As crypto markets saw record liquidations during Friday’s market plunge, major DeFi protocols like Aave, Hyperliquid, and Morpho faced significant pressure – and held up.
On Friday, October 10, the crypto market once again showed how quickly it can take a sharp turn, with crypto exchanges reporting around $20 billion in leveraged positions liquidated in just a few hours – the largest single-day liquidation event the industry has seen to date.
In the ensuing chaos in the markets, decentralized finance (DeFi) protocols underwent a major stress test and emerged largely unscathed – with most of the largest protocols experiencing no outages and very few user-reported issues, especially compared to their centralized counterparts.
On Friday evening, following reports that US President Donald Trump had imposed 100% tariffs on imports from China, Bitcoin fell more than 10% from above $120,000, briefly falling below $103,000 on some exchanges before rebounding, while many altcoins plunged further during short squeezes and most assets recorded double-digit losses.
Ethereum (ETH) fell below $4,000 and XRP hit its lowest price since November last year. Total market capitalization plunged more than 15% in a matter of hours, from over $4.2 trillion to around $3.5 trillion.
Markets have since recovered much of their losses, with total market capitalization back up to $3.97 trillion at press time, BTC over $114,000, and ETH at around $4,100. But traders and others in the industry – particularly those trading with leverage, more than 1.6 million of whom were liquidated on Friday – continue to analyze and discuss what happened, how major platforms are performing and what’s next for the markets.
What happened with Binance and Ethena’s USDe?
During the stock market crash and its aftermath, much of the drama focused on the largest centralized exchange (CEX), Binance, as well as USDe, Ethena’s US dollar-pegged token, which showed a breathtaking fall on the exchange to as low as $0.6567.
But on other platforms, particularly Curve Finance pools, USDe remained near its price peg at $1.00, a lag that led some to believe the drop was caused by Binance’s own technical setup. Critics have pointed to a delay in price feeds and taking market makers offline, saying this could leave the CEX order book out of sync with the broader market.
However, in a blog post on Saturday, October 12, Binance distanced itself from these accusations, instead saying that the exchange’s main futures and spot matching engines as well as API trading “remain operational.”
The exchange also added that the forced liquidation volume processed by the platform represented a “relatively small proportion compared to the total trading volume, indicating that this volatility was mainly due to overall market conditions.”
Binance also said it compensated users who were liquidated following the withdrawal of USDe and two other assets on the exchange – as they held these assets as collateral for their leveraged trades and loans – by paying a total of $283 million to users, although The Defiant could not independently verify these figures.
Many remain unconvinced, however, pointing to inconsistencies in the blog post, unclear timelines, vague technical explanations, and missing data on liquidations and compensation.
How did DeFi fare amid the chaos?
During this time, DeFi protocols faced their own pressure tests as liquidity dwindled and collateral values varied wildly. Aave, the largest lending protocol with over $42 billion in total value locked (TVL) according to DefiLlama, underwent “the biggest stress test” of its lending infrastructure, Aave founder Stani Kulechov wrote in an X article on the evening of October 10.
“The protocol worked flawlessly, automatically liquidating a record $180 million collateral in just one hour, without any human intervention,” Kulechov added.
Hyperliquid, the largest decentralized perpetual exchange by trading volumes, also weathered volatility with “100% uptime with zero bad debt,” according to founder and CEO Jeff Yan, who said in an article of leverage – for more than two years that it has existed.
After explaining Hyperliquid’s operations during the first 20 minutes of the crash, when billions of dollars of leveraged positions on the DEX were liquidated, Yan argued that “on other sites, the liquidation engine is not transparent and therefore may not be subject to the same strict margin requirements as for normal users.”
However, its Hyperliquide rival, Lighter, which last week overtook its competitor in terms of daily volumes, struggled during the crash. The team behind DEX reported that its database was experiencing heavy traffic and experienced a 4.5-hour outage on Friday evening.
After the market chaos, the team acknowledged in an
The team also shared user loss figures and promised compensation, reporting that 2,008 traders lost more than $1,000, while 367 lost more than $10,000 and 38 lost more than $100,000.
Morpho, another large lending protocol with over $7 billion in TVL, reported no major issues, with co-founder Merlin Egalite in an October 11 X article calling the event “one of the biggest tests DeFi has seen in recent memory” and stating that the protocol “continues to perform as expected.” However, some users have reported having difficulty accessing their orders due to what Egalite described as a “RPC wallet” issue.
In a commentary on The Defiant, Sam MacPherson, lead contributor behind Spark, a DeFi protocol in the Sky ecosystem with over $9.6 billion in TVL, revealed in a commentary on The Defiant that Spark’s protocols, including DeFi’s third largest lending protocol, SparkLend, were operating normally during the market crash.
MacPherson said deposits into Sky’s USDS stablecoin “remain at a total of $8 billion, with $3.2 billion of stablecoins available for instant redemption.”
The lead Spark contributor also noted that “the balance sheet exposure is as simple as possible, with the majority of loans outstanding against BTC, ETH and LST,” adding that “being in the industry for so long, these kinds of events are common over a period of years.”
Questions remain
People are still wondering who or what is really responsible for the crash and the resulting massive wave of liquidations, as rumors and reports continue to circulate on X and other social platforms.
Some public figures are pointing the finger at the largest centralized exchanges, saying they may be downplaying the numbers, which could mean the true scale of the liquidations was much larger than what was publicly disclosed and reported on platforms like Coinglass.
Meanwhile, in DeFi, liquidity was hit hard, falling by around 11%, or $20 billion, from Friday to Saturday.
MEXC Research chief analyst Shawn Young told The Defiant that the forced unwind “removed a substantial layer of speculative exposure, effectively cleaning out the system and setting the tone for a more sustainable uptrend move.”
