According to a blog post published on June 06 by United States-based cryptocurrency exchange Poloniex, its margin lenders lost around $13.5 million on its platform thanks to a price flash crash in its Clam (CLAM) market.
Severe Flash Price Crash
Poloniex has a P2P (peer-to-peer) margin system where lender and borrowers can trade in cryptocurrencies. Lenders are pooled together and then rewarded with the interest from the loans they have given. For a borrower to avail of these funds, the user must hold a minimum required collateral so that there is certainty that the debt will be repaid by a given date.
Poloniex revealed that a severe price crash took place on May 26 on its CLAM market, where price plunged about 77% in a span of just 45 minutes. This led to these margin lenders losing about 1,800 BTC (Bitcoin), which was valued at $13.5 million.
The exchange reported that this incident impacted 0.4% of its users, and that it also resulted in a reduction of all margin loans for BTC by 16.202%.
After the flash crash, Poloniex froze all accounts of the defaulted borrowers. The exchange added that it would keep these accounts frozen until all loans were paid off. Poloniex also announced that it would return funds to all the affected margin lenders once the money lost was recovered.
The crypto exchange put forward a number of possible reasons that led to this flash crash. It stated that because the price declines were so sudden and there was a lack of liquidity in the CLAM market, it became impossible for the automated liquidations of the market’s margin positions to process transactions normally as they would have happened in a liquid market.
Added to that, a large portion of the loan value had been collateralized in the cryptocurrency CLAM, because of which both the positions of the borrowers as well as their collateral lost in value at the same time. And since CLAM is now trading at a price of $4.96 after having lost about 80% of its value, the expectation is that most borrowers are currently unlikely to pay off their debts.
Preventing a Recurrence of this Incident
Poloniex stated that to ensure that such a situation did not occur another time on its platform, it will be taking steps to protect its margins. One of these steps will be to remove illiquid markets such as CLAM, MAID, FCT and BTC.
The exchange will also add layers of processes as well as protections so that the risk in its margin markets are monitored at all times.