FTX 2.0 Crypto’s Biggest Liquidation Event Yet? The Signs Are Already Here
Mass liquidations aren’t accidents. They’re designed events, wiping out traders in seconds while someone else cashes in.
Whales know your liquidation points. They know when you’ll panic. And they use it against you. A $300M position doesn’t just vanish — it gets harvested.
Who really pays when the market crashes? The trader? The exchange? Or the entire system?
CEXs and DEXs handle these wipeouts differently. Some let whales game the system. Others make winning traders cover the losses. A few just watch it burn.
This isn’t a glitch. It’s the system itself. And by the end of this, you’ll see why.
The System that was Built to Wipe You Out
Liquidation cascades are the silent executioner of crypto markets. They don’t discriminate. Retail traders, whales, even exchanges themselves — no one is safe once the trap is set.
Here’s how it happens:
- Overleveraging: A trader borrows excessively, betting the market will move in their favor.
- Market Reversal: The market shifts against their position, pushing prices toward their liquidation point.
- Forced Liquidation: The exchange automatically sells off the trader’s assets to cover the borrowed amount.
- Cascade Effect: This sell-off drives prices down further, triggering more liquidations in a self-perpetuating cycle.
And just like that, a chain reaction begins. A self-perpetuating cycle where liquidations fuel more liquidations, swallowing up positions, accounts, and entire portfolios in seconds.
Case in Point: The 2022 Crypto Market Collapse
In 2022, the crypto market witnessed a series of catastrophic liquidation cascades:
- Three Arrows Capital (3AC): This prominent crypto hedge fund failed to meet margin calls and defaulted on loans exceeding $665 million. Their overleveraged positions led to forced liquidations, contributing to a broader market downturn.
- TerraUSD (UST) and Luna Collapse: The algorithmic stablecoin UST lost its peg to the US dollar, causing its sister token, Luna, to plummet from $119.51 to virtually zero. This collapse wiped out nearly $45 billion in market capitalization within a week.
- FTX Bankruptcy: Once the third-largest cryptocurrency exchange, FTX faced a liquidity crisis in November 2022, leading to its bankruptcy. The collapse was triggered by a spike in customer withdrawals that exposed an $8 billion shortfall in FTX’s accounts.
For retail traders, it’s a nightmare. You wake up to see your position gone, your balance at zero, and no way to fight back. The market didn’t just dip — it hunted your stop, chewed through your collateral, and spit you out.
For whales, it’s a different game. They don’t get liquidated — they set the liquidations. They see the leverage buildup. They push price just enough to trigger a cascade, scooping up liquidated assets at fire-sale prices. It’s not just trading. It’s execution.
For exchanges, it’s a delicate balance. Too many liquidations, and the system cracks. Too few, and the exchange takes the loss. Some dump the risk on insurance funds. Others force profitable traders to absorb the hit. Some just raise margin requirements and let traders drown.
The real question isn’t whether liquidations happen. It’s who takes the loss — and who walks away richer because of it.
How CEXs Choose Who Gets Liquidated
Centralized exchanges live and die by leverage. They let traders borrow big, collect fees, and hope the system holds when things go south. But when liquidation cascades start rolling, they must choose: who takes the loss — the trader, the exchange, or someone else?
1. Insurance Funds: The Safety Net
Exchanges love to tout their insurance funds as a safety net. The reality? They work — until they don’t.
CEXs stockpile these funds from liquidation fees, using them to cover losses when traders go too deep in the red. On paper, this prevents the exchange from taking a hit. In practice, when the cascade starts rolling, insurance funds evaporate faster than anyone admits.
FTX had an insurance fund. So did Celsius. They still collapsed. Binance’s liquidation fund? $1 billion strong — until it isn’t. When an exchange bleeds out faster than its fund can cover, the next fail-safe kicks in. And that’s when things get ugly.
2. Auto-Deleveraging (ADL): The Invisible Margin Call
When the insurance fund runs dry, CEXs need another way to stop the bleeding. Enter Auto-Deleveraging (ADL) — the most controversial tool in crypto trading.
ADL forces winning traders to absorb losses, closing their positions to balance the books. You made the right bet. You were in profit. The exchange still takes your position away.
This isn’t some fringe policy — it happens. It happened on BitMEX. It happened on OKX. Exchanges keep ADL in the shadows, but when forced to choose between their solvency and your profit, they will always choose themselves.
3. Dynamic Risk Limits: The Leverage Kill Switch
Some CEXs claim they’ve outsmarted liquidation spirals. They haven’t, but they’ve found ways to slow them down.
One method? Dynamic risk limits. The bigger your position, the lower your leverage. A trader trying to open a $300M trade at 50x leverage? Not happening. Their max leverage might drop to 1.5x automatically, preventing a single liquidation from detonating the order book.
Bybit and Binance use this system to throttle risk, but here’s the problem: traders adapt.
Multiple low-KYC accounts, spread across different identities, bypass these restrictions. One whale can act like a hundred smaller traders, circumventing risk limits entirely. They still get the leverage. They still trigger liquidations. The system still breaks.
No Rules, No Mercy its an Unregulated Battlefield
Decentralized exchanges are built on code, liquidity, and risk. No central authority means no one can shut them down — but it also means no one is there to catch the pieces when things break. No bailouts. No refunds. Just smart contracts doing what they were coded to do.
DEXs try to manage liquidation risk differently than CEXs, but without a safety net, every system has a breaking point.
1. Liquidity Vaults: The Last Line of Defense
CEXs rely on insurance funds. DEXs have liquidity vaults. Instead of absorbing liquidation losses centrally, they spread them across liquidity providers.
Hyperliquid’s HLP Vault is a prime example:
- When a whale gets liquidated, the vault soaks up the trade, preventing a market dump.
- Profits and losses get distributed to those staking liquidity.
- This decentralizes risk, making the system more resilient — until the vault runs dry.
And that’s the catch.
During a $200M ETH liquidation, HLP ate a $4M loss and kept the market intact. It worked. This time. But what happens when a $1B position collapses? When multiple vaults get drained back-to-back?
The moment liquidity providers pull out, the vault becomes an empty shell. The system doesn’t just wobble — it implodes.
2. Automated Market Makers (AMMs): The Slow Bleed Approach
Some DEXs don’t believe in instant liquidations. Instead, they liquidate slowly, bleeding collateral into the market instead of dumping it all at once.
Curve’s LLAMMA model (Lending-Liquidating AMM Algorithm) tries to do this:
- Instead of selling everything when a loan turns bad, it sells collateral bit by bit as prices fall.
- This softens the blow, keeping the market stable.
- It sounds smart — until volatility outpaces the system.
If prices crash too fast, LLAMMA doesn’t have time to react. It can only adjust so quickly before the gap between liquidation and execution becomes too wide. Then? The system lags, delays, and finally buckles.
It’s better than a sudden liquidation wipeout, but it’s not immune to the same fate.
3. Oracle-Based Liquidations: The Weakest Link
DEXs rely on on-chain oracles to determine liquidation prices. But oracles don’t see the market in real-time — they report past prices with a lag.
For retail traders, this means liquidations might not happen at the right price. For exploiters, this is a goldmine.
- Lagged oracles let manipulators delay liquidations, giving them time to withdraw funds, move assets, or artificially push prices back into safety.
- Flash loan attacks can temporarily distort price feeds, making undercollateralized positions look safe.
- Thin liquidity can cause oracle discrepancies, where a token’s price on a DEX differs wildly from external markets.
CEXs solve this by using internal mark prices, ensuring liquidations are based on live trading data, not delayed feeds. DEXs, however, must trust third-party oracles — which means they must trust something they can’t control.
And in crypto, trust is a liability.
Can High Leverage Ever Be Safe?
Leverage is a loaded gun. Used right, it amplifies gains. Used wrong, it triggers avalanches.
CEXs and DEXs know this, yet they keep pushing the limits. More leverage means more volume, more fees, more traders willing to roll the dice. But when the market turns, the system bends — then breaks.
Take Hyperliquid’s recent meltdown. A whale didn’t just get liquidated — they set the liquidation.
- They withdrew floating P&L, nudging the liquidation price just enough to trap the system.
- Boom. The liquidation hits. Hyperliquid eats the loss, not the trader.
- Their fix? Lower leverage. Higher collateral requirements.
This isn’t a solution. It’s a reaction.
Traders will always find a way around limits. Multiple accounts. Coordinated plays. Thin liquidity zones where one push sends the whole thing crumbling. Lowering leverage slows the cycle — it doesn’t stop it.
The real fix? CEX-level surveillance in DEX environments.
✔ Track manipulation in real time. Stop the game before it starts.
✔ Limit open interest dynamically. If exposure gets too high, throttle it.
✔ Restrict large positions intelligently. Don’t just cap size — cap risk impact.
Right now, most DEXs don’t have the tools to do this at scale. The dream of trustless, free-market trading collides with the reality of leverage abuse.
So, can high leverage ever be safe?
Not until someone builds a system that sees the game before it’s played.
Liquidity is a Lie
The crypto market survives on one great illusion — liquidity.
It looks endless when times are good. Deep order books. Tight spreads. Flashing green numbers. But in crisis, it vanishes like smoke. Market makers pull bids. Spreads widen. The exit door shrinks to nothing. You hit sell, and there’s no one left to buy.
CEXs and DEXs pretend they’ve solved this. They tweak margin rules, adjust liquidation engines, and slap band-aids on bleeding systems. But the core problem never changes.
- Leverage pushes risk beyond what any system can handle.
- Whales don’t fear liquidations — they engineer them.
- Risk controls only work until someone finds the next exploit.
As long as leverage exists, liquidation cascades are inevitable. The real question isn’t if they’ll happen.
It’s who gets to survive when they do.
Astraea is an analyst with a rich background in finance, having worked at various research firms where he gained deep insights into investments and corporate strategies. Now, he blends this expertise with a unique perspective, crafting content for those venturing in finance, tech, or crypto. For more information check out Ascendant Finance.
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A Word of Caution
Nothing in this article is financial advice. This was written purely for entertainment purposes, and we don’t hold or own any of the coins mentioned. If you’re tempted to jump into the meme coin frenzy, remember to do your own research — or at least check if the developer is live-streaming from a dog cage or toilet first.
