
A Mass Liquidity Meltdown
Rena’s anomaly detection engine registered one of the steepest and most intricate market dislocations ever observed in stablecoin trading. This is surprising given the absence of concerns regarding the stability of USDE’s collateral, unlike prior UST and USDC depegs. Mints and redemptions of USDE continued normally. Nevertheless, professional market makers retracted liquidity from the pair dramatically, a move partly due to automated risk-assessment systems initiating defensive quote withdrawals to minimize exposure.
Pre-collapse, the average total liquidity for USDE was approximately $89 M with a well-balanced distribution of buy and sell orders. Between 21:40 and 21:55 UTC, the liquidity of the pair on Binance plummeted by nearly 74%, dropping to around $23 M. By approximately 21:54, market depth had nearly vanished. Total liquidity fell to a mere $2 M, and market-making activities effectively ceased, resulting in bid-ask spreads skyrocketing to 22%.
The market’s structural integrity collapsed during the crash. Trading volume surged by a factor of 896, while ask-side depth fell by 99%. This imbalance caused USDE’s price to drop to $0.68 on Binance’s spot market, whereas it remained near its peg on other exchanges.
During the 10-minute crisis period, trade intensity surged nearly 16 times compared to the usual rate of 108 trades per minute, reaching nearly 3000 trades per minute, with 92% of these being sell orders. A significant portion of these orders was linked to panic selling, stop-loss triggers, and forced liquidations.
Evidence of Anomalous Market Activity
Rena’s anomaly detection engine identified abnormal activity well before the USDE liquidity crisis ensued. At around 21:00 UTC, it recorded 28 anomalies, a rate four times greater than in the previous hour. These anomalies involved unusual spikes in volume, prices, or trade intensity and suspicious patterns, particularly bursts, clusters, and sequences of trades, as well as fingerprinting activity indicative of various forms of order spoofing.
Three distinct large order sequences occurred right before the crisis, identified in the order book’s size profile. These orders were placed when BTC had already started to decline on major exchanges, but before USDE faced a liquidity crunch.
This incident underscores the fragility and leverage inherent in the crypto market, where cascading liquidations can eliminate what seem to be secure trades. Just as we saw 99% drawdowns on certain altcoins during the crash, the USDE depeg illustrates that many tokens lack organic demand to sustain them. With the absence of significant market makers like Wintermute, many crypto assets’ order books have demonstrated minimal resilience.
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