Wintermute founder discusses "1011 Night of Terror" and market predictions.

Author: The Block, Translated by: Azuma

Editor's Note: On October 11, the cryptocurrency market experienced an epic crash. Although a week has passed since then, discussions about the reasons for the crash that day and its subsequent impacts are still ongoing.

On October 15, Evgeny Gaevoy, the founder and CEO of Wintermute, the industry's leading market maker (which was rumored to have collapsed on the day of the crash but has since been debunked), participated in The Block's podcast, giving his views on the “1011” incident.

The following are the main points of the podcast, with some content omitted for readability.

A Completely Chaotic Hour

Host: Let's get straight to the point. What happened on October 11th was very shocking for the entire market. Can you take us back and review what exactly 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 ins and outs of this crash, but one thing is clear — the trigger seems to be a series of news related to Trump, which gradually led to the largest liquidation event in the history of cryptocurrency.

That day was extremely unusual for everyone — not just for ordinary traders, but also for market makers. Within an hour, the market was completely out of order.

Later we will discuss the ADL mechanism and talk about how this crash is different from past market fluctuations. One thing is certain, this day has been very difficult and unprecedented for many.

It is still unclear who has suffered the biggest loss, perhaps it is the hedge institutions

Host: Public statistics show that approximately 19 billion dollars were liquidated that day, but since Binance has not fully disclosed the data (the system can only display one liquidation event per second), the actual number could be much larger, at least between 25 to 30 billion dollars. This means that the recent liquidation scale is more than five times larger than the previous second-largest liquidation event. Why is this happening? Is it due to excessively high leverage in the system? Or is it because of a malfunction in some key infrastructure? This prevented market makers like you from intervening in time to stop a chain reaction of collapses.

Evgeny Gaevoy: I believe this is the result of multiple factors coming together. On one hand, there is indeed more leverage in the system; on the other hand, the market has seen more categories of tokens, more perpetual contract products, and more large platforms trading these perpetual contracts. Looking back three or four years ago, we simply didn't have so many perpetual contract products with huge open interest and significant risks of collapse. In terms of market maturity, while it is indeed more refined and sophisticated than in the past, this development has also given rise to many issues.

Currently, we are still unclear about who exactly “liquidated” and who suffered the most losses, but I suspect that many institutions with significant losses are actually implementing long-short strategies, such as shorting Bitcoin while going long on certain altcoins. They thought this would hedge their risks, but instead they were “slapped in the face” by the ADL mechanism.

Moreover, when the market experiences extreme declines, various trading paths often get stuck. This is especially troublesome for market makers. For example, if you buy on Binance and sell on Coinbase, you may find that your stablecoins on Coinbase are increasing while you have acquired a batch of tokens on Binance — but at this point, withdrawals on both sides are blocked, making it impossible to transfer assets.

So, when people say “market makers are exiting the market and unwilling to provide liquidity,” it is often not a matter of “unwillingness,” but rather “impossibility” — they cannot quote here or place orders there because the assets simply cannot move. This situation occurs not only in centralized exchanges (CEX) but also in DeFi, which has not been spared. This is precisely the most tricky issue — you simply cannot perform cross-platform rebalancing.

The Lack of Transparency in ADL Causes Confusion

Host: You mentioned ADL (Automatic Deductions), and I guess about 90% of cryptocurrency users are hearing this term for the first time. Can you explain the principle of ADL and why it caused so much confusion during this incident? Also, when market makers are unable to be active on multiple exchanges simultaneously, what impact does that have on market efficiency?

Evgeny Gaevoy: ADL (Auto-Deleveraging) is essentially the exchange's “last line of defense” mechanism. Generally, when your perpetual contract position's margin is insufficient, the exchange will directly liquidate your position in the market; if the liquidation is unsuccessful, the insurance fund should theoretically bear the loss.

The ADL mechanism is usually never triggered, and many exchanges have not used it for years. It was originally designed as a “last resort” measure. In extreme cases, such as a large-scale drop like 1011 and a series of liquidations, if the order book continues to force liquidations, the price could drop directly to “zero”, resulting in the entire exchange becoming insolvent, while short sellers would make huge profits. Therefore, the exchange will attempt to use ADL to forcibly offset some short positions, which is equivalent to artificially matching shorts with liquidated longs, creating a form of “virtual offset” to prevent a complete price collapse.

In theory, this is an “elegant” solution, but the premise is that the execution must be orderly, which this time is clearly very chaotic. The biggest question is — — how is the execution price of ADL determined? This will become the focus of many trading institutions inquiring with exchanges in the coming days or even weeks.

This time, many institutions were passively liquidated at extremely outrageous prices. For example, in our case, some ADL prices were completely illogical; the market price was 1 dollar, while our short position was forcibly liquidated by the system at a price of 5 dollars. This is simply impossible to hedge and only results in an instant loss.

Is there an “ADL exemption” privilege?

Host: As far as I know, Ethena has agreements with certain exchanges that have anti-ADL clauses. Can large market makers like you obtain similar protections? Why is Ethena granted such special treatment?

Evgeny Gaevoy: First of all, I'm not entirely sure if Ethena enjoys this privilege. It's also worth noting that Ethena mainly trades BTC and ETH, which are mainstream coins that rarely trigger ADL. ADL is more applicable to various altcoins and meme coins. If there is such a protective mechanism, we would certainly welcome it.

But should exchanges widely offer such terms? Not necessarily. I believe that if implemented, it must be open and transparent, and investors need to know which open contracts enjoy the privilege of being exempt from ADL, otherwise it will create a detrimental market structure. We certainly welcome such protections, but the premise is that a highly transparent disclosure mechanism must be established; otherwise, the so-called privileges are just conspiracy theories.

Another key point that is rarely discussed is that some exchanges (like Coinbase and Kraken) have implemented liquidity protection programs for market makers. 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 ADL. It lets the most risk-tolerant market makers absorb these risks. However, on mainstream platforms that have recently faced large-scale liquidations, such programs are 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 saying circulating on platform X that the reason this liquidation wave is more severe than in the past is partly because Hyperliquid is now one of the top three exchanges in terms of open interest across the network, and much of its data is very transparent — including information such as liquidation prices, which are completely invisible on centralized exchanges like Binance, OKX, and Bybit. Some people believe that this may allow certain individuals to more easily estimate that “if we just push the price down to here, we can trigger these liquidations,” thereby artificially triggering a chain reaction of liquidations. In your view, has this transparency really contributed to this liquidation wave, causing some assets to plummet by 90% or more?

Evgeny Gaevoy: I believe that if Hyperliquid were the only exchange in the world, then this conspiracy theory of “targeted sniping” might make more sense — that is to say, there are indeed people specifically targeting Hyperliquid to trigger this chain liquidation. But in reality, a large amount of open interest still exists on exchanges where liquidation points are not visible, so I think the likelihood of this statement being true is relatively small.

I think the more interesting point is whether Hyperliquid is the future direction of the industry? In other words, could its mechanism of “all settlement points being publicly visible” become the industry standard?

I personally believe that Hyperliquid should ultimately find a balance between transparency and privacy — the current level of information disclosure is indeed a bit “excessive”. One solution is to enhance privacy; another potential approach is to introduce circuit breakers.

This feature is not available on any centralized exchange. Although I can roughly understand the reason, it should indeed exist. Especially for some stable assets or mainstream tokens, when you see it decouple to $0.6, trading should be paused or switched to auction mode, rather than allowing it to fall indefinitely.

In traditional financial markets, almost every exchange — whether for stocks, futures, or commodities — is equipped with a circuit breaker mechanism. It prevents the underlying assets from plummeting too much in a short period; the system will automatically suspend trading or enter a bidding mode, or a combination of both. However, in the cryptocurrency market, no exchange has such a mechanism, which has always puzzled me. If there were a circuit breaker mechanism, it could actually protect many retail investors from being subjected to cascading liquidations.

Of course, some people might wonder — if only one exchange (like Coinbase) adopts a circuit breaker while Binance does not, would it be useful? After all, much of the price discovery actually happens on Binance. As a result, even if Coinbase stops trading, the price of cryptocurrencies will continue to fluctuate on other platforms (including on-chain markets). Therefore, if only a single exchange adopts the circuit breaker mechanism, its effectiveness may be limited. To be truly effective, most exchanges need to adopt it in coordination.

This is actually a trade-off issue. You have to choose between two types of risks: should you allow the price to plummet and liquidate all long positions? Or should you choose to pause trading to ensure that the exchange maintains solvency?

For example, if Bitcoin plummets 20% on an exchange, as the exchange, you can completely determine that this is an abnormal fluctuation, rather than a fundamental collapse, and it would be reasonable to enable a circuit breaker at this time; however, if a altcoin drops 50%, it may fall within normal fluctuations, allowing the market to clear itself. Therefore, the circuit breaker mechanism should at least be introduced for specific trading pairs or asset types.

Will the exchange proactively “cut the network cable”?

Host: There have been rumors in the past that some exchanges would “pretend to go offline” when, in fact, they were triggering a circuit breaker. For example, during the market crash in 2020 due to the pandemic, BitMEX went offline amid the collapse. At that time, the market generally speculated that they did this to avoid a 99% price drop. Do you think this was a genuine circuit breaker action at that time? Or was it simply because their technical architecture couldn't handle it? Furthermore, why do exchanges like Binance still experience outages even now? Knowing that there will be a huge wave of trading demand, why haven't they made improvements?

Evgeny Gaevoy: I tend to think that the simplest explanation is often the correct one. In my view, the reason is simple — the infrastructure of most centralized exchanges is poor and far from the technical standards of traditional financial markets such as the Chicago Exchange, the New York Stock Exchange, and NASDAQ. While there are historical reasons for this, in the short term, no one will really migrate to a NASDAQ-level technical architecture.

It is precisely because the technology level is so backward 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 that exchanges would intentionally “take down and liquidate retail investors” to make money from the insurance fund, as the risks of doing so are too great.

From a business perspective, for exchanges and market makers, encouraging retail investors to trade continuously, engage in repeated speculation, and retain them long-term is far more profitable than “clearing out retail investors every year.” Because once everyone is wiped out, many will leave the market completely and never return.

Will there be institutional collapses?

Host: I still remember the Luna crash; although it wasn't as severe as this time, the impact was significant. It took us about two to three weeks to realize that Three Arrows Capital (3AC) had actually gone bankrupt. This time, the scale of the liquidation is 5 to 10 times larger than back then. While there are speculations that some market makers, trading firms, and lending institutions have been severely impacted, so far, I haven't heard of any firm completely going bankrupt or shutting down; at most, I've heard of a few trading companies “losing a bit of money.” Which institution do you think will be discovered to have imploded next? After all, this time the open interest and liquidation scale have both reached record highs.

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

Now, if a market maker really goes bankrupt, you should ask who it will affect? How long is the chain of impact? What everyone is most worried about is actually the “contagion effect.” Do you remember how Alameda operated at that time? They started to aggressively sell off assets on DeFi during the rebound, and everyone could see it very clearly.

If a market maker really goes bankrupt, for example Wintermute — this is just a hypothesis — what would the outcome be? We have some loans, which could all become worthless; we also have some market-making contracts signed with protocols, which may still be in effect; theoretically, after bankruptcy, we could sell off some assets to recover funds, or just run away (just kidding); additionally, we have settlement counterparties, who might have deposits with us, such as BTC or ETH.

In other words, the real scope of impact mainly includes the protocols served by market makers and the counterparties that have margin transactions with the market makers. The worst-case scenario is that they sell off their BTC or ETH to cash out, but the scope of this situation's impact is actually quite limited.

If some smaller market makers really might be “wiped out”, they may sell some specific tokens in hand, such as the project tokens they are responsible for making a market for, but to be honest, this usually does not help, because the liquidity of these tokens is limited, and the sell-off is too obvious, the market will immediately notice.

Overall, the scope of this infection is very limited compared to 2022. Back then, Three Arrows lent to Genesis, and Genesis borrowed money from Gemini, causing the entire industry to be interconnected, leading to a series of bankruptcies. Now, the system is much cleaner, and risk isolation is better.

Experiences and Lessons After Extreme Market Conditions

Host: After this incident, do you have any reflections or lessons learned? For example, are there any areas for improvement in your response strategies, risk control, or hedging mechanisms?

Evgeny Gaevoy: The challenge with such events 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 a lot of resources specifically to optimize for these “black swan” events.

Many market makers have simply exited the market this time, as such extreme market conditions do not suit their systems at all. We are still here, but we are only participating with very limited positions — the inventory issues mentioned earlier have restricted our operational space. Although this is not the first time we have encountered such a situation, it is indeed more difficult than before. If we add ADL (Auto Deleveraging) to the mix, it becomes even more tricky.

We have indeed learned something from this experience, which is to handle ADL events better. Although our system reacts quickly, allowing us to immediately detect changes in open positions and automatically adjust our positions, when you receive 500 ADL emails from Binance, manual management is still required. Of course, you could design a perfect system that automatically trades perfectly in such extreme situations, but it doesn't matter for the other 364 days of the year, and it's not worth the investment.

We also held a meeting this morning to discuss the next steps for improvement, such as in the quoting system, where we have a large number of “circuit breakers” internally. They have been triggered too frequently this time, almost disconnecting every minute. We may make it less aggressive in triggering during extreme market conditions in the future.

Overall, we are satisfied with our performance in responding. Although there were some losses on ADL, we also made a good amount due to high volatility, which balanced each other out and resulted in a decent overall performance. Of course, it could be better, but overall it is not an issue.

The annoying thing is that there is a lot of FUD right now. We have spent a lot of time communicating and explaining our inventory situation with the opposing party and cooperation agreements. Although this is troublesome, it is also understandable—after all, everyone is quite nervous.

What is the expectation for the market?

Host: So, looking ahead to the next few months, what do you think? This time, the scale of the liquidation set a historical record, far exceeding events like FTX and Luna, but this time it seems like no one feels it's the “end of the world,” just that many people have suffered significant losses.

Evgeny Gaevoy: I believe the main impact in the coming months will be that sectors outside of major coins will be affected, because this liquidation is mainly concentrated on altcoins. The number of altcoins and meme coins in the market is much higher than it was four years ago, and investors have less money and are more cautious, so I think the market heat for altcoins will noticeably decline. Of course, new retail investors enter the market every day, so the market will eventually recover, but in the short term, there won't be a significant “altcoin season.”

It is worth noting that Bitcoin, Ethereum, and even Solana have performed quite steadily this time. For example, Cosmos (ATOM) once dropped by 99.9%, while BTC and ETH only had a maximum drop of 15%, which is very mild.

Liquidity will further concentrate towards BTC, ETH, and SOL

Host: Does this mean that the maturity of the market and the assets themselves has improved?

Evgeny Gaevoy: I think so. Bitcoin has now become an institutional-grade asset. There are ETFs, support from MicroStrategy, and infrastructure like CME futures. Ethereum is basically close to this status, and Solana is also approaching it.

So I'm not worried about any major flash crash of BTC, unless something very strange happens, like a quantum computing attack of that level.

This is actually a positive signal, indicating that some mainstream assets are now “safe for long-term holding.” The more ETFs there are and the wider the access channels, the more limited their volatility will be, which also means you can hold BTC, ETH, or even SOL with more confidence and higher leverage. In the future, we will also see more and more leverage and liquidity concentrating on these assets.

Wintremute's Emergency Response Mechanism

Host: Your team is mainly in London, right? Although you also have overseas offices, I guess most of your trading team and core members are in London. The timing of this market event has been quite late for London, almost in the evening or even early morning. So when your traders are all asleep, how do you handle such emergencies? Do you have teams in other countries that can take over immediately? How automated is trading at this point? If such emergencies occur at the worst times in your time zone, how do you deal with them?

Evgeny Gaevoy: Yes, in this regard, we actually have to thank the “Trump rallies”; we have long been accustomed to this situation — extreme market fluctuations often occur on weekends or late Friday night London time.

So although this is still quite shocking, we were actually prepared for it. Of course, to be honest, this is terrible for the work-life balance of traders, but this is the case in any trading company.

Generally, we have this division of labor — the London office and the Singapore office take turns. Around 10 to 11 PM London time, the Singapore team takes over the trades, while the people in London start to slowly “relax.” However, this market movement erupted just before the handover, so we didn’t have a chance to relax, and everyone got caught up in it. That night was indeed particularly busy.

Host: I spoke with another market maker, and they said they have a device that will wake up traders at night if there is a drastic market fluctuation. I guess that might be because their scale is not as large as yours and they don’t have a global team to take over. Do you do the same? For example, if a certain asset suddenly drops by 15%, will someone be alerted by the system? Or are you now distributed widely enough to sleep soundly?

Evgeny Gaevoy: Basically, I only get woken up when things are really bad and we've lost a lot of money. So actually, I slept pretty well that night.

The next morning at eight o'clock, I woke up to see a bunch of people on Twitter asking things like “Are you guys dead?” That's when I started to deal with the FUD. The team hardly slept that night, but I slept quite well.

This is also the “luxury” of running a large, proprietary trading company — you have enough traders to take over, allowing you to sleep soundly and deal with issues the next day.

So if I'm woken up at three in the morning, it means something really big has happened. So far, this kind of thing has not happened.

Views on DeFi Performance

Host: From this incident, have you noticed any particular phenomena on the blockchain (DeFi) side? Although your activities in DeFi are not that extensive, you have done some operations. Was there any part that had issues or surprised you this time? For example, I noticed that Aave performed well during this drop, with very few liquidations, and the system is quite robust. Compared to the past, DeFi has actually been quite resilient this time.

Evgeny Gaevoy: We are seeing a terrible situation in DeFi over here. But indeed, we are encountering the same issues in DeFi as in CeFi: inventory issues.

Our positions are on Binance, but we can't transfer them out, so we've sold all that we can sell in DeFi, and bought everything available on Binance, but we can't transfer assets over, we can only wait for the inventory to flow back. Of course, we could also borrow assets to provide liquidity, but that carries a lot of risks and could lead to liquidation. Another approach is to quote different prices for USDC in different markets (like DeFi and Binance) to do cross-market arbitrage, but that is also very difficult to execute.

This kind of extreme event actually happens only once a year, and you can't specifically set up a system for it. We've seen that most competitors simply halted DeFi trading during this event, possibly because their risk control circuit breakers were triggered.

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

About FUD

Host: The last question — Wintermute (WM) has almost become the “scapegoat” in the eyes of the crypto community. Whenever there is any market fluctuation, everyone blames you. For example, when someone noticed that you deposited hundreds of millions into Binance before the crash, rumors immediately spread that you were manipulating the market. In fact, I know that was just a delta neutral trade, but the rumors still run rampant. Do you care about this kind of public opinion? Although you don't rely on retail investors or Twitter sentiment, and you focus more on LPs (liquidity providers) and partnership agreements, how do you personally cope with it? Do you get angry? Or have you already become indifferent to it?

Evgeny Gaevoy: To be honest, I have completely let it go. I am just sad that some people can be so foolish. They piece together unrelated data fragments and draw absurd conclusions, all with such confidence.

For example, some people saw that we deposited 700 million dollars into Binance on that day and shouted, “Wintermute is going to dump the market,” but they didn't realize that we also withdrew almost the same amount on the same day. These people are essentially retail investors betting on altcoins — and we just happen to be the ones making money off them.

So this is a kind of “ecological relationship” — they are shouting nonsense on crypto Twitter, and we profit from their stupidity. It's a bit sad, but if they all became smart, our trading volume might really decline.

We have always been net long

Host: Will you consider expanding into businesses beyond market making in the future? For example, proprietary trading, investment, or others?

Evgeny Gaevoy: In fact, we have always been involved in some other businesses, but there is a misunderstanding from the outside that we are shorting every day. In reality, we have been almost entirely net long.

We have been bullish overall since 2022 and even earlier. We have a venture capital department that has invested in many projects, and as a result, we have obtained a lot of locked tokens. We also hold a large amount of core assets such as BTC, ETH, HYPE, and SOL. We cannot crash 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 net assets, so even if the market crashes tomorrow, we will only lose a maximum of 25% and will not go bankrupt. We also will not put more than 35% of our net assets on a single platform, so even if Binance collapses like FTX tomorrow, we will still survive.

This is why we were able to survive the FTX collapse and withstand hacker attacks. Unless the top five exchanges disappear at the same time, we can all survive.