When a position goes wrong, there is a certain type of silence which falls over a trading desk. It is not the hysterical screaming of the pits, but the silence of a digital hum of a screen flickering amber, there to say that a line has been crossed. In the old world, which was the world of Liquidation 1.0, this silence would normally be succeeded by a drop of the guillotine. A risk number would violate a limit and the engine would sell out everything at market into a vacuum of liquidity. You were not merely stalled, you were destroyed, frequently at the lowest ebb, and stood on the other side of the sale as your compelled sale turned into the gas which set off a wave that swept away the other end of the market with you. But there is a new wave of that violent abruptness, which is coming to pass nowadays, something stranger, something quieter. The job does not disappear, it simply begins to recede, systematically and in a civilized way. It is the age of the so-called gentle cut, structural development of the financial systems in the face of failure.
You can only see why that is important by examining the anatomy of a crash. The forcing sale of a leveraged position in the crypto markets on October 10, 2025, when the crypto markets crashed and close to 20 billion dollars worth of positions were forced in just one day, was the owning of the truth. Geopolitical was the triggering catalyst, interestingly a sudden announcement of tariffs, but the carnage was structural. The risk, on a traditional liquidation model, is binary. Either you are solvent or you are not. The system is in a panic when thousands of traders cross that line at the same time. It deposits huge sell orders on a weakening order book, driving prices lower, triggering the subsequent level of liquidations. It is a vicious circle of destruction as the mechanism aimed at preserving the exchange will destroy the value of the market. That was the case on that October day when we could observe such assets as ATOM and restricted stablecoins on specific venues briefly liquidate to approximately close to zero, not by being worthless, but by liquidation engines being ignorant of value, and instead interested only in immediate cash.
The solution to this savagery in the industry is Liquidation 2.0. It is grounded on the understanding that survival is not about cessation of the blood flow immediately, but the clotting of the wound gradually. The idea, which is advanced by institutional prime brokers, such as FalconX, and introduced in the form of decentralized protocols, such as MakerDAO, removes the binary cliff in favor of a gradient. The system does a partial deleveraging rather than completely deleverage the position as soon as the margin falls below a 10 million. It cuts off the risk, just about a half-million dollars, to revive the account. It does not make such a sale as a panhandling dump, but via complex algorithms that chop up the order into minuscule bits, and sells them in stages to conceal the footprint left by predatory high-frequency traders. The idea is to live long enough to make it through five minutes, which provides time to the trader and the market to breathe.
Such a change in the market structure is occurring as a result of this change of blunt force into surgical precision. FalconX as an example has been able to establish its reputation on this so-break-up service between institutional capital and the fragmented violence of crypto exchanges. They will take their business to regulated, investor-friendly rails, where they will execute and cross-margin and smart order route, a move they have underscored with the acquisition of 21Shares in late 2025. They can offset exposures in a variety of venues, which would otherwise have a trader being liquidated in one exchange and having a profitable hedge in another. It is a step to efficiency that looks on liquidation not as a penalty, but as a difficult liquidity management issue.
The same philosophy is reflected in the working part of the industry. The auto-liquidation, which is offered by FalconX to miners, uses this logic on revenue instead of debt. The system feeds the sales, a conversion of rewards to cash at any given time, instead of the miners hoarding coins and dumping them in large amounts in order to pay bills, and thereby creating small crashes of the market. In DeFi, the shift of Maker Protocol to Dutch auctions in selling collateral to replace the bidding wars of the previous years with a predictable downward-sloping curve. Predictability is the goal in both instances. Bad news goes down in markets; it is uncertainty about how the bad news is going to be implemented that markets cannot take.
But to the individual trader who is reading the charts, this new safety net is an illusion that is dangerous. The presence of the soft cut has given birth to a two layer market. The institutions that gain access to prime brokerages and sophisticated algorithmic execution do not actually play by the same rules as the retail trader on a typical derivative exchange. As the institution is being untidily liquidated, the retail trader may still be experiencing the guillotine, delivering the exit liquidity that the smarter systems are sucking up. The October crash proved that with correlation of one (when the entire market is screaming at the same time) even the finest algorithms may falter when there is just no one left to buy.
After all, Liquidation 2.0 does not solve risk; it is just a more efficient method of dealing with the aftermath of the negative. It is a sort of growing up of the immune mechanism of the market, an effort to prevent the contagion of the failure of one trader by the whole body. Although the moral of the story is the same: the greatest competitive advantage in any market is just not to get into the field where the machine does its job. The algorithm is perhaps now kinder, a scalpel rather than an axe is used to snip, but it is sniping nonetheless. Survival art means that you should at no time allow it the opportunity to begin.
@Falcon Finance #FalconFinance
