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Perpetual contract hedging overturn: looking at the structural defects of the contract from the "10.11" liquidation, the lessons of old leek's blood and tears

On October 11, 2025, $19 billion in perpetual contracts were liquidated, and even professional hedging strategies failed! Reveal the three fatal flaws of perpetual contracts as hedging tools and teach you how to avoid these pitfalls.

Perpetual contract hedging overturn: looking at the structural defects of the contract from the "10.11" liquidation, the lessons of old leek's blood and tears

Perpetual contract hedging overturn: looking at the structural defects of the contract from the "10.11" liquidation

From October 10 to 11, 2025, the currency circle experienced an epic liquidation, and leveraged positions of US$19 billion to US$40 billion were forcibly liquidated. The most ironic thing is that it was not just the mindless retail investors who were harvested this time. The "safety cushions" used by many professional traders to hedge risks - the delta neutral strategy, the conservative 1x leverage, and the order books of professional market makers, all failed.

This incident is like a mirror, completely exposing the structural flaws of perpetual contracts as a hedging tool: It transforms pure market price risks into a bunch of more uncontrollable operational risks. When extreme market conditions come, risks such as exchange failure, automatic position reduction (ADL), oracle manipulation, and collective withdrawal of orders by market makers will erupt at the same time, making your "hedging" strategy instantly ineffective.

To put it bluntly, it may be fun to speculate and take direction with perpetual contracts, but do you want to rely on it to protect your assets? Maybe he's seeking skin from a tiger.

Why does perpetual contract hedging fail? Three fatal causes

1. Automatic deleveraging (ADL): specializing in “profitable” hedging positions

ADL is the last line of defense for exchanges. When the market fluctuates violently and a large number of positions are liquidated, causing the insurance fund to be exhausted, the exchange will forcefully close the most profitable and leveraged positions on the platform to fill the holes left by the losing positions.

This creates a paradox: If your hedging short order is opened accurately, it will be profitable when the market falls. But precisely because it is profitable and may have leverage, it will be liquidated by "Sacrifice" first in the ADL rankings.

Give a bloody example: Before "10.11", an old leek used 3 times leverage to go long 5 million US dollars in BTC spot, and at the same time opened a 5 million US dollars BTC perpetual short order at the price of 120,000 US dollars for hedging, without setting a stop loss. When the market plummeted, his profitable short order was first liquidated by ADL, instantly turning him into a naked long position and exposed to the plummet. Eventually, the long position was also liquidated, and all the principal of US$5 million was returned to zero.

This is not an isolated case. On the decentralized exchange Hyperliquid alone, 20,000 users experienced 35,000 ADL events during the "10.11" period. The original intention of hedging is to avoid risks, but in the end, it was the first to be "sacrificially sacrificed" because of this mechanism.

2. Market makers collectively divest: Liquidity evaporates at a critical moment

During the "10.11" period, data monitoring showed that the order book depth of major trading pairs plummeted by 98% in a short period of time, from US$1.2 million to US$27,000. what does that mean? **Professional market makers are coordinating divestments and running away! **

Market makers themselves also use perpetual contracts to hedge their own inventory risks. But when ADL occurs, their own hedging positions may also be liquidated, resulting in risk exposure. In order to protect yourself, the most rational choice is to withdraw all orders immediately and stop providing liquidity.

As a result, the perpetual contract market, which is known as 24/7 and has abundant liquidity, has turned into a backwater precisely at the moment when liquidity is most needed for smooth transition and execution of transactions. Do you want to close your position? Want to adjust your hedge? Sorry, there are no buy/sell orders, or the price difference is too large for you to bear.

3. Oracle failure and cross-margin: a serial bomb that damages both.

In order to improve capital efficiency, modern exchanges generally adopt the cross margin system. All assets in your account serve as common collateral for all positions.

This sets a time bomb. When an asset (such as wBETH at that time) showed a price plunge of 89% due to a price feed failure of the oracle machine, the margin of your entire account would be instantly accrued with huge losses. Even if your other positions (such as BTC hedging short orders) are safe and sound, you will receive a margin call due to insufficient overall margin, and may even be liquidated.

**Risk is no longer isolated. ** An error in a small currency oracle that you don't care about may blow up your carefully constructed main position hedging strategy.

Conservative strategies also fail: Lessons from the XPL incident

Do you think it’s safe to reduce leverage to 1x? "10.11" is a systemic risk, so let's look at individual cases.

In August 2025, classic whale manipulation occurred on the pre-release token XPL (Plasma) traded on Hyperliquid. The maximum leverage of the perpetual contract of this token is 3 times. Some smart users think: I use 1 times leverage to short it in advance to hedge the airdrop tokens that I may get in the future. Is this stable?

As a result, Giant Whale relied on its financial advantage to directly increase the price by 200% in the pre-issuance market with thin liquidity. Short orders with 1x leverage are liquidated instantly. One victim trader lamented: "1x hedge, account destroyed, I lost half of my XPL allocation."

The lesson is: **In markets that are illiquid or susceptible to manipulation, any leveraged perpetual contract hedge is vulnerable. ** What you think is the “margin of safety” is vulnerable to malicious manipulation.

If you have to hedge permanently, how to reduce the risk? (for reference only)

Despite all the bad words above, in reality some institutions or strategies may still have to use perpetual contracts for partial hedging. If you belong to this very small minority, please be sure to abide by the following "military rules", which can only reduce but not eliminate the risk:

1. Prepare adequate capital: Forget about “capital efficiency” Stop dreaming about using $100,000 to hedge $1 million. Under true risk management, perpetual contracts are not capital efficient at all.

  • Hedging mainstream currencies (such as BTC): Prepare funds with a position value of 1.4-1.65 times**.
  • Hedging pre-launch tokens: Prepare funds with more than 2.5 times the position value**. **The funds are not enough for 1.5 times the position size? Then don't hedge. The risk you create is greater than the risk you offset. **

2. Forcibly set stop loss and take profit, and spread it to multiple platforms

  • Stop loss must be set: Set it before opening a position based on the fluctuation you can tolerate (for example, the position will be closed if the price fluctuates 20-30% in the opposite direction).
  • Must be diversified: Never put all your hedging positions on one exchange. It is scattered on at least 3 or more mainstream platforms, such as Binance, Bybit, and OKX.
  • Independent collateral: Positions on different platforms use independent margins. Never open cross-position margins to avoid chain reactions.

3. Leverage shall not exceed 1 time and shall be monitored around the clock

  • Leverage Red Line: The leverage of a hedging position must not exceed 1 time. If you think 1x leverage is too inefficient, it means you are not suitable for permanent hedging at all.
  • Monitoring is the lifeline: "10.11" took only 90 minutes from the beginning to the peak of the crash, which occurred in the early morning of Beijing time. In the time it takes you to sleep, commute, or eat, your account may be gone. Without a 24/7 professional monitoring team or automated system, you are running naked.

Conclusion: For most people, the best hedge is to not hedge at all

After multi-dimensional tests such as the overall market crash (10.11) and individual currency manipulation (XPL), the conclusion is cruel and consistent: **Perpetual contracts, as a hedging tool, fail for the vast majority of users. **

It seems effective in calm weather, but always breaks down at the height of a storm. For 95% of the participants in the crypto market—whether they are VCs, retail investors, or party members—there is a better way to manage risk than perpetual contracts:

  • Retail investors/Growers: Control the size of the position, set a profit-taking plan in batches, and accept the fact that you cannot hedge all risks. This is much better than using unfamiliar derivatives and causing a liquidation.
  • Institutions seeking professional hedging: Should give priority to over-the-counter (OTC) transactions, structured products, or options and futures in traditional financial markets (such as CME), rather than exposing risks to the complex operational risks of perpetual contracts.

The most important lesson the "10.11" liquidation taught us is: The best risk control in the crypto world is often the simplest - reduce leverage, moderate allocation, and timely profit taking. Trying to hedge all risks with complex instruments may lead to greater disasters.

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