Liquidating a whale by hand, 22 times
Show notes
Patrick McKenzie (patio11) reads his 2022 Bits About Money essay demystifying financial leverage, starting from the balance sheet math that lets you work out in your head how big a drop in asset value wipes out a firm’s equity: add one to the leverage ratio and take the reciprocal. A firm levered ten to one is gone after a loss of about 9%.
He walks through how brokerages manage customer leverage with margin calls, and why paying down the loan lowers your risk more than depositing the same amount in shares. He then tells the story of a whale’s account blowing up on the DeFi lending protocol Solend during the FTX collapse. Solend pushed the interest rate on SOL deposits to 2,600% and still couldn’t attract enough, and Patrick spent an evening in Tokyo liquidating the whale’s debt by hand, 22 times, through software that crashed about 70% of the time.
Postscripts cover Solend’s rebrand to Save, what 2x leverage on Google would have earned since the essay was written, and why today he would just have an AI agent write the liquidation bot.
–
Full transcript available here: https://www.complexsystemspodcast.com/liquidating-a-whale-by-hand-22-times/
–
Presenting Sponsor: Mercury
Complex Systems is presented by Mercury. Mercury Payroll puts payroll, benefits, and compliance right inside your Mercury account. An in-house team backed by AI registers you in new states, files and remits your payroll taxes, and handles the notices, so you don’t have to copy from PDFs to Excel to web portals. Setup takes minutes, and Mercury Payroll is free for eligible Mercury customers through the end of 2026 at mercury.com/payroll
–
Links:
–
Timestamps:
(00:00) Intro
(01:06) Basic balance sheet math
(02:20) Why leverage as a concept is useful
(03:55) Managing leverage of one’s customers
(07:40) Mismanaging customer leverage
(09:10) Decentralized finance innovations in leverage management
(09:48) Sponsor: Mercury
(12:13) Solend and the whale
(21:31) Closing thoughts
(22:03) Wrap
All episodes of Complex Systems with Patrick McKenzie (patio11)