Our three main lessons from the biggest crypto liquidation event in history
1/ Leveraged trading is riskier than you think
Most leveraged traders will acknowledge the inherent risks in trading high volatility assets, particularly when trading at aggressive leverage multiples
However, this event exposed just how thin and fragile perps markets can be. In particular, an issue in one trading venue (Binance) can have consequences across the entire market
Leveraged traders during this event with only "modest" leverage (e.g., 2-3x) would have had their entire position wiped in one candle in the majority of alts. Many traders had their entire portfolios wiped
It also acutely affected delta neutral traders, which as part of Auto-Deleveraging also saw some of their positions liquidated. This was exacerbated with funding rates going as low as -400% after
Leveraged traders need to reconsider how they can appropriate position their trades to account for these scenarios, across stop losses, collateral rebalancing and leverage ratios
2/ You cannot ignore oracle design when assessing risk
This event clearly illustrated how essential oracle pricing is for the functioning of markets
In particular, oracles using the market price of stablecoins add another element of risk. In turbulent market conditions, traders may execute large market sell orders of fully collateralized stablecoins. This can cause a temporary depeg, even when the underlying stablecoin is robust
Platforms that use oracles that price stablecoins on NAV offer a lower risk profile here, as temporary dips in the market price will not have any impact
3/ The importance of dry powder
Having a reserve of stablecoins in your portfolio can position yourself to make profits during these events
Savvy traders could have made significant profits from buying the flash crash.
Furthermore, as traders sell other assets to recapitalize their accounts, this presents arbitrage opportunities
For example, we executed a 1000%+ APY opportunity by taking advantage of a depeg in a number of Solana LSTs
These opportunities typically only present themselves during periods of market stress - underlying the importance of having a reserve of capital to take advantage of them