Hackers Cause Liquidation Issues in Binance Due to Collateral Shortfall: Report

A recent report by Wu Blockchain indicates that the crypto market crash on October 11 wasn’t merely a random sell-off but rather a coordinated attack exploiting a vulnerability in Binance’s Unified Account margin system.

As reported by journalist Wu Blockchain, it appears that attackers manipulated specific collateral assets on Binance, causing a significant loss in value that led to widespread liquidations across the platform.

The focus of the attack was on USDE, wBETH, and BnSOL, which experienced severe depegging: USDE dropped to $0.65, wBETH to $0.20, and BnSOL to $0.13.

The timing was critical, coinciding perfectly with Binance’s announcement on October 6 regarding an oracle price adjustment, which was set to take effect on October 14, presenting a ripe opportunity for attackers.

Within 24 hours, the trading volume for these three affected assets on Binance reached between $3.5-$4 billion, leading to estimated realized losses of between $500 million and $1 billion that the exchange may need to absorb.

Unified margin design exacerbated cascade liquidations

The underlying vulnerability arose from Binance permitting PoS derivatives and yield-bearing stablecoins as unified margin collateral, with liquidation prices based on Binance’s own spot order book rather than pegged values.

While BUSD maintained its peg and Aave oracle data indicated a 1:1 ratio for USDE on-chain, thus preventing large-scale liquidations elsewhere, Binance’s internal pricing mechanism created a distinct vulnerability.

As Bitcoin (BTC) and altcoins experienced significant declines, derivatives traders began to incur hefty losses. For coin-margined positions, falling coin prices along with drastic collateral depegging further diminished margin values.

Market makers utilizing these assets as margin were compelled to liquidate their holdings, contributing to the increased downward pressure.

A further decline in USDE was driven by Binance’s 12% yield program, which prompted large stablecoin holders to engage in recursive borrowing, amplifying the damage from the targeted exploit.

On Binance, USDE spot prices plummeted well below values on other centralized exchanges, which mostly remained above $0.90.

Similarly, several altcoins hit local lows on Binance that were substantially lower than those on other exchanges, likely a result of forced liquidations by major market makers.

Structural risks reminiscent of LUNA-UST collapse

Investor Mindaoyang observed similarities between this incident and the LUNA collapse, noting that both events occurred when major exchanges treated “non-fiat” stablecoins as high-collateral assets.

The most hazardous scenario involves market-driven pricing combined with high collateral ratios, especially when centralized exchanges exhibit low arbitrage efficiency.

Wu Blockchain’s analysis recommended that liquidation oracles for PoS-based native assets should ensure hard floor prices instead of relying on spot order book pricing.

Tom Lee from BitMine suggested that market pullbacks may have been inevitable after a 36% gain since April. The VIX fear index spiked by 29%, marking the 51st largest single-day movement in history, placing it among the top 1% of extreme events.