On Thursday, 7th of 2019, popular crypto exchange Poloniex revealed that the margin lenders on its platform had lost 1800 BTC which was approximately $13.5 million according to the current Bitcoin market price. This loss was due the fact that the CLAM (Caritas Libertas Aequitas Monetas) market experienced a flash crash on the 26th of May 2019.
It may interest you to know the Poloniex platform is a peer-to-peer platform with a margin trade feature that accommodates both borrowers and lenders. Usually, the lenders are put together, and then get rewards in the form of interests on the funds they lend out. For an intending borrower to access the margin funds available for lending, the user must be able to provide some collateral, as a means to ensure certainty that the user will be able to have the debt paid back at some later date.
On the 26th of May, 2019, there was a 77% drop in the CLAM market, and this happened within 45 minutes on the crypto platform, thus causing sequences of liquidations that were created to reduce losses, and thus clear the debts with the lender. However, Poloniex’s automatic liquidation could not perform well, because the magnitude and speed of the crash was too much to handle in the liquid market. The crash led to the loss of 1,800 BTC, and at the time of writing this article, the lenders have not been repaid. Basically, about 16.202% of the whole margin lending pool got erased, which invariably affected some of the users of the platform.
In an unfortunate twist of events for both the borrowers and lenders, a great part of the collateral that was provided by the borrowers, was done with the CLAM crypto. Hence, with the current trading price of CLAM ($4.96), it may be very difficult for the borrowers to repay their debts, because CLAM is trading 80% less than before the crash happened.
Poloniex has made it known that they plan to contact users of the platform that defaulted on their part of the deal with the loans. According to the crypto exchange company, they are pursuing the borrowers that defaulted, in order to have them pay the lenders the Bitcoin they owe. Furthermore, they are exploring other methods to better manage losses that could affect margin lenders, which is why they have taken steps to prevent another similar situation from happening. Poloniex is planning to ensure that there is adequate protection for its margin users, and they are removing liquid markets like CLAM, MAID, FCT, and BTS. The crypto exchange company is also adding different layers of protections and processes needed to monitor and identify the risks in the platform’s margin markets.
There is a need for improved security and risk management processes for crypto exchanges, in order to prevent losses such as this one from taking place again. If cryptocurrency is going to rise to the point where it becomes a mainstream payment and investment system, it is imperative to nip the security risks, in the bud.