On Sunday 2nd of February 2025 the entire Digital Asset market took a sudden nosedive - leading to more than 2 billion USD in liquidations. Although the mainstream narrative has been revolving around Trade Wars and Geopolitical instability, the market has shown that the real reason behind this catastrophic event has been leverage.
Leverage simply means borrowing extra money from the exchange in order to have a larger position in the market. When you only have 100 USD and a hole in your pocket, taking a 10X leverage from your favourite centralized exchange may seem very tempting. After all, you can have 10 times more exposure and can earn 10X more if your trade becomes successful. And just like that, millions of people (and institutions) across the world happily take out leveraged positions every single day.
“God Mode”
In the world of Digital Assets, transparency is taken very seriously. Blockchain explorers allow anyone to verify that transactions have been executed correctly - with a permanent record appended to the chain of transactions. Sadly the same cannot be said for centralized exchanges.
One of the most controversial aspects of centralized exchanges has been the ability to use “God Mode”. If suddenly you saw the entire order book and all the open purchase and sell orders (including all the stop-loss orders), the potential for “manipulation” would become simply impossible to resist. Imagine standing on a mountain next to a giant snowball. It would take you just one little push to send this cold white mass roaring down the mountain - wiping everyone in its path.
This is how “God Mode” works. It allows the exchanges to manipulate the market in order to liquidate small (and large) traders. Although we can’t 100% confirm that it happens, we can confirm that anyone who uses leverage eventually gets liquidated. Have you ever wondered why your favorite crypto KOL’s constantly promote leveraged exchanges?
The centralised exchanges are always in dire need of “new meat” to feed into their liquidation machine. Let’s see how they do it.
“God Mode” in action
Having a “black-box” model is amazing. Nobody from the outside can poke their nose into your infrastructure and your algorithms, let alone ask you to provide on-chain proof of transactions. This gives leveraged exchanges full control over your position inside their own orderbook. Here are the most common examples of “God Mode” exploitation:
- Liquidation targeting: Exchanges can push price movements toward key liquidation levels of highly leveraged traders, forcing them out of their positions and profiting from the resulting forced sales. When you have 10 - 100X leverage, the price needs to slip just a bit in order to force you out of the market.
- Stop-Loss sniping: By identifying stop-loss orders, exchanges can briefly push prices down (or up) to trigger these orders, allowing them to buy low and sell high. These movements can easily be seen as suspicious long wicks on the chart. Coinbase is a master at this.
- Slippage manipulation: Traders might experience unnatural slippage - prices moving significantly just before an order is executed - causing them to buy or sell at worse rates than expected. The most famous example of this tried and true method is none other than Robinhood. Worse yet, they are known to sell their order flow to other industry leaders that happily frontrun these orders in mere milliseconds.
- Front running: By knowing large upcoming trades, exchanges and insiders can enter positions before them, taking advantage of price swings in advance. In the decentralised world this is done by MEV bots.
As mentioned above, most large centralized exchanges have been accused of these nefarious practices. Bitmex, Binance, Bitfinex, Coinbase and FTX are the best examples from recent history. Sadly these practices are also quite common in the traditional financial markets.
Personal tragedy is just another statistic
In the world of Web3 honesty, transparency and reputation play a significant role in spreading the gospel of Blockchain. It takes a long time to learn the basics of Web3 and it takes even longer to become good at it. Today centralised exchanges are responsible for;
- Retail investor loss: Many traders get liquidated by manipulated price moves they could never anticipate. Thanks to “God Mode” and insider look into the order-books, this becomes a breeze. Unfortunately the vast majority of these liquidated traders will quit Web3 for good and will never discover the world of decentralisation.
- Loss of trust: Centralized exchanges claim to provide a fair market but, in reality, they control price movements within their own systems. Unless these concerns are not addressed properly, this destructive trend will continue.
- Regulatory scrutiny: Authorities are increasingly investigating market manipulation, leading to legal battles and potential restrictions on crypto trading platforms. Every year several centralized exchanges land under the spotlight of the regulators.
How to avoid being liquidated
The world of Web3 is truly unique. Innovation is taking place at lightning speed and massive centralized conglomerates will very soon have to make place for more agile and nimble competitors - decentralized exchanges. The best way to protect yourself from becoming another liquidation statistic, is to use a DEX. cow.fi is one of the best examples that protects users from predatory MEV bots and offers the best swapping experience.
While decentralized leverage exchanges like GMX offer traders an interesting option to bypass the “God Mode”, the technology is still in its infancy - yet, our team sees a great future in its development.
One of the best ways to protect yourself from predatory leveraged exchanges is to treat them like a fast food restaurant. You hop in for a quick snack and you head out the door just as quickly. Do you ever let your wallet linger on a table in a fast food joint? Then it goes without saying that storing your digital assets inside your own non-custodial wallet is indeed the best strategy.
The future is decentralized
Code is law. This goes for every Dapp (Decentralized Application) that lives on any smart contract network today. After all, you can only fleece and manipulate your customers to a certain extent before they opt to use decentralized alternatives.
Knowing what you know now, the rise of DeFi is in no means accidental. It is in fact a healthy response to all the shenanigans that centralized exchange throw at us on a daily basis. The more they manipulate, the more people join DeFi and never look back. When your trading is 100% transparent and auditable, the choice becomes obvious and logical.
Today we have a plethora of Dapps that offer us decentralised yield farming, staking, trading and much more. Thanks to new bridges it’s easy to hop from Ethereum to Fantom and from Arbitrum to Metis. The only obstacle that stands in their way of DeFi adoption is the learning curve - using DeFi is (still) a bit difficult for newbies.
With time new and better ecosystems will pop up and more user-friendly options will appear. It’s just a matter of time. If you’re building your own Web3 project, definitely tap into the endless possibilities of DeFi and discover what real world problems you can help solve. Success will be the only inevitable outcome.
Jesse Livermore was considered to be the best trader in the world. During his career he has earned (and lost) millions of dollars. Even this man of iron will and perseverance wasn’t immune from the tricks of large centralised institutions. On the 28th of november 1940 he booked a room in the Sherry-Netherland hotel in Manhattan and shot himself in the head. For every trader and investor alike, the loss of Jesse Livermore was a massive tragedy. For the large centralised institutions it was just another Thursday.
