Wintermute's founder discusses "1011 Fright Night" and market outlook

Author:The Block,Compiler:Azuma

Editor's Note:On October 11, the cryptocurrency market suffered an epic crash. Although it has been a week now, the discussion surrounding the causes of the crash and its subsequent impact continues.

On October 15, Evgeny Gaevoy, founder and CEO of Wintermute, the industry's leading market maker (rumors of a crash were circulating online on the day of the crash, but this was later debunked), participated in The Block's podcast and gave his views on the "1011" incident.

The following is the main content of the podcast. For the sake of reading fluency, some content has been deleted.

An hour of complete disorder

Host: Let's get straight to the point. What happened on October 11th was a huge shock to the entire market. Can you take us through what happened on 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 Trump-related news, which gradually triggered the largest liquidation event in the history of cryptocurrency. That day was incredibly unusual for everyone—not just ordinary traders, but also market makers. Within an hour, the market was completely disordered. We'll talk later about the ADL mechanism and how this crash differed from previous market fluctuations. What is certain is that this day was extremely difficult and unprecedented for many people. It's still unclear who suffered the most losses, perhaps hedge funds. Host: Public statistics show that approximately $19 billion was liquidated that day, but because Binance doesn't fully disclose data (the system only displays one liquidation event per second), the actual number is likely much higher, at least between $25 billion and $30 billion. This means that the latest liquidation was more than five times the size of the next largest liquidation event. Why is this so? Is it because of excessive leverage in the system? Or is it because some critical infrastructure failed, preventing market makers like you from stepping in quickly enough to prevent a cascading crash? Evgeny Gaevoy: I think it's a combination of factors. On the one hand, there's definitely more leverage in the system; on the other hand, there are more tokens, more perpetual swaps, and more major platforms trading these swaps. Just three or four years ago, we didn't have so many perpetual swaps with massive open interest and the potential for significant crashes. While the market is certainly more mature and sophisticated overall, this development has also created numerous challenges. It's still unclear who was "blown up" and who suffered the biggest losses, but I suspect many of the institutions that suffered the most were operating long-short strategies. For example, they might have shorted Bitcoin and longed certain altcoins, thinking this would hedge their risk, only to be thwarted by the ADL mechanism. Furthermore, during extreme market declines, various trading paths often become blocked. This is particularly problematic for market makers. For example, if you buy on Binance and sell on Coinbase, you'll find that your stablecoin holdings on Coinbase are increasing, while you've received a large portion of the token on Binance—but withdrawals on both sides are blocked, making it impossible to transfer assets. So, when people say "market makers are withdrawing from the market and unwilling to provide liquidity," it's often not "unwilling" but "unable"—they can't quote prices here or place orders there because the assets are simply immobile. This situation isn't just happening on centralized exchanges (CEXs), DeFi is no exception. This is the most problematic issue—you can't rebalance your positions across platforms. Lack of transparency in automatic liquidation (ADL) causes confusion. Host: You mentioned ADL (auto-deleveraging), and I'd guess 90% of cryptocurrency users are hearing about it for the first time. Can you explain how ADL works and why it caused so much confusion in this incident? And, when market makers can't be active on multiple exchanges simultaneously, what impact does this have on market efficiency? Evgeny Gaevoy: Auto-Deleveraging (ADL) is essentially an exchange's "last line of defense." Normally, when your perpetual swap position is undermargined, the exchange will liquidate your position directly in the market. If the liquidation fails, the insurance fund should bear the loss. The ADL mechanism is usually never triggered, and many exchanges haven't used it in years. It was designed as a last resort. In extreme cases, such as a massive drop and a series of margin calls like the one on October 11, forced liquidations through the order book could drive the price directly to zero, plunging the exchange into insolvency and profiting lavishly for short sellers. Therefore, exchanges will attempt to use ADL to forcibly offset some short positions. This is essentially having the system artificially match short positions with liquidated long positions, creating a "virtual offset" to prevent a complete price collapse. In theory, this is an elegant solution, but it presupposes orderly execution, which was clearly chaotic this time. The biggest question is how the ADL execution price is determined. This will be a key point of inquiry from numerous trading institutions to exchanges in the days and weeks ahead. Many institutions had their positions liquidated at ridiculously high prices. For example, some ADL prices were completely illogical: the market price was $1, but our short positions were forcibly liquidated by the system at $5. This made hedging impossible, resulting in an immediate loss. Does an "ADL-free" privilege exist? Host: As far as I know, Ethena has ADL-free clauses with certain exchanges. Can large market makers like you receive similar protections? Why does Ethena receive such special treatment? Evgeny Gaevoy: First of all, I'm not entirely sure whether Ethena enjoys this privilege. It's also important to note that Ethena primarily trades BTC and ETH, mainstream currencies that are less likely to trigger ADL. ADL applies more to altcoins and meme coins. If such a protection mechanism exists, we would certainly welcome it. But should exchanges offer such a clause widely? Not necessarily. I believe that if it is implemented, it must be transparent. Investors need to know which open interest contracts are exempt from ADL. Otherwise, it will create a toxic market structure. We certainly welcome such protections, but the prerequisite is that a highly transparent disclosure mechanism is established, otherwise the so-called privilege is just a conspiracy theory. Another key point that's rarely discussed is that some exchanges (such as Coinbase and Kraken) have implemented market maker liquidity protection programs. FTX, in the past, also had a similar program. These programs allow market makers to take over positions that are about to be liquidated, bypassing the insurance fund and the ADL. This allows the market makers with the highest risk tolerance to absorb these risks. However, such programs were absent from the major platforms that experienced large-scale liquidations this time. I believe that reinstating such programs would greatly improve market resilience. Does the market need a "circuit breaker mechanism"? Host: There's a rumor circulating on X that this wave of liquidations is more severe than previous ones, in part because Hyperliquid is now one of the top three exchanges by open interest, and because it offers very transparent data—including information like liquidation prices, which is completely invisible on centralized exchanges like Binance, OKX, and Bybit. Some have suggested that this may have made it easier for someone to calculate, "We just need to hit this price to trigger these liquidations," thereby artificially triggering a chain reaction of liquidations. Do you think this transparency may have contributed to this wave of liquidations, causing some assets to plummet by 90% or more? Evgeny Gaevoy: I think if Hyperliquid were the only exchange in the world, then the "targeted attack" conspiracy theory might be more plausible — that someone was specifically targeting Hyperliquid to trigger this chain reaction. However, given the significant amount of open interest still held on exchanges where liquidation points are not visible, I find this theory less likely. The more interesting question is: Is Hyperliquid the future direction of the industry? In other words, could its "public visibility of all liquidation points" mechanism 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 increase privacy; another potential solution is to introduce circuit breakers. This feature isn't available on any centralized exchange, and while I can generally understand why, it should be there. Especially for stablecoins or mainstream tokens, if you see them de-pegging to $0.60, trading should be suspended or switched to an auction mode, rather than allowed to plummet indefinitely. In traditional financial markets, nearly every exchange—whether it's stocks, futures, or commodities—has a circuit breaker mechanism. It prevents the underlying asset from plummeting too much in a short period of time by automatically suspending trading, entering a bidding mode, or a combination of both. But in the crypto market, no exchange has such a mechanism, which has always puzzled me. A circuit breaker mechanism could actually protect many retail investors from being liquidated in a chain reaction. Of course, one might ask—if only one exchange (like Coinbase) implements circuit breakers, and Binance doesn't, will that be effective? After all, a lot of price discovery actually happens on Binance. So, even if Coinbase halts trading, the price of the coin will continue to fluctuate on other platforms (including on-chain markets). So if only one exchange implements a circuit breaker, its effect may be limited. To be truly effective, the majority of exchanges would have to adopt it in concert. It's really a trade-off. You have to choose between two risks: allow the price to plummet and liquidate all long positions? Or suspend trading and ensure the exchange remains solvent? For example, if Bitcoin plummets 20% on a particular exchange, as an exchange, you can easily determine that this is an abnormal fluctuation rather than a fundamental collapse, and it's reasonable to activate a circuit breaker. However, if an altcoin drops 50%, that might be considered normal fluctuation, allowing the market to clear itself. Therefore, circuit breakers should at least be implemented for specific trading pairs or asset types. Will exchanges proactively "unplug" their network? Host: There have been rumors in the past that some exchanges would "fake downtime" to artificially trigger circuit breakers. For example, during the 2020 pandemic crash, BitMEX went offline during the crash, and the market widely speculated at the time that they did this to prevent a 99% price plunge. Do you think this was a genuine circuit breaker at the time? Or was it simply a case of the technical architecture failing? Furthermore, why do exchanges like Binance still experience downtime today? Knowing there would be a huge surge in trading demand, yet they still haven't improved? Evgeny Gaevoy: I tend to believe that the simplest explanation is often the correct one. In my opinion, the reason is simple—the infrastructure of most centralized exchanges is awful, far from the technological standards of traditional financial markets (such as the Chicago Board of Trade, the New York Stock Exchange, and Nasdaq). While there are historical reasons, no one will seriously migrate to a Nasdaq-level technical architecture in the short term. Precisely because of this technological backwardness, these platforms often crash under high load. I think this is a more reasonable explanation than any conspiracy theory. I don't believe exchanges would deliberately "crash" to liquidate retail investors to profit from their insurance funds; that would be too risky. From a business perspective, it's far more profitable for exchanges and market makers to keep retail investors trading continuously, repeatedly playing the game, and retaining them for the long term than to "clean out retail investors annually." Once everyone is wiped out, many will leave the market completely and never return. Will there be institutional meltdowns? Host: I remember the Luna crash. While not as severe as this one, the impact was still profound. Back then, it took us about two or three weeks to discover that Three Arrows Capital (3AC) was insolvent. This time, the scale of liquidation is five to ten times larger. While there's speculation that some market makers, trading firms, and lending institutions have been severely impacted, so far, we haven't heard of any complete liquidation or bankruptcy. At most, we've heard of a few trading firms "losing some money." Do you think any institutional meltdowns will be discovered next? After all, both open interest and liquidations hit records this time. Evgeny Gaevoy: I think the market is much less interconnected now than it was in 2022. Back then, when Three Arrows collapsed, the entire market was directly dragged down by its long positions. If a market maker goes bankrupt now, you have to ask who will be affected? How far along will the chain of influence be? The biggest concern is actually the "contagion effect." Remember what Alameda did? They started frantically selling off DeFi assets during the rebound. Everyone could see it; it was very obvious. If a market maker really goes bankrupt, like Wintermute — this is just a hypothesis — what will happen? We have some loans, which could all go to zero. We also have some market-making contracts with protocols, which may still exist. After bankruptcy, we could theoretically sell off some assets to recover funds, or simply run away (just kidding). Furthermore, we have settlement counterparties, who may have margin deposits with us, such as BTC or ETH. Therefore, the true impact primarily includes the protocols that the market maker serves and the counterparties with whom the market maker maintains margin. In the worst-case scenario, they might sell off their BTC or ETH to cash out, but the impact of this scenario is actually quite limited. If smaller market makers are truly wiped out, they might sell off certain tokens, such as those of the projects for which they are market-making. But honestly, this usually doesn't help, as these tokens have limited liquidity, and a sell-off would be too obvious, and the market would immediately notice. So overall, the scope of this contagion is much more limited than in 2022. Back then, Three Arrows lent money to Genesis, which in turn borrowed from Gemini. This implicated the entire industry, ultimately leading to a series of bankruptcies. The current system is much cleaner, with better risk isolation. Lessons Learned from Extreme Market Conditions: Host: Do you have any reflections or lessons learned from this incident? For example, are there areas for improvement in response strategies, risk control, or hedging mechanisms? Evgeny Gaevoy: The challenge with these types of events is that they may only occur once every year or two. You can learn a lot from them, but devoting significant resources to optimizing for these "black swan" events isn't necessarily cost-effective. Many market makers actually exited the market altogether during this period, as these extreme conditions simply didn't suit their systems. We're still participating, but with a very limited position size—the aforementioned inventory issues limited our maneuverability. While this wasn't the first time we'd encountered this situation, it was definitely more challenging than usual. Adding ADL (auto-deleveraging) to the mix, it became even more challenging. We did learn one thing from this experience: we need to better handle ADL events. While our systems are very responsive, detecting changes in open interest immediately and automatically adjusting positions, when you get 500 ADL emails from Binance, you still have to manually manage them. You could certainly design a perfect system that automatically trades perfectly in these extreme conditions, but it wouldn't be worth the investment the other 364 days of the year. We held a meeting this morning to discuss further improvements. For example, we have a large number of internal circuit breakers in our quote system, and they were triggered too frequently this time, with disconnections occurring almost every minute. We may try to make them less aggressive in future extreme market conditions. Overall, we're satisfied with our performance. Although we suffered some losses on ADL, we also made significant profits due to the high volatility, which offset the overall performance. Of course, it could be better, but overall, it's OK. What's more frustrating is that there's a lot of FUD going on right now, and we're spending a lot of time communicating with counterparties, explaining our cooperation agreements, and explaining our inventory status. While this is troublesome, it's understandable—after all, everyone is nervous. What are your expectations for the future market? Host: So, looking ahead to the next few months, what are your thoughts? This time, the scale of liquidations is record-breaking, far exceeding events like FTX and Luna, but no one seems to be feeling the end of the world this time; many people have simply suffered significant losses. Evgeny Gaevoy: I think the primary impact over the next few months will be that sectors outside of the majors will be impacted, as this liquidation was primarily concentrated in altcoins. There are far more altcoins and meme coins in the market now than there were four years ago, and investors have less money and are more cautious, so I think the altcoin market will see a significant decline in interest. Of course, with new retail investors entering the market every day, the market will eventually recover, but in the short term, we won't see a major "altcoin season." On the contrary, it's worth noting that Bitcoin, Ethereum, and even Solana have all performed very steadily this time. For example, Cosmos (ATOM) plummeted 99.9% at one point, while BTC and ETH saw only a maximum drop of 15%, a very mild decline. Liquidity will further flow into BTC, ETH, and SOL. Host: Does this indicate a growing maturity of the market and the assets themselves? Evgeny Gaevoy: I think so. Bitcoin is now an institutional-grade asset. It has ETFs, MicroStrategy's backing, and infrastructure like CME futures. Ethereum is roughly approaching this status, and Solana is also getting closer. Therefore, I'm not worried about a major flash crash in BTC, unless we encounter a very unusual black swan event, such as a quantum computing attack. This is actually a positive sign, indicating that some mainstream assets are now "safe enough to hold for the long term." The more ETFs there are and the wider access they provide, the more limited their volatility will be. This also means you can hold BTC, ETH, and even SOL with greater confidence and leverage. We will also see increasing leverage and liquidity concentrated in these assets in the future. Wintremute's Emergency Response Mechanism Host: Your staff is primarily based in London, right? While you also have overseas offices, I'm assuming most of your trading team and core members are based in London. This market fluctuation occurred quite late in the day for London, almost in the evening or even the early morning. How do you handle such emergencies when your traders are asleep? Do you have teams in other countries that can take over immediately? How automated is your trading today? How do you handle emergencies that occur at the worst possible time in your time zone? Evgeny Gaevoy: Yeah, we can actually thank the "Trump rallies" for that. We're used to it—extreme market movements often occur on weekends or late Friday night London time. So, while it was a bit of a shock, we were prepared. Of course, it's a terrible balance for traders, but that's true at any trading firm. Usually, we split the work between the London and Singapore offices. Around 10-11 PM London time, the Singapore team takes over, and the London team starts to relax. This time, the market rallies happened right before that, so we didn't have time to relax before we were all caught up in the action. It was a very busy night. Host: I spoke with another market maker, and they said they have systems in place to wake traders up during the night if there's significant market volatility. I imagine that's because they're not as large as you and don't have a global team to relay information. Do you do the same? For example, if an asset suddenly plummets 15%, will anyone be woken up by the system? Or are you now spread out enough that you can sleep soundly? Evgeny Gaevoy: Basically, I only get woken up when things get really bad and we're losing a lot of money. So I actually slept pretty well that night. I woke up at 8 a.m. the next morning to a bunch of people on Twitter asking, "Are you dead?" and other things like that, so I started dealing with the FUD. The team barely slept that night, but I did sleep well. That's the luxury of running a large, proprietary trading firm—you have enough traders to cover the day, so you can sleep soundly and deal with problems the next day. So if I get woken up at 3 a.m., it means something's seriously wrong. So far, that hasn't happened. Thoughts on DeFi Performance: Host: Did you notice anything special about on-chain DeFi during this incident? While your DeFi activity isn't huge, you're still doing some operations. Were there any issues or surprises this time? For example, I noticed that Aave performed very well during this crash. There weren't many liquidations, and the system is quite robust. Compared to the past, DeFi has actually been quite resilient this time. Evgeny Gaevoy: We've seen terrible things happen in DeFi. We're indeed facing the same problem in DeFi as CeFi: inventory issues. Our positions are on Binance, but we can't transfer them out. So, we've sold everything we could on DeFi and bought everything we could on Binance, but we can't transfer our assets there, leaving us waiting for inventory to return. Of course, we could borrow assets to make markets, but that's very risky and we could be liquidated. 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's also difficult to execute. This extreme event only happens once a year, so you can't build a system specifically for it. We saw most competitors simply halt DeFi trading during this incident, likely because their risk management circuit breakers triggered. I'm quite satisfied with our performance. While we could have made more money, we simply ran out of inventory. Regarding FUD: Moderator: Last question — Wintermute (WM) has become a scapegoat in the crypto community. Every little market snafu is blamed on you. For example, when someone discovered you deposited hundreds of millions of dollars on Binance during the market crash, rumors immediately spread that you were dumping the market. I know it was just a delta neutral trade, but the rumors still spread. Do you still care about this kind of public opinion? While you don't rely on retail investors or Twitter, you focus more on LPs (liquidity providers) and partnership agreements. How do you personally deal with this? Are you angry? Or have you become detached? Evgeny Gaevoy: Honestly, I've completely let it go. I'm just sad that some people can be so foolish. They piece together unrelated pieces of data, draw ridiculous conclusions, and act so confidently. For example, some people saw we deposited $700 million into Binance that day and started shouting, "Wintermute is going to crash the market!" They didn't even notice we withdrew a similar amount that same day. These people are just retail investors betting on altcoins—and we're the ones profiting from them. So it's kind of an "ecosystem relationship"—they're spouting nonsense on crypto Twitter, and we're profiting from their stupidity. It's a bit sad, but if they were smarter, our trading volume might actually go down. We've always been net long. Host: Will you consider expanding beyond market making in the future? For example, proprietary trading, investing, or something else? Evgeny Gaevoy: We've actually always been involved in other businesses, but there's a misconception that we're always shorting. In fact, we've almost always been net long. We've been bullish overall since 2022, or even earlier. We have a venture capital arm that has invested in many projects, resulting in a significant amount of locked tokens. We also hold a significant amount of core assets like BTC, ETH, HYPE, and SOL. We can't possibly crash the market, as 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. Even if the market crashes tomorrow, we will lose at most 25% and will not go bankrupt. We also do not put more than 35% of our net assets on a single platform. So even if Binance collapses tomorrow like FTX, we will still survive.

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