Teetering on the Edge: How Black Thursday Exposed the Flaws in the Crypto Markets - Ep.164

Kyle Samani, managing partner at Multicoin Capital, dissects Black Thursday, March 12, the day the crypto markets plunged twice amid the wider sell-off in the markets due to the coronavirus. He offers several theories for the first price drop that day, how that set off a series of liquidations on various exchanges, and then why liquidations stopped for about 12 hours before the next wave, which triggered the next price slump. He also describes why, at that point, the crypto market structure broke, as arbitrageurs attempted to move collateral from one exchange to another but could not because both the Bitcoin and Ethereum blockchains became congested, setting off a downward spiral particularly in Bitcoin, as miners began turning off equipment due to the falling BTC price. This led, ultimately, to there being $200 million worth of positions to liquidate on BitMEX, but only $20 million worth of bids on the entire BitMEX order book. Then we cover what happened next that ultimately saved the price of BTC dropping to $0 on BitMEXT.
Next, we discuss the second fall in prices that day, and how that affected MakerDAO, with congestion on the Ethereum blockchain preventing keepers from being able to liquidate undercollateralized vaults. A clever keeper sent a bid to liquidate a vault with a higher gas price, but realizing that there was no competition, bid $0, walking away with $4.5 million, and a total of $8 million being won this way. We covered how the price of ETH fell to $88 but because oracles weren't properly updating, the last price of ETH on MakerDAO was at $101 — a dollar higher than the $100 where a bunch of liquidations would have occurred, which would have likely put more downward pressure on ETH, resulting in another downward spiral.
Kyle also evaluates some of the technical options for preventing these issues in future times of volatility, why many of them aren't promising but what is.
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Episode links:
https://multicoin.capital/2020/03/20/march-12-the-day-crypto-market-structure-broke-part-2/
Links from news recap:
Kyle Samani: https://twitter.com/KyleSamani
Multicoin Capital: https://multicoin.capital/
Multicoin blog part 1: https://multicoin.capital/2020/03/17/march-12-the-day-crypto-market-structure-broke/
Part 2: https://multicoin.capital/2020/03/20/march-12-the-day-crypto-market-structure-broke-part-2/
Theory that BitMEX’s maintenance was to prevent a collapse in Bitcoin: https://twitter.com/SBF_Alameda/status/1238306306043162625
https://www.theblockcrypto.com/genesis/58918/money-2-0-stuff-free-price-auctions
How traders took advantage of the roiling markets: https://www.theblockcrypto.com/post/59172/surfing-the-spread-crypto-market-turmoil-arbitrage
More on the liquidations in MakerDAO: https://medium.com/@whiterabbit_hq/black-thursday-for-makerdao-8-32-million-was-liquidated-for-0-dai-36b83cac56b6
https://blog.makerdao.com/usdc-approved-by-maker-governance-as-the-third-collateral-type-of-the-maker-protocol/
MakerDAO weighs emergency shutdown: https://www.coindesk.com/defi-leader-makerdao-weighs-emergency-shutdown-following-eth-price-drop
MakerDAO adds USDC as collateral: https://www.coindesk.com/makerdao-adds-usdc-as-defi-collateral-following-black-thursday-chaos
Kain Warwick on USDC as Dai collateral: https://twitter.com/kaiynne/status/1239795250882740225?s=20
Eva Beylin on USDC as Dai collateral: https://twitter.com/evabeylin/status/1240039492985085952?s=20
Huobi’s derivatives platform introduces circuit breaker:
https://www.theblockcrypto.com/linked/59210/huobis-derivative-platform-now-includes-a-circuit-breaker-function
Debate over circuit breakers in crypto:
https://twitter.com/TusharJain_/status/1238311534767595520
https://www.coindesk.com/does-crypto-need-circuit-breakers-last-weeks-price-crash-ignites-a-debate