Cryptocurrency prices plummeted last Friday, as successive liquidations fueled historic volatility, some experts still say Wall Street’s old-fashioned safety net wouldn’t have helped.
In the US, venues such as the Nasdaq and the New York Stock Exchange have been using circuit breakers to promote orderly trading since 1988, following the stock market crash known as Black Monday. They found that investors needed more time to respond to changing market conditions.
In traditional finance, a ‘time-out’ can reduce panic selling, but the result is a ‘time-out’ more than 19 billion dollars in crypto liquidations last Friday, some experts emphasize that these safeguards do not fit well decentralized finance– and can even make conditions worse. (There are indications that forced closed positions may be underreported on some platforms.)
During a panel discussion at DC Fintech Week in Washington, DC, Amanda Tuminelli, executive director of the DeFi Education Fund, said that “there is no off switch” in DeFi that allows an individual or entity to exert unilateral control over networks and assets.
“That’s because code is autonomous,” she said, referring to services supported by smart contracts. “Decentralized systems like Uniswap, Ave and dYdX have weathered the entire liquidity crisis, and that is a testament to the resilience of decentralized technology.”
The cryptocurrency market is decentralized, and the same qualities that can make it impractical to implement market-wide trading halts or circuit breakers are the same ones that allow digital assets to be traded hands 24 hours a day, every day of the year.
After $19 billion worth of leveraged positions were liquidated last Friday, some traders looking for outsized returns were quickly wiped out. And conditions deteriorated to the point where some market makers, including Wintermute, participation they were forced to withdraw.
Circuit breakers can limit trading activity on a market-wide basis or concentrate on individual securities. They are automatically triggered when a price or index moves a certain amount within a certain time frame, with varying levels of restrictions.
Tuminelli noted that it might be possible to impose restrictions on the “front ends” of services that connect to DeFi protocols, but she argued that “just means there are a million other front ends accessing the same protocol,” potentially limiting their effectiveness.
Gregory
Traditionally, circuit breakers have worked well in the U.S. securities markets, where assets are typically traded in one place and buy and sell orders are consolidated in one place. However, in DeFi, assets are traded universally, with constant arbitrage between locations.
“The only thing you can achieve is a circuit breaker [in DeFi] is a disruption,” he said. “Solutions we look for for new markets have to be designed for those new markets.”
That’s not to say DeFi isn’t capable of coming up with its own solutions, Xethalis added, or taking inspiration from centralized markets when designing risk parameters for protocols.
“But we must be careful not to fall into the trap of thinking that yesterday’s solutions will always work for tomorrow’s products,” he said. “This stuff is traded all over the world.”
