A $19 billion liquidation wave is here! dYdX only provided $460,000, sparking intense discussions in the community.

The decentralized exchange dYdX experienced an outage for about 8 hours on October 10, due to “incorrect processing order in the code, and the validators restarting the Oracle Machine Sidecar service exacerbated the latency of the interruption.” The dYdX governance community will vote to decide on compensating affected traders up to a maximum of $462,000 from the protocol insurance fund, a sum that has sparked intense discussions in the community.

8-hour service interruption due to code error causing liquidation disaster

(Source: dYdX)

dYdX stated that the interruption on October 10 was due to “an error in code execution order, and the latency in validators restarting the Oracle Machine Sidecar service exacerbated the duration of the interruption.” According to the DEX, when the chain was restored, “due to outdated Oracle Machine data, the matching engine processed transactions/liquidations at incorrect prices.” This technical failure caused a chain reaction that forced some traders to be liquidated at price levels where they should not have been.

The Oracle Machine is a key infrastructure of decentralized exchanges (DEX), responsible for providing real-time price data. When the Oracle Machine service is interrupted, smart contracts cannot obtain the correct price information, which may lead to erroneous liquidation judgments. In the case of dYdX, the delayed restart of the Oracle Machine Sidecar service resulted in the system using outdated price data after recovery, which could not reflect the actual changes in the market during the 8-hour interruption.

On October 10, the cryptocurrency market was in a period of intense turmoil. Trump's announcement of a 100% tariff on Chinese imports triggered global market panic, leading to a massive liquidation in the cryptocurrency market, with approximately $19 billion in positions evaporating, marking one of the largest liquidation events in cryptocurrency history. Under such extreme market conditions, any technical failures would be amplified, resulting in even greater losses for users.

dYdX stated that no user funds were lost on-chain, but some traders experienced losses related to liquidations during the suspension period. This clarification is important as it distinguishes between two different types of losses. Loss of funds means that the user's assets were stolen or permanently lost, whereas liquidation-related losses refer to trading losses caused by forced liquidations. The former is a security issue, while the latter is an operational issue. dYdX emphasizes that the safety of funds has not been affected, attempting to characterize the incident as a technical failure rather than a security breach.

dYdX Event Timeline and Impact:

October 10: Global market crash, $19 billion in crypto positions liquidated

Service Interruption: dYdX chain suspended for about 8 hours

Technical Reasons: Incorrect code execution order + Oracle Machine service restart latency

User Impact: Some traders were liquidated at incorrect prices.

Fund Security: No user funds are lost on-chain.

Compensation Plan: Community vote decides a maximum compensation of $462,000

The dYdX governance community will vote to decide whether to use funds from the protocol insurance fund to compensate affected traders. This decentralized governance mechanism is a feature of dYdX as a DEX, where significant decisions are made through votes by community token holders rather than being unilaterally decided by the company's management.

Binance simultaneously dumped 728 million dYdX, only losing 460,000, sparking controversy

The cryptocurrency market crash in October led to the evaporation of approximately $19 billion in positions, marking the largest liquidation event in cryptocurrency history, while also testing the services of several exchanges. Binance faced severe volatility, user concerns, and regulatory scrutiny. Traders criticized Binance's technical failures that prevented them from closing their positions, including interface issues that caused the prices of multiple tokens to fall below zero, as well as the decoupling of Ethena's USDe synthetic stablecoin.

Although Binance does not bear any responsibility for traders' losses, it announced a $400 million relief plan for affected traders, which includes $300 million in token vouchers and $100 million in relief funds for affected ecosystem participants. Binance initiated a $45 million BNB token airdrop to memecoin traders who suffered losses during the crash to “boost market confidence.” The exchange has committed a total of $728 million to traders affected by the sell-off.

The enormous disparity in compensation amounts has sparked intense discussions within the dYdX community. Binance compensated $728 million, while dYdX only compensated $462,000, a difference of over 1,500 times. Although the user base and trading volume of the two exchanges differ greatly, this stark ratio of compensation still raises questions. Some dYdX users have expressed dissatisfaction on social media, believing that the $462,000 compensation is too meager relative to user losses.

However, there are also voices defending dYdX. As a decentralized exchange, dYdX's insurance fund is limited in scale, accumulated from protocol revenue, and cannot be compared to the capital pool of centralized exchanges. Binance, as the world's largest cryptocurrency exchange, has annual revenues in the billions of dollars and is capable of bearing large-scale compensations. In contrast, dYdX's insurance fund mainly comes from trading fees and liquidation penalties, making its scale relatively small. From this perspective, $462,000 may already be the maximum compensation amount that dYdX's insurance fund can bear.

A deeper issue is the attribution of responsibility. Binance's compensation is voluntary, as its terms of service typically exempt it from liability for losses resulting from market fluctuations. Binance chooses to compensate out of considerations for its reputation and to maintain user relationships. The situation with dYdX is similar, as its smart contract code typically includes disclaimers, and losses due to technical failures may not legally require compensation. Community voting determines compensation, reflecting the spirit of decentralized governance, but also highlights that the compensation amount is strictly limited by the scale of the insurance fund.

The Advantages and Challenges of Decentralized Governance

The community voting compensation mechanism adopted by dYdX reflects the governance features of decentralized exchanges. Unlike centralized exchanges where the management decides the compensation plan, major decisions at dYdX require approval through voting by token holders. This mechanism has its advantages: high transparency, strong community participation, and a democratic decision-making process. However, it also faces efficiency issues: voting takes time, proposals need to be discussed, and affected users may have to wait weeks or even months to receive compensation.

From the perspective of the voting mechanism, the governance token holders of dYdX will decide whether to use the insurance fund for compensation. This design has potential conflicts of interest: a reduction in the insurance fund means a weakening of the risk buffer for the protocol, which may affect the value of the tokens. Therefore, token holders need to balance short-term user satisfaction with the long-term security of the protocol when voting.

This incident also exposed the vulnerabilities of decentralized exchanges under extreme market conditions. Although dYdX claims that funds are secure and unaffected, the 8-hour service interruption and erroneous liquidation executions still resulted in user losses. While the decentralized architecture provides censorship resistance and asset autonomy, it still faces challenges in technical reliability and operational efficiency. Oracle Machine failures, validators coordination issues, and smart contract vulnerabilities are all areas that decentralized systems need to continuously improve.

In the long term, this incident may drive dYdX and other decentralized exchanges to improve their technological architecture and risk management mechanisms. Possible improvements include: increasing Oracle Machine redundancy to prevent single points of failure, establishing more robust validators coordination mechanisms, expanding the scale of insurance funds to cope with future incidents, and improving suspension and recovery processes to reduce the risk of erroneous executions.

The Dilemma of Insurance Fund Scale and Decentralization

The insurance fund of dYdX is accumulated from the protocol's revenue, primarily sourced from trading fees and liquidation penalties. Unlike centralized exchanges that can allocate funds from company profits, the insurance fund of decentralized protocols relies entirely on on-chain revenue. This model is more transparent, but it also means that the size of the fund is strictly limited.

The compensation limit of $462,000 may reflect the actual capacity of the dYdX insurance fund. If the compensation amount is too large, it may deplete the insurance fund, rendering the protocol unable to compensate in future incidents. Therefore, the community needs to weigh the interests of current victims against the protection of future users when voting. This is a typical dilemma of decentralized governance: how to allocate limited resources among different stakeholders.

Some community members suggested that dYdX should allocate more funds from future revenue to expand the insurance fund or introduce external insurance mechanisms to enhance compensation capabilities. These suggestions are constructive, but implementation requires time and technical development. For the currently affected traders, their main concern is whether they can quickly receive reasonable compensation.

In contrast, Binance's $728 million compensation, although substantial, also reflects the advantages of centralized exchanges in terms of financial strength. Binance can allocate funds from its company reserves, unhindered by the limitations of insurance fund sizes. However, centralized exchanges also bear higher regulatory risks and operational responsibilities. This comparison between decentralization and centralization highlights the respective advantages and disadvantages of the two exchange models.

For dYdX users, this event serves as an important lesson. While decentralized exchanges provide asset sovereignty and censorship resistance, they may not be as robust as centralized exchanges in terms of technical failures and compensation capabilities. Users need to weigh these factors when choosing a trading platform. For large trades or users employing high leverage, centralized exchanges may offer better protection. For users who prioritize privacy and asset control, decentralized exchanges remain the preferred choice, but they must accept their relatively lower compensation capabilities.