Tom Lee: 10/11 Flash Crash Explained as Abnormal USDE Plummet on a Certain Exchange Triggering Automatic Liquidations

On November 23rd, during an interview with CNBC, Tom Lee explained to the host the reason for the sharp drop in the cryptocurrency market on October 11th. "The cryptocurrency market has a large number of automated processes. ADL (Automatic Deleveraging) is a typical example. When a user's account assets or collateral prices drop, the system will initiate a forced liquidation similar to a margin call in traditional markets. While USDC maintained a price of 1 USD on other trading platforms, the internal quote on a certain exchange platform suddenly dropped to 0.65 USD. Due to the insufficient liquidity on that trading platform, the ADL mechanism was triggered, resulting in a large number of accounts being automatically liquidated. This chain reaction eventually spread throughout the entire market. As a result, thousands of cryptocurrency accounts were wiped out within minutes, even though they were profitable just a moment before." Essentially, this was a systemic risk caused by a code flaw: the trading platform was supposed to collect cross-platform price data to set stablecoin valuations but erroneously relied on an internal pricing system. This incident caused a significant reduction in capital for market makers and trading institutions. More critically, as the shrinking trading volume led to a decline in coin prices, these institutions needed to prepare more capital to sustain operations, forcing them to further deleverage their balance sheets - this was like a vicious cycle that continuously eroded the market foundation. The essence of the 2009 crisis was the uncontrolled real estate and subprime mortgage collateral. While Wall Street established mechanisms like CDOs to cope with it, the subsequent overregulation had negative impacts. Today, the cryptocurrency sector's ADL code flaws and pricing mechanism defects will also eventually be corrected. Fortunately, we will not repeat the mistakes of overregulation, but we must confront the impact of the liquidation mechanism. The eight-week-long Great Liquidation of 2022 is still fresh in our memory; this is the essence of DeFi: there will inevitably be flaws in the code, and leverage is the true source of risk. Investors should not abuse leverage in the cryptocurrency market."