Conflict of interest disclosure: This article aims to conduct an objective analysis and mechanism interpretation of market events and does not constitute any investment advice. The author does not hold any positions related to the institutions mentioned in the text, nor does he have any conflict of interest with Mr. Yi Lihua or Liaode Capital. The risks in the cryptocurrency market are extremely high, and institutional behavior may trigger severe volatility; readers are advised to make cautious decisions.
The cryptocurrency market once again showcases the familiar drama of 'whales stranding'. Trend Research (Liaode Capital) founder Yi Lihua is known for holding nearly 600,000 ETH, and now his massive position is exposed to liquidation risk. From a peak net worth of $762 million to less than $200 million, he has begun actively selling ETH to 'maintain health', and this series of actions outlines a classic 'passive death spiral' driven by excessive leverage. This article places this event under the dual lens of history and structure, analyzing its similarities and differences with the collapse of Three Arrows Capital, interpreting the on-chain liquidation mechanism behind it, and exploring its deep implications for market cycles and ordinary participants.
1. In-depth deconstruction of events: This is not a crash, but a "passive liquidation spiral."
The core issue of Yilihua's position is not simply a "directional error," but an outbreak of a common structural risk in DeFi (decentralized finance) lending protocols.
Business model and risk mismatch:
Nature of business: As an investment institution (Trend Research/YaoDe Capital), its business model is to manage investors' funds and achieve excess returns through investments. The large amount of ETH it holds is likely a core asset or collateral for its portfolio.
Fatal operation: To pursue higher returns or maintain positions during a downturn, institutions are likely to have over-collateralized their ETH holdings in DeFi protocols like Aave and Compound, borrowing stablecoins for other investments or operational payments. This essentially adds financial leverage to the "buy and hold" strategy.
Formation of the "passive liquidation spiral":
When ETH prices continue to decline, it triggers the following irreversible chain reactions:Step 1: The value of collateral shrinks. The total value of the collateralized ETH decreases.
Step 2: The health factor approaches the warning line. The "health factor" in DeFi protocols drops to a dangerous threshold (usually close to 1).
Step 3: Faced with a choice: either add collateral (top up), or repay part of the loan to improve the health factor.
Step 4: Passive choices under liquidity exhaustion. When the cash reserves (bullets) of institutions and their investors are exhausted, and they cannot complete Step 3, the only remaining choice is to sell their other assets (including ETH itself) to repay the loan. This is "self-liquidation" or "active deleveraging."
Step 5: Selling intensifies the decline, forming negative feedback. The selling behavior in the market further suppresses the ETH price, worsening the health of their positions and forcing more selling, creating a "spiral."
Core judgment: Yilihua's selling behavior is not a strategic retreat after actively turning bearish, but a passive reduction in positions for survival under the leverage shackles. This marks its transformation from a "hunter of the market" to "prey hunted by the liquidation mechanism."
2. Historical reflection: The repetition and mutation of the Three Arrows Capital (3AC) tragedy.
Comparing the current events with the collapse of Three Arrows Capital in 2022 reveals striking historical similarities and key differences:
Similarities (core root cause):
High leverage against cycles: Both established extremely high leverage positions during the peak of market frenzy or bull market tops (whether through borrowing to buy assets or through derivatives). Three Arrows Capital was hit during the LUNA-UST crash, while Yilihua faced pressure amidst ongoing macro tightening and the depletion of altcoin liquidity.
Ignoring tail risks: They all underestimated the possibility of a continuous and significant market correction, and the risk models are fragile.
Triggering systemic concerns: Its scale is enough to instill fear of broader chain liquidations in the market, forming a narrative of "Could this be the next Lehman Brothers?"
Key differences (market evolution):
Transparency differences: Three Arrows Capital's positions are often on opaque centralized lending platforms (such as BlockFi, Genesis), while Trend Research's ETH positions are traceable on-chain (such as Aave), where their health, collateral amounts, and liquidation prices are monitored by the market, accelerating the formation of expectations.
Differences in liquidation mechanisms: Three Arrows Capital faces margin calls and eventual bankruptcy procedures from counterparties (CeFi platforms). In contrast, Yilihua faces public, automated, permissionless DeFi liquidation procedures. The latter resembles a timed public auction, where any arbitrage bot can participate.
Differences in contagion paths: The collapse of 3AC primarily spread through the credit network to other CeFi institutions. However, if the Yilihua event triggers liquidation, the selling pressure will directly and publicly impact the liquidity pools of exchanges like Binance, causing more immediate and transparent price effects on the secondary market.
3. Interpretation of on-chain indicators: How to monitor the next "Yilihua"
For ordinary investors, learning to monitor on-chain risks is crucial. Here are key indicators and tools:
Monitoring the collateral positions of whales:
Tools: Use DeBank, DeFiLlama, or Etherscan to track known whale addresses.
What to watch: Focus on their positions in major lending protocols like Aave and Compound. Pay special attention to changes in the "health factor." When this value drops below 1.2, it enters a high-risk zone; below 1.05, liquidation becomes imminent.
Exchange flow and supply changes:
Tools: CryptoQuant's "Exchange Netflow" indicator.
What to watch: Continuous and large amounts of ETH flowing from wallet addresses into exchanges like Binance may be an early indicator that whales are preparing to sell or repay loans associated with exchanges. Conversely, if whale addresses continue to withdraw coins from exchanges during a downturn, it may indicate a strong holding or accumulation intention.
Pressure in the derivatives market:
Tools: Binance contract trading data.
What to watch: Continuous negative funding rates for perpetual contracts, along with high open interest (OI), indicate crowded short positions. Once a whale sell-off triggers a sharp price drop, it may lead to a large number of short positions being liquidated (buying), resulting in a rapid rebound after a "spike" and dramatically increased volatility.
4. Macro correlation and ultimate insights: There is no eternal bull market, only eternal cycles.
The cases of Yilihua and Three Arrows Capital both point to an iron law transcending traditional finance and the crypto market: empires expanded through leverage in loose liquidity (bull markets) must undergo stress tests in tightened liquidity (bear markets or headwinds) until the most fragile link breaks.
Macro mapping: The global monetary expansion from 2020 to 2021 gave rise to an unprecedented leverage bubble in the crypto market. The aggressive interest rate hikes and quantitative tightening (QT) since 2022 have ruthlessly burst this bubble. The actions of institutions are merely the waves under the macro tide.
The ultimate lesson for ordinary investors:
Respect leverage: Whether for individuals or institutions, leverage is an accelerator, not a creator. It amplifies not only returns but also human weaknesses (greed and fear) and the destructive power of black swan events.
Focus on cash flow, not paper wealth: The collapse of institutions often begins with liquidity exhaustion. Individual investors should also ensure they have a continuous income or sufficient stable assets to cope with the long winter of the market and avoid being forced to sell at the bottom.
Use transparency to protect oneself: The on-chain transparency of the crypto market is a double-edged sword. It brings pressure for "open card games" but also provides ordinary investors with tools to monitor risks and respond in advance. Learning to use these tools is a survival skill in the new era.
Risk warning: The market may overreact to the difficulties of a single institution or underestimate its chain effects. In the current fragile market structure, any large position's passive liquidation could trigger a brief liquidity crisis, leading to significant price deviations from intrinsic value.
Open-ended interactive question: After witnessing a series of institutions like Three Arrows Capital and Yilihua collapse due to high leverage, do you believe that for ordinary investors, completely avoiding any form of leverage in cryptocurrency investment should become an unshakeable "iron rule"? Or, under strict limits (such as 5% of position value) and comprehensive stop-loss measures, is moderate leverage still a usable tool? Please share your views based on your understanding or experience.
