The DeFive Reforms
The October 10 crash offers a chance to rethink DeFi if it is to have a mainstream future.
The JDB Report has looked at the October 10, 2025 flash crash that originate on Binance as an opportunity to take stock of the industry’s shortcomings. The events of October 10-11 wiped out $19 billion from accounts that should have been considered solvent.
The crash has had an ongoing impact on an over-leveraged crypto market: bitcoin is now below $90,000 from the high of $160,000 in early October. Liquidity vanished during the crash as market makers fled the scene, but it has not returned, making the spot market on centralized exchanges prone to violent swings from relatively smaller trades. Money is existing bitcoin ETFs: one week in October saw more than $1 billion of outflows. The crypto market’s size has shrunk by 23 percent in just over a month, from $3.9 trillion on October 27 to $3 trillion on November 20.
The good news is that this dislocation has not impacted traditional finance. The heady rush in TradFi to embrace stablecoins, invest in bitcoin, and pursue real-world tokenization has not yet resulted in meaningful connections between digital assets and bank deposits or credit. Although some selling is due to TradFi accounts looking to derisk portfolios, most of the selling is probably by crypto whales eager to turn their vast paper fortunes into US dollars – in an environment of poor liquidity.
The bad news is that crypto markets remain unsuited for TradFi money. In the US there is talk of exposing retirement funds to these markets. This would be a mistake. Until DeFi market structure improves, the walls between TradFi and crypto assets must remain high.
However, the crash also points to several ways DeFi shortcomings can be addressed. Some of these ideas are anathema to crypto investors and builders. Others may be technically difficult. But they all deserve discussion.
One last point. Since we began writing about ‘10/10’, it has become clear that the crash wasn’t just a random event, a point at which leverage tilted too far and investors got nervous. No, this crash appears to have been manufactured. Hackers found vulnerabilities in Binance’s systems that allowed them to profit from triggering the crash. This exposes problems in Binance’s internal risk and collateral systems, vulnerabilities that probably exist at other centralized exchanges too. Binance has already paid $283 million in compensation for user losses attributed to its risk engine.
Market participants should not leave the matter with such small amounts of compensation (Binance reported 2024 revenues of $16.8 billion). When addressing market structure, inevitably this means the biggest changes must happen where the liquidity is: centralized exchanges. But more changes can be made around them as well. Here are The JDB Report’s five DeFi reforms: the DeFive.
1. Robust, Decentralized Oracle Infrastructure
Crypto markets rely heavily on price feeds from oracles to determine asset values for trading, lending, and liquidation. The October 10 flash crash revealed that centralized exchanges often use their own internal oracles, which can malfunction or be manipulated, leading to cascading liquidations and mispricing. (Binance had announced it will transition to oracle-based risk pricing, and the timing of the 10/10 coordinated selling may have been meant to front-run such changes.)
Experts like Joshua Tobkin of Supra emphasize that decentralized oracles, which aggregate data from multiple sources and use cryptographic verification, are essential for resilience. However, relying on multiple oracles increases cost and complexity, and there is still a risk of collusion if the underlying data sources are concentrated.
Challenges:
Ensuring true decentralization and avoiding concentration risk in data sources.
Balancing cost and redundancy: more oracles mean higher fees but greater reliability.
Transparency in oracle methodology is not universal, making it hard for institutions to audit risk.
Criticality:
High. Without reliable, decentralized oracles, institutions cannot trust the integrity of price data, which is foundational for trading, lending, and risk management.
Tradeoffs:
Higher costs for redundancy and transparency.
Potential for slower price updates if consensus mechanisms are too conservative.
Regulatory scrutiny over oracle providers could limit innovation.
2. Clearing and Settlement Infrastructure
Crypto exchanges currently combine multiple roles (price discovery, clearing, settlement, and custody) under one roof, creating conflicts of interest and systemic risk. In some jurisdictions, such as Hong Kong, this is mandated for virtual-asset service providers – a bad regulation, in our view. Centralized exchanges have made their founders billionaires by owning the full stack, but by doing so, they are no longer ‘exchanges’ like a stock market operator: they are brokerages and their users are unsecured creditors. Changing this will require a coordinated regulatory response, which is difficult: the carrot is transforming crypto markets to go mainstream; the stick is the threat that TradFi markets simply replicate onchain plumbing and keep crypto forever on the margins as a gambler’s den.
Where to begin? Arnab Sen of GFO-X argues that separating these functions, as in traditional finance, is essential for institutional adoption. A dedicated clearinghouse would provide default funds, rulebooks, and a waterfall for managing counterparty risk, allowing institutions to extend credit with confidence.
Challenges:
Building the infrastructure for real-time or near-real-time clearing and settlement.
Regulatory alignment across jurisdictions.
Convincing exchanges to cede control over clearing and custody.
Criticality:
High. Institutions require robust clearing and settlement to manage credit risk and ensure market stability.
Tradeoffs:
Increased operational complexity and cost.
Potential for slower settlement if regulatory requirements are stringent.
Risk of fragmentation if multiple clearinghouses emerge.
3. Liquidity Provision and Market Maker Standards
Crypto markets suffer from thin liquidity, especially for altcoins and during periods of stress. Market makers play a crucial role in providing liquidity, but their incentives and obligations are not standardized. The flash crash showed that market makers can retreat during volatility, exacerbating price dislocations. Experts suggest that exchanges could incentivize market makers to maintain liquidity during stress, but this requires clear rules and possibly regulatory oversight. We doubt that market makers are going to volunteer.
Challenges:
Defining and enforcing minimum liquidity provision requirements.
Aligning incentives for market makers to stay active during volatility.
Regulatory harmonization across jurisdictions.
Criticality:
Medium to high. Liquidity is critical for price stability and institutional participation, but some fragmentation and volatility are inherent in crypto markets.
Tradeoffs:
Higher costs for exchanges and market makers.
Potential for reduced innovation if regulations are too prescriptive.
Risk of regulatory arbitrage if standards vary by jurisdiction.
4. Regulatory Harmonization and Standards
The crypto industry is fragmented, with different exchanges and jurisdictions adopting varying standards for pricing, custody, and risk management. Experts like Adam Morgan McCarthy of Kaiko stress the need for regulatory harmonization, such as the EU’s MiCA framework, to create a level playing field and reduce regulatory arbitrage. However, achieving global consensus is difficult, and some jurisdictions may resist harmonization to attract business. Dubai, for example, has enjoyed great success by tailoring its regulations to the crypto industry, independent of its existing financial regulators. Should crypto-native regulators set the benchmark, or the US SEC?
Challenges:
Aligning regulatory standards across jurisdictions.
Balancing innovation with investor protection.
Managing regulatory arbitrage.
Criticality:
High. Regulatory clarity and harmonization are essential for institutional adoption and market stability.
Tradeoffs:
Slower innovation if regulations are too restrictive.
Risk of fragmentation if harmonization fails.
Increased compliance costs for exchanges and institutions.
5. Circuit Breakers and Anomaly Detection
Crypto markets operate 24/7, making it difficult to implement circuit breakers or other mechanisms to pause trading during extreme volatility. The flash crash highlighted the need for anomaly detection systems that can identify and respond to price dislocations, potentially pausing trading or triggering risk management protocols. However, implementing such systems in a decentralized environment is complex, and there is a risk of over-policing or under-policing.
Challenges:
Designing circuit breakers and anomaly detection systems that work in a decentralized environment.
Balancing the need for market stability with the desire for continuous trading.
Regulatory acceptance of such mechanisms.
Criticality:
Medium. Circuit breakers and anomaly detection can prevent cascading liquidations and market panic, but they are not a panacea for all market risks.
Tradeoffs:
Potential for reduced liquidity if trading is paused too frequently.
Risk of regulatory overreach if mechanisms are too prescriptive.
Increased complexity and cost for exchanges and market participants.