Crypto markets are extremely volatile. You never know how wildly up or down the price may go or when. This turned out to be a disaster for US crypto exchange Poloniex when an obscure token that it offered peer-to-peer margin trading on suffered a flash crash.
On May 26, the price of CLAM dropped so violently that margin borrowers blew their margins multiple times over. Now Poloniex has to figure out how to extract the losses from the borrowers. For now, lenders will have to suck up the loss.
Even lenders not active at the time of the crash were affected. David, it's straight out of the Bitfinex playbook. Haircut on unrelated lenders some time after the actual losses were incurred. In other words, the funds simply evaporated, and there was nothing to repay loans with. Naturally, the margin lenders, which only account for 0. Why did Polo not have better risk management in place? Why did it not have an insurance fund set up to absorb the loss? And why did Polo allow margin trades β and collateral loans β on an extremely illiquid coin in the first place?
Margin trading is risky business, even more so when you are trading crypto assets, due to their high volatility. When you trade on margin, you put down a collateral and borrow against that, doubling, tripling, quadrupling β or whatever β your trade. Trading on margin magnifies your profits, but also your losses. If the trade goes in your favor, you can repay the loan and tuck in a nice profit. Bitcoin derivatives exchange BitMEX loans you the funds for margin trades.
Poloniex does something different. They get paid in interest. Margin traders consume lending offers starting with the lowest rate. The coin launched in May , as a fork of Blackcoin BLK , which launched in February as a fork of Peercoin, an early proof-of-stake coin.
