Bank Run

What is Bank Run?

A bank run occurs when a large number of customers attempt to withdraw their funds simultaneously due to fears that the institution is insolvent. In Web3, this typically affects centralized exchanges or lending platforms.

How does Bank Run work?

1. Negative rumors or evidence of financial trouble start to circulate.
2. Panic spreads as users rush to withdraw their assets before they are gone.
3. The platform, which may not have 1:1 liquid reserves, runs out of available funds.
4. To prevent total collapse, the platform often halts all withdrawals.
5. This action confirms the panic, often leading to bankruptcy or a total loss of trust.

Why does Bank Run matter?

Bank runs highlight the risks of custodial services and the importance of "Proof of Reserves." They remind users that on-chain transparency and self-custody are safer alternatives to trusting a centralized "black box."

Key features of Bank Run

• Mass simultaneous withdrawal attempts
• Triggered by loss of confidence or liquidity fears
• Self-fulfilling prophecy of collapse
• Often leads to "frozen" accounts
• Highlights the value of decentralized transparency

Examples of Bank Run

• The collapse of FTX, where a surge in withdrawals revealed a multi-billion dollar hole.
• Celsius Network halting withdrawals after users rushed to exit during a market downturn.
• Terra (LUNA) collapse, where the rapid exit from the UST stablecoin led to a death spiral.