Backpack Exchange—a Solana-based centralized crypto platform founded by Armani Ferrante—experienced massive volatility-driven liquidations totaling $181.6 million, with $71.8 million from SOL perpetuals alone.
This was part of a broader market crash where DeFi lending platforms saw over $210 million in liquidations, and platforms like Backpack faced technical strains, including order lags and position anomalies.
Amid this, some users reported that after full liquidation wiping their account balance, subsequent deposits did not appear in their accounts. Instead, these funds were automatically applied to cover “unsettled equity” or negative balances from the liquidation, effectively settling debts owed to profitable traders the “winners”.
This sparked widespread outrage on X, with users calling it “diabolical,” “worse than banks,” and a “debt spiral” where losses extended beyond the initial position. Critics argued it blurred the line between trading and involuntary debt repayment, lacking safeguards like insurance funds or explicit user agreements seen in traditional finance.
Armani Ferrante’s Explanation
Backpack’s founder and CEO, Armani Ferrante addressed this directly in a reply on X, framing it as standard risk management to ensure platform solvency and fairness. If you didn’t have enough dollars to pay your losses, then you owe the winners money. If your deposit didn’t land, it’s because you paid the winners the money you owed them.”
Ferrante elaborated that this is non-recourse—meaning users can’t owe more than they deposit post-liquidation—and aligns with Backpack’s design philosophy. The exchange uses an insurance fund to cover negative equity initially, but if a user deposits before full settlement, it’s automatically allocated to close the gap.
Richard_ISC He emphasized that the system “operates as it should,” preventing the exchange from holding user debt and ensuring “the exchange has no debt. We settled all the unsettled equity.”
Ferrante has repeatedly discussed Backpack’s risk engine in detail, drawing lessons from FTX’s collapse where he was an early engineer. In an April 2025 thread, he outlined the three-stage liquidation waterfall to prioritize user protection and transparency.
Positions sold directly on the public order book to minimize impact. 99.82% of recent liquidations handled here; chips away slowly using order book depth to avoid “stink bids” and price bands for protection.
If book fails, positions handed to participating market makers. Absorbs cascades without market disruption; open program for MMs to join. Only 0.18% used in recent volatility.
Auto-Deleveraging (ADL) matches against opposite-side positions by margin fraction and delta. Prioritizes reducing system risk delta to zero; 0% usage recently, but “like a seatbelt” for worst-case scenarios.
Ferrante stressed that bankruptcy is a “valid state transition” in any margin system CEX or DEX, and Backpack avoids FTX-like issues by lacking internal market makers, infinite credit lines, or single points of failure. No liquidation fees are charged forgoing ~$18M in annual revenue, and real-time ZK proofs of reserves run every 10 minutes for transparency.
Backpack’s unique setup blends spot, perps, borrow-lending, and cross-collateral into one subaccount-based engine, inspired by DeFi (e.g., Aave). Users can borrow against their full portfolio, earning yield on collateral while paying interest on borrows—treated like “directional delta” positions.
Liquidation triggers at 100% Maintenance Margin Ratio (MMR): orders cancel, borrows repay from available balance, and positions unwind via the waterfall. The “automatic” part for deposits stems from unsettled negative equity.
If volatility spikes faster than liquidation like during the October 10 crash, accounts can briefly go negative. New deposits settle this to protect lenders and winners, as Backpack’s borrow-lending requires over-collateralization and real-time monitoring.
Ferrante argues this is “friendly and fair,” as it avoids exchange insolvency and uses deposits only up to the owed amount—no further pursuit. Those liquidated during the crash who deposited soon after saw funds “vanish” until settlement cleared typically quick.
Platform assets remained solvent $425M vs. $421M user assets, 100.89% reserve rate. No prior clear disclosure; feels like “stolen” funds or TradFi-style margin calls without recourse. Some question tech reliability, as the engine failed to close positions before negatives in extreme volatility.
Supporters note it’s non-recourse no endless debt and isolated to affected accounts; the system held up without broader failures. Backpack’s normalized post-crash; historical data synced. Ongoing improvements: Higher leverage caps, performance upgrades and clearer UI for rates/equity.
Ferrante: “Transparency around risk is key,” urging diligence on any exchange’s risk management. This incident highlights tensions in high-leverage crypto trading: Innovation vs. user protection.
Backpack prioritizes systemic solvency over individual buffers, but the backlash may push for better disclosures. For alternatives, users eye DEXs though they have their risks or lower-leverage CEXs. If trading there, monitor MMR closely and avoid depositing mid-liquidation.
