Contract Algorithm Scythe: The Cause of Alpaca's Delisting Before the Short Squeeze and the Effect of Contract Paradox

Author: @agintender

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The true nature of perpetual contracts is not revealed during their smooth operation, but is exposed in moments when they are under extreme pressure, on the brink of collapse. The unusual event of Alpaca Finance ( $ALPACA ) perpetual contracts being announced for delisting is a perfect example that reveals this essence of “short squeezing”.

“Short Squeeze” is a classic financial hunting game that combines market structure, capital leverage, and group psychology into a brutal art. The bloodshed and violence attract a group of bewildered onlookers. Traditional market logic suggests that the delisting of an exchange is a strong bearish signal, inevitably leading to a crash in asset prices as its liquidity will be stripped away and trading channels will close. However, in the case of the ALPACA incident, a significant negative fundamental news triggered an explosive price surge of thousands of percentage points. The driving force behind this anomaly did not stem from any improvements in the project’s fundamentals, but was entirely dominated by the unique mechanisms of its perpetual contract market. This “perpetual contract paradox”—where a negative catalyst triggers an extreme positive price reaction—has made perpetual contracts both the stage for this game and the weapon of the game, creating a market reality that is completely independent of the project’s health or future prospects. Here, it is the mechanism of the tools that determines the outcome, rather than the intrinsic value of the assets; Here, perpetual contracts are not a venue for price discovery, and funding rates are not tools for regulating market games, but rather “weapons” for harvesting retail investors. Reading Guide: For friends who are not familiar with the background and factors that led to the Alpaca event, it is recommended to start from the first section; for friends who want to understand the specific operational methods of Alpaca, it is recommended to start from the fourth section; for those who have read a long article about Alpaca, it is recommended to start from the fifth section. A brief review of the timeline:

1. Timing: The weaponized “Zeroing Consensus” In any meticulously planned campaign, timing is everything. For the operators of ALPACA, the best “timing” is not the breakthrough of a certain technical indicator, but the impeccable psychological consensus created by the world’s top exchange, Binance. Catalyst: The “Oracle” Effect of Delisting Announcements On April 24, 2025, Binance officially announced that it will delist the ALPACA spot trading pair on May 2 and will settle its perpetual contracts early on April 30. In the crypto world, Binance’s announcements are almost equivalent to a “divine oracle.” A “delisting order” is considered by the vast majority of traders as a death sentence for a project. This perception quickly formed a simple, clear, and highly tempting logical chain: delisting → liquidity depletion → loss of trading value → price must go to zero. This “must go to zero” mentality spread through the market like a virus, quickly unifying the expectations of nearly all retail investors. For them, shorting a token that is about to be abandoned by Binance is no longer a high-risk speculation, but rather a “sure profit” arbitrage opportunity. Hunting Ground Construction: Crowded Short Trap This powerful psychological consensus directly translates into market behavior: a highly crowded, high-leverage, and highly consistent behavioral pattern of short sellers rapidly forms. Data shows that after the announcement, the short OI position of ALPACA perpetual contracts soared sharply. The market has dug a perfect “short trap” for itself. The tweet on April 25 about “the requirement for market makers to issue more tokens” has pushed this “short-selling” sentiment to the extreme, following the precedent of the Gifto incident. Therefore, the market anticipates that this “issuance” behavior may accelerate the delisting timetable. Although this “issuance” event has not been specifically implemented, it is undoubtedly a successful “catalyst.” The big players / whales see everything. What they see is not a failed project, but a liquidity-rich fuel depot made up of countless future “forced buyers” (shorts forced to close positions). They do not need to create panic; they just need to patiently wait for the panic to ferment to its peak, allowing as many shorts as possible to enter this carefully arranged hunting ground. This “timing” created by authoritative announcements provides the perfect stage for subsequent harvesting actions.
2. Geographical Advantage: The Hidden Rules of the Battlefield If “timing” is the victory of psychological warfare, then “location” is the ultimate utilization of the microstructure of the market and trading rules. The major players cleverly chose two battlegrounds— the spot market and the perpetual contract market— and two pieces of news— delisting and additional issuance. By using the “extremely negative news,” they turned the funding rate mechanism of the perpetual contract market into a tool for harvesting retail investors. Pivot: Low Market Cap Spot Market The core strategy of the ALPACA event lies in exploiting the structural weaknesses of its spot market. At the time of the event, its circulating market value shrank to only about 5 million dollars. This means that manipulators only needed to deploy relatively small amounts of capital to create severe price fluctuations in the spot market, thereby leveraging a derivatives market that is much larger and highly leveraged. The spot price became the “price anchor” in this long-short battle. Punishment: Funding rates as financial weapons Perpetual contracts use the “funding rate” mechanism to anchor their prices to the spot price. Typically, when bearish sentiment is strong and the contract price is below the spot price, the funding rate is negative, and shorts need to pay fees to longs. In this game, a key move by Binance on April 29 completely changed the rules. The exchange announced that the funding rate settlement frequency for the ALPACA perpetual contract would be changed from the regular once every 8 hours to 4 hours / 2 hours, and eventually adjusted to once every hour, with a rate cap set at an astonishing “±2%”. (On the 30th, it changed to ±4%) The impact of this adjustment is devastating. It means:

Short position holders are required to pay a “holding cost” of ±2%/4% of their position value every hour.

The cost of holding a short position for one day can be as high as 48%/96%.

The funding rate is no longer a trading cost at this moment, but rather an unbearable financial “torture tool”. It sets a ticking “death countdown” for all short positions, forcing them to choose between liquidation and paying hefty fees, and ultimately the only rational choice is to surrender—buy to close. (Part four will explain this in detail)

3. Human and: The anticipated opponent

If the timing and geographical advantages are the leverage and utilization of the big players, then the success of “human harmony” stems from the precise prediction and utilization of the psychology and behavioral patterns of the other party in the game—the retail investors.

The script of the dealer vs. the paradigm of retail investors

Starting from the second half of 2024, a mindset has emerged in the market: “When an exchange issues an announcement (whether it’s listing/delisting = bearish = short selling).” The fatal flaw of this primary thinking is that it completely ignores the microstructure of the market, the extreme changes in trading mechanisms, and the existence of counterparty positions.

In contrast, the script of the dealer is multidimensional and multi-layered:

Accumulation period: quietly accumulate a large amount of spot chips when the market is in panic and prices are low (around $0.03). (There are market rumors that ALPACA has previously completed its “shell change”)

Baiting Period: Utilize official announcements to fully ferment the “zeroing narrative,” enticing a large number of shorts to enter the market and build a liquidity-rich opposing position.

Attack period: When short positions are the most crowded and the funding rate rules are most favorable, triggering the liquidation engine of the derivatives market by pulling up the spot.

Exit period: When the short squeeze reaches its peak and market sentiment turns to FOMO, sell off the accumulated spot assets to the retail investors who are chasing the rise, completing profit harvesting and causing a price crash.

Retail investors’ cognitive blind spots

The harvesting of retail funds is rooted in several key cognitive blind spots:

Ignoring structural risks: failing to assess ALPACA as a low market cap, low liquidity token, whose spot price can be easily manipulated by a small amount of funds.

Underestimation mechanism weapon: failing to regard extreme negative funding rates and high-frequency settlements as a financial weapon, but merely viewing them as manageable holding costs.

Misreading market consensus: Viewing one-sided bearish consensus as a definitive signal, especially the “increase issuance” tweet on April 25, has pushed it to the forefront, while failing to realize that when trading in one direction becomes overly crowded, the risk has disproportionately tilted in the opposite direction.

Retail investors see a project on the verge of failure, while the big players see a market full of structural flaws that can be exploited to harvest their opponents’ positions. Worse yet, the big players did not issue an invitation; retail investors came in on their own.

Four, 4% “death token” and conservative liquidation strategy

Catalyst: How Binance’s funding rate adjustment weaponizes time decay

If the accumulation of funds by whales and the bearish consensus in the market is a masterpiece of timing and conditions, then the adjustment of the funding rate rules by Binance exchange has become the catalyst that ignited this explosion (“death knell”). On April 25, 2025, Binance announced that the funding rate settlement frequency for the ALPACAUSDT perpetual contract would be adjusted from the usual once every 8 hours to once every hour. Subsequently, on April 30, the upper limit of the rate was further raised to ±4%.

The impact of this rule change is immense. As whales begin to push up spot prices, the prices of perpetual contracts lag due to short-selling pressure, leading to a significant discount of contract prices relative to the spot index prices. This causes the funding rate to quickly turn deeply negative. When the funding rate reaches -2% or even -4% per hour, it means that short traders need to pay long traders a fee of 2% to 4% of their position value for every hour they hold their position.

In theory, at a -4% rate, the funding cost of a short position held for 24 hours will amount to 96% of its principal, not including any losses caused by price fluctuations. This mechanism transforms the funding rate from a price anchoring tool into a punitive, time-based weapon.

Short sellers face a dilemma: either they are forced to close their positions due to rising prices, or they voluntarily close their positions due to the inability to bear the high holding costs. Time itself becomes the enemy of short sellers, as the pressure to surrender no longer comes solely from price movements, but also from unbearable capital losses. On the other hand, long positions are in a highly advantageous position, as they can profit from rising prices while continuously “sucking blood” by collecting the high funding rates paid by short sellers.

Some say that Binance’s decision to set a 4% funding fee per hour is “aiding the oppressor”—on the contrary, Binance’s action is a reluctant one.

From the exchange’s perspective, the most feared situation is the “liquidation” caused by severe volatility. This not only disrupts market liquidity but may also result in losses for the exchange. Therefore, before a definitive “delisting,” the exchange will take various measures, such as moving the liquidation line forward (allowing positions to be taken over by the clearing engine earlier), separating the insurance fund from the Alpaca trading pair, and adjusting funding rates to encourage positions to “retreat”. The goal is to minimize the exchange’s open interest (OI) as much as possible before delisting.

Imagine this, just before the delisting, when all the orders disappear — who will take on these positions? From another perspective, a fee rate of 4% per hour is also “dissuading” the market.

It’s a pity that this kind of “bloodthirsty” behavior not only failed to scare off the “fishermen,” but instead attracted more sharks.

V. Hunting Moment: Analysis of the Chain Reaction of Gradual Liquidation

After all the actors and props were in place, the market welcomed its final climax. In less than 24 hours from April 29 to April 30, the price of ALPACA skyrocketed in a stunning parabolic trend. The price soared from a low of about $0.065 to a high of over $1.47, an increase of over 2,160%. In this case, any “margin position” would be reduced to ashes.

The extreme price volatility this time is quantitatively reflected in the liquidation data. During peak periods, the total liquidation amount of the ALPACA contract exceeded $55 million within 24 hours, of which approximately $45 million came from the liquidation of short positions. This figure even surpassed the liquidation volume of Bitcoin for a short time, highlighting the severity of this short squeeze battle.

Trigger: A Well-Designed Liquidation Waterfall

With the return of “favorable timing, favorable location, and harmonious relationships” along with the “4% catalyst”, the harvesting officially begins. The process is akin to a precise chain reaction, namely the core mechanism of “short squeeze”:

Pulling Spot: The dealer invests funds in a poorly liquid spot market to violently push up prices.

Contract following the rise: The price of perpetual contracts acts as a shadow of the spot market, forced to follow the increase.

Funding rate assistance: The funding rate acts as an “assistant,” eroding the “maintenance margin” of short positions at a rate of 2%/4% per hour (increasing the cost of holding positions).

Triggering liquidation: The price surge first reached the forced liquidation line of the first batch of highly leveraged short positions.

Vicious cycle: The key is that the liquidation of short positions (forced closing) is essentially a mandatory market buy order. These forced buy orders further drive up the contract price, leading to more short positions with slightly lower leverage being liquidated.

More conservative liquidation strategy: The exchange is aware that “delisting” is imminent, so it will do its best to prevent “cross-collateral” events from occurring, which would affect the “insurance fund”. Therefore, a more conservative liquidation strategy will be adopted (the liquidation line will move forward).

Formation of a waterfall: Against the backdrop of implementing conservative strategies in exchanges, this cycle of “rise → liquidation → buy → rise again” continuously reinforces itself, ultimately forming a spectacular liquidation waterfall, with prices showing a vertical increase.

The table below records the key nodes of the ALPACA delisting short squeeze event based on public information, linking price, trading volume, liquidation data, and key events to visually present this “magnificent” process.

6. The narrative of delisting coins driven by short-squeezing.

After an epic short squeeze, everything inevitably comes to an end. With the final settlement of the perpetual contracts on April 30 and the delisting of the spot trading pairs on May 2, the price of ALPACA collapsed rapidly, returning to its value range determined by fundamentals.

At the end of May 2025, the project team officially announced that it would gradually shut down all operations before the end of the year. In the announcement, the team clearly stated that Binance’s delisting was the “last straw that broke the camel’s back,” which severely undermined market confidence, cut off the liquidity of the token and user acquisition channels, and forced the suspension of all potential new product development and merger plans. A project that was once highly regarded in the DeFi space thus came to a dismal end.

Before the delisting, the price fluctuations were directly compared by many analysts to the ALPACA incident, proving that this “delisting coin narrative” has become a speculation strategy recognized by the market. However, the demise of $ALPACA gave rise to a new and peculiar market narrative - the “delisting coin concept.” This incident showed the market a possibility: a token on the brink of fundamental death could potentially explode with an astonishing wealth effect in its perpetual contract market due to structural imbalance. Inspired by this, some speculators began actively searching for tokens with small market caps, poor liquidity, and potential delisting characteristics on major exchanges, aiming to replicate the short squeeze miracle of ALPACA. The price fluctuations of $MEMEFI that appeared later in the market before its delisting were also directly compared by many analysts to the ALPACA incident, proving that this “delisting coin narrative” has indeed become a speculation strategy recognized by the market.

This series of events reveals a core vulnerability in the low liquidity perpetual contract market: its internal mechanisms can be manipulated to produce results that are completely contrary to fundamental logic. Delisting, which should signal the end of an asset’s value, instead became a necessary precondition for igniting a brief but severe explosion in value. In an efficient liquidity market, the price of delisted assets should logically fall. However, the market size of ALPACA is extremely small (with a market cap of about 5 million USD), leading to a lack of liquidity.

This allows a determined actor to control the spot price with relatively little capital. By controlling the spot price, they can manipulate the price difference (basis) between the spot and perpetual contracts, which in turn directly determines the direction and magnitude of the funding rate. The highly concentrated short positions in the market provide ample fuel for this fire, with the giant whales controlling the spot price as the spark, while the funding rate rules set by the exchanges act as the accelerant. This fully illustrates that for certain specific assets, the perpetual contract market is no longer a place for price discovery, but rather a self-contained battlefield filled with game theory.

In this battlefield, the rules of the game are far more important than the value of the underlying assets.

Conclusion: A perfect hunt

The “delisting short squeeze” incident of ALPACA is a capital hunting event that utilizes timing, advantageous conditions, and human behavior to the extreme. The manipulators leveraged authoritative information (timing) to create a cognitive bias among retail investors, designed an inescapable trap using market structure and trading rules (advantageous conditions), and precisely exploited the collective behavior of retail investors (human behavior) as fuel to ignite the trap.

The final outcome of this game is extremely ironic: the speculative frenzy of the derivatives market ultimately became the last straw that broke the Alpaca Finance project itself. The project team clearly pointed out in the subsequent shutdown announcement that Binance’s delisting and the ensuing price volatility “seriously undermined market confidence” and forced all potential self-rescue plans to be halted.

For all market participants, the ALPACA incident is a brutal warning: in the dark forest of finance, you are trading not just assets themselves, but also engaging in a game with all other players and the rules of the game. Those who cannot see the overall structure and act solely based on a single narrative and habitual thinking are the most likely to go from hunter to prey.

May we always hold a heart of reverence for the market.

Knowing the facts and understanding the reasons behind them.