The recent crash of the ZKJ token has raised significant alarm among cryptocurrency investors. With over 80% of its value lost in a single day, this event has intensified discussions about risks in the crypto market.
Causes of the ZKJ Token Crash
According to the official report from the Polyhedra team, the rapid decline of the ZKJ token was not caused by a single issue but rather a confluence of coordinated actions and market conditions. The main factors included:
- A targeted liquidity attack. - Significant deposits of ZKJ tokens to centralized exchanges (CEX) by major players like Wintermute. - A wave of cascading liquidations on leveraged trading platforms.
Liquidity Attack as a Catalyst
The initial catalyst for the sell-off, as described by Polyhedra, was a deliberate attack targeting the liquidity pools where ZKJ was traded. The report mentions significant withdrawals from the PancakeSwap ZKJ/KOGE V3 pool. Such attacks aim to drain available liquidity, making the token’s price highly susceptible to large sell orders. Additional factors:
- Weakened Pool Stability: Earlier changes, such as Binance reducing Alpha farming rewards, had already diminished incentives for liquidity providers. - PancakeSwap V3 Dynamics: Concentrated liquidity in V3 pools means that when a token’s price moves outside the narrow range where liquidity is concentrated, volatility increases dramatically.
Role of Cascading Liquidations
As the spot price of the ZKJ token plummeted, a domino effect unfolded across various trading platforms. Traders who had taken leveraged positions on ZKJ, anticipating a price increase, found their collateral values falling below critical thresholds. Platforms like Bybit experienced a wave of forced liquidations. When a position is liquidated, the platform automatically sells the trader’s holdings to cover the debt, adding substantial downward pressure on the price. This phenomenon, known as cascading liquidations, is often an accelerant during sharp market downturns.
The incident involving the ZKJ token highlights the inherent risks present in the volatile cryptocurrency market. Takeaways from this event can assist projects and traders in better risk management and understanding market structures amidst sudden price swings.
