Hackers Trigger Liquidation Problems on Binance Amid Collateral Shortfall: Report
A recent analysis by Wu Blockchain suggests that the crypto market downturn on October 11 was not just a random sell-off, but a deliberate attack that took advantage of a weakness in Binance’s Unified Account margin system.
Summary
- Wu Blockchain asserts that the crash on October 11 may have been a strategic exploitation of Binance’s margin system.
- In the midst of this volatility, USDE, wBETH, and BnSOL experienced significant value drops to $0.65, $0.20, and $0.13, respectively.
- Binance’s framework permitted yield coins to be utilized as collateral, increasing the likelihood of liquidations.
According to journalist Wu Blockchain, attackers appear to have manipulated specific collateral assets on Binance, resulting in a substantial devaluation that triggered widespread liquidations on the platform.
The primary targets of the attack were USDE, wBETH, and BnSOL, which suffered severe depegging: USDE fell to $0.65, wBETH to $0.20, and BnSOL to $0.13.
The timing was crucial, aligning perfectly with Binance’s announcement on October 6 regarding an impending oracle price adjustment set for October 14, creating a favorable opportunity for attackers.
Within 24 hours, the trading volume for these three impacted assets on Binance surged to between $3.5-$4 billion, leading to estimated realized losses between $500 million and $1 billion, which Binance may have to absorb.
Unified margin structure intensified liquidations
The core vulnerability stemmed from Binance allowing PoS derivatives and yield-bearing stablecoins to be used as unified margin collateral, with liquidation prices determined by Binance’s own spot order book rather than pegged values.
While BUSD maintained its peg and Aave’s oracle data indicated a 1:1 ratio for USDE on-chain, thus avoiding large-scale liquidations elsewhere, Binance’s internal pricing mechanism revealed a significant vulnerability.
As Bitcoin (BTC) and altcoins saw notable declines, derivatives traders began to face substantial losses. For coin-margined positions, falling coin prices coupled with drastic depegging of collateral further eroded margin values.
Market makers leveraging these assets for margin were forced to liquidate their holdings, adding to the already increasing downward pressure.
A further drop in USDE was fueled by Binance’s 12% yield program, which encouraged large stablecoin holders to engage in recursive borrowing, exacerbating the impact of the targeted exploit.
On Binance, USDE spot prices plummeted well below values seen on other centralized exchanges, which generally remained above $0.90.
In a similar fashion, many altcoins reached local lows on Binance that were considerably lower than on other exchanges, likely a consequence of forced liquidations by key market makers.
Structural risks echoing the LUNA-UST collapse
Investor Mindaoyang pointed out the parallels between this event and the LUNA collapse, highlighting that both incidents occurred when major exchanges treated “non-fiat” stablecoins as high-collateral assets.
The most perilous scenario involves market-driven pricing coupled with high collateral ratios, particularly when centralized exchanges demonstrate low arbitrage efficiency.
Wu Blockchain’s analysis advised that liquidation oracles for PoS-based native assets should establish hard floor prices instead of relying on spot order book pricing.
Tom Lee from BitMine noted that market pullbacks might have been unavoidable after a 36% rise since April. The VIX fear index surged by 29%, marking the 51st largest single-day movement in history, placing it in the top 1% of extreme events.