Let's Talk Analysis: The 2021 Flash Crash

Uncover a detailed breakdown of the Flash Crash and learn how to prepare for the next one

A few things happened that caused the massive correction, which I will cover. The first thing that happened was essentially a "normal" move heavily exaggerated by two factors: 

Leverage and liquidation. Let’s take a closer look…

Since we have a ton of "fake" volume in crypto and the over-leveraged start getting liquidated, it essentially creates an avalanche of liquidations that crushes the market. Combine this with effortless access to derivatives (and shit exchange matching engines) and people liquidating non-collateral assets to try and meet margin - it's akin to adding fuel to the fire.

People did not realise that many farming coins like ETH and BSC got hit real hard. There is a reason for this. The sudden dip in price most likely put many people below the collateral threshold. So people started selling ETH into stablecoins to try and push transactions through into their vaults to meet collateral. This reaction is evident when you look at the transactional Gwei price at the end of the dump; it almost reached 1800 Gwei! However, this also created the opportunity for some attacks, both happening on BSC.

The first protocol that got rekt was Bunny. 

"Today at 10:34 UTC, PancakeBunny was attacked with an economic exploit that crashed the price of BUNNY. None of the vaults have been compromised. Team Bunny is currently working on solutions and will provide a report as soon as possible." 

The attacker used flash loans to achieve this. In the short version of events, the attacker used PancakeSwap to borrow a shit ton of BNB and executed a flash loan attack. They could drain about $200m from the protocol before repaying the loan and leaving like nothing happened (see tx and chart below).

The following protocol that was rekt was Venus protocol. It had over 200m in liquidations. On top of all, the protocol accrued a bad debt of about 95m. Looking at the aftermath, the attacker used large market orders to manipulate the price on Binance, under-collateralising many loans. However, instead of paying back the loan on time, these borrowers elected to keep their newly acquired tokens and default on the loan. The protocol then worked as expected, liquidating the remaining collateral.

Only the collateral value had fallen so much that, even when sold, it was less than the original loans. This rapid decline in value created massive liquidations and lousy debt for Venus users.

Furthermore, Justin Sun most likely caused the massive Ethereum dip. In summary, he had a 1 Billion dollar position that was almost liquidated (yes 'B'). He had about 2 minutes to rebalance his vault (i.e. inject another 300m) into the pool to avoid liquidation. If the market had liquidated him, the price could have dropped below 1500 USD. Some speculate that some whales tried to drive down the price to liquidate Sun. However, he was able to meet margin requirements in time.

The introduction of DeFi lending protocols on top of traditional markets has ramped up leverage to another level. In addition to hammered exchange prices, people were liquidating their vaults into stablecoins or selling ETH to meet collateral, including other assets like BSC and even Polygon.

Hence, we had an extremely bloody dump, which is likely to start and shake out weak handed retail investors.

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tl;dr Degenerate traders and leverage being easy to access. 

- q

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