After the crash on October 11, Backpack was heavily criticized when users complained about "depositing money but not seeing the money" due to the ADL mechanism automatically compensating for losses in the P2P model and the "refund" in the form of KFC vouchers being misleading.
Backpack causes controversy over ADL liquidation mechanism and KFC voucher case
After the horrific crash on October 11, the crypto community has not stopped talking about the mass liquidation incident on many exchanges. Backpack Exchange has also been caught up in many accusations when some users reported that "deposited money but did not see the money".
The story quickly went viral, causing a wave of FUD on social media, forcing Armani Ferrante, founder and CEO of Backpack, to directly speak up to clarify.
What happened?
On the night of October 11, the crypto market experienced one of its most historic crashes, wiping out over $19 billion in futures positions in just a few hours. BTC and ETH prices plummeted, liquidation on most exchanges dried up, leading to a domino effect: a series of liquidations were triggered, and ADLs (Automatic Deleveraging) occurred simultaneously on major exchanges — from Binance, Hyperliquid, to Backpack.
Immediately after that crash, a small group of traders (about 40 people) encountered a strange situation: after being liquidated, they re-deposited money into Backpack to re-trade, but the newly deposited money "disappeared" from their accounts, up to 40,000 USD.
User Ferrari (@CryptoA77468) said:
"Imagine your account is burned, your entire position is liquidated, but you still want to "catch the Dip", so you deposit more money to buy back at a lower price. Then, the money leaves your wallet but never appears on the exchange. Because even after losing your account, you still owe money. That's exactly what happened to Backpack users."
Accompanying the Chia is a screenshot from Armani Ferrante - the founder of Backpack - with an explanation on Discord that reads:
“If you get liquidated, you have to pay the winning side. If you don't have enough USD to pay, you owe them. When you reload and don't see it, it's because that money was used to pay the winning side."
This statement, taken out of context, quickly sparked outrage on social media. Many users interpreted Backpack as using traders’ new deposits to pay others, and likened it to a form of forced debt repayment, meaning that even if the trader had lost everything, their additional deposits were deducted to cover the losses of the winning side.
Imagine getting liquidated, adding more money to grab some cheaper tokens… but it never shows up on the exchange. Why? You were STILL IN DEBT even after losing your entire account
— Ferrari 🕯️ (@CryptoA77468) October 11, 2025
That's what happened to @Backpack users
Way worse than what banks do pic.twitter.com/CH8poTjOwT
The ADL mechanism on Backpack is misunderstood by users
ADL (Auto-Deleveraging) is an automatic mechanism to reduce leverage, which means closing the position of profitable traders when market liquidation is exhausted to keep the system balanced.
In perpetual contracts (perps), there are no real assets like BTC or ETH, but in reality, it is just a sum of money that is transferred between traders according to the zero-sum principle: The winning side receives exactly the amount that the losing side loses. Each player must deposit a margin, and if the price fluctuates strongly, the losing side can lose all of its margin (get liquidated).
Normally, when a trader is liquidated, the exchange sells that position to the Order Book book and a new buyer takes over, helping to balance the Longing and Short. But if liquidation disappears, the exchange cannot find anyone to “carry” the order, and the insurance fund will temporarily absorb it.
However, the vault is not infinite, and when the Capital is depleted, the exchange is forced to activate ADL – the final step in the system protection chain . Technically, this mechanism is mandatory: no exchange can guarantee an infinite number of losers so that you will always win. In other words, ADL is like when you win so much in a casino that the whole casino runs out of chips to play.
Users accused Backpack of not properly executing ADL, which temporarily transferred negative balances to traders who deposited funds, causing some accounts to record negative balances after being burned despite ADL being activated.
However, the reality is that when the loser deposits more money, while the system is processing, the new deposit will automatically be used to cover the remaining loss, completing the payment cycle between the two parties, causing users to misunderstand.
1/ Since a lot of people are waking up to see their perps positions closed and wondering what the hell “Auto-Deleveraging” means, here's a quick and dirty primer.
— Doug Colkitt (@0xdoug) October 11, 2025
What is ADL? How does it work? And why does it exist? pic.twitter.com/I9MHXVAInd
Response from CEO
Following a wave of criticism of the liquidation mechanism, Armani Ferrante, CEO of Backpack, posted an explanation to clear up the misunderstanding.
- He expressed disappointment that his statement was edited and edited, affirming that the controversial statement was only a technical explanation of the PnL mechanism in futures, not the exchange's policy.
- According to Armani, Backpack is a true P2P platform, where buyers and sellers match orders directly, without a market maker or intermediary. Therefore, the winners' profits come from the losers' losses, the true nature of a zero-sum game.
- The incident occurred when the market collapsed, liquidation was not enough to meet the demand, causing many accounts to have negative balances. Some traders re-deposited money before the system had finished settling, causing the new deposit to be automatically used to cover the remaining negative balance, leading to the misunderstanding of "depositing but not seeing the money".
- Armani admitted that the biggest problem was not the post-trade settlement process, but the severe lack of liquidation when the market collapsed, as the exchange did not have an internal market maker.
- Armani emphasized that this is just a technical consequence of the P2P model. Traditional exchanges have insurance funds or market makers so they do not encounter this phenomenon, and all profits/losses are paid directly between players by Backpack.
- He also denied rumors of the exchange's insolvency, asserting that there was no clawback, no socialized loss, Proof of Reserves were still published daily, and all accounts were safe.
Waking up to see this post, I'm an exhausted, disappointed, and heart broken to see it go viral and to see the responses.
— Armani Ferrante (@armaniferrante) October 11, 2025
No one cares about our users more than our team, and if you take the time to actually read our Discord and my tweets over the past day, I hope you'll see… https://t.co/Dam7CKf3Zw
KFC voucher criticized by the community
Immediately after the collapse and a series of criticisms aimed at Backpack, a post on the @Backpack_CN channel made the community "hot-eyed".
In the post, the exchange appears to suggest that those affected will be “reimbursed” in the form of KFC vouchers, leading many to believe that the exchange is making fun of traders’ actual losses.
backpack exchange is reimbursing users with fried chicken pic.twitter.com/QDhiBoRI8O
— kook 🏝️ (@KookCapitalLLC) October 12, 2025
The post quickly went viral and was deemed disrespectful and inappropriate in a situation where some people were suffering great losses. Armani Ferrante later had to speak out, saying that the post did not represent Backpack, calling it extremely stupid.
Yesterday's "KFC voucher" post from @Backpack_CN was one of the most distasteful moments in crypto.
— Chocoo. SOL |🧁🎮🎒| (@chocoo_web3) October 12, 2025
Even @armaniferrante called it "f***ing retarded" offensive and not representative of the company🎒 @MadLads community manager called the post a "Big L" yesterday in a chat…… pic.twitter.com/HvC63QECYo
However, the user reaction was fierce, claiming that the exchange was disrespecting the financial loss of those affected, turning a serious incident into a joke. Although Backpack publicly apologized and affirmed that the voucher was not an official compensation mechanism.
Coin68 synthesis
