Well Protocol lost $8.2m on ARC liquidation as it holds losses
A major crypto trader lost $8.2 million after an open bet on ARC Perpetual Market's decentralized derivatives platform Lighter, forcing the platform to tap its liquidity backstop and trigger automatic transfers to manage risk.
In a series of articles posted on X, the platform revealed that the whale has built a very large long position in several days, pushing the total open interest in the ARC (ARC) market to 50 million dollars, about 600 traders and market makers took the opposite side.
The trade started to fail when the price of ARC dropped around 6:00 pm on Wednesday. About $2 million of the position was written off the order book, and the remaining position was moved to the Liter's Liquidity Provider Pool (LLP), which is held under the High Risk Strategy category.
The platform has subsequently enabled automatic liquidation (ADL), which means that some profitable short traders are partially closed so the system can safely liquidate the position. At one point, LLP briefly took a $200 million ARC worth $14.7 million before the position narrowed as prices continued to decline.
Related: How South Korea is using AI to spot crypto market fraud
Risk protections limit LP losses to $75,000
Even with the large liquidation, losses to liquidity providers were limited. Instead of exposing the exchange's entire liquidity pool, Leiter said the ARC market was isolated in a separate risk bucket, so only about $75,000 was affected. Power short traders with the whale were profitable.
“In the end, the biggest long trader lost 8.2M USDC, the LLP lost 75k, and the short traders who took the risk of betting on this position were profitable,” Leiter wrote.
Following the incident, Leiter added new safeguards to the market. In a pop-up message on its website, the platform announced an open interest cap of $40 million on ARC and said it had floated the pair under the cap's liquidity strategy with an allocated capital of $100,000 USDC. If that liquidity runs out, the system now automatically moves to ADL to close the risk.
The exchange said the same holds could apply to other assets.
Related: How pork-eating crypto scams are turning trust into a financial tool.
Risks of cheating on decentralized platforms
The incident comes amid concerns about price manipulation on decentralized trading platforms. In August of last year, four whales were accused of manipulating the price of the Plasma (XPL) token on Hyperliquid after the asset jumped nearly 200% in minutes to over $1.80.
In June, the DeFi protocol offering suffered a security breach on its wstUSR market, resulting in a loss of $9.6 million due to the attacker merging it with the established stablecoin cvcrvUSD.
Magazine: Bitcoin May Take 7 Years to Upgrade to Post-Quantum – BIP-360 Co-Author
