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Jay Hao: Comparing Liquidation Engines of Crypto Exchanges
In the past two years, we have been channeling our efforts to perfect the risk management engine for the futures market, and we have yet recorded any BTC clawbacks for about a year and a half. This system was designed to retain a small amount of user funds in our insurance fund, so that we are able to survive a >30% drop in the market during volatility. I am very clear that blindly raising the maintenance margin ratio is a detriment to our users.
In the past 6 months, OKEx was publicly recognized by leaders from our peer exchanges, such as FTX and Deribit, on several occasions. Until March 13, we have never had the chance to really see how everything would come together, nor to let the market put our risk management system to test. We don’t want to call this Friday the 13th crash a black swan event, because we already foresaw a day like this might happen when we designed our systems. We were well-prepared for that.
As the CEO of OKEx, one of my proudest moments was when Huobi (our doppelgänger) copied and launched the same risk management system framework as ours just a few days before the market meltdown. They said that imitation was the sincerest form of flattery – I would like to think that Huobi was able to withstand this market volatility by following our footsteps, which is one of our “special” contributions to the crypto ecosystem. We won’t stop innovating. We aim to become the Nikola Tesla in the blockchain industry, building the core blockchain infrastructure and paving the ground for the success of all. I expect our closest friends who have been benefiting from our innovations, to continue to enjoy our fruits by improving the design of their swaps and linear derivatives based on ours shortly.
Like most derivative exchanges, we had our own hiccups on March 12–13 when our swap products went down for a few minutes on the Thursday night before the major drop. Our tech team was able to scale up operations and bring the system back online in a short period of time. The OKEx team was then on watch for the rest of the night in high alert, and no other major crash happened to the exchange. It was relatively smooth sailing for our derivative markets since then and we didn’t suffer any clawbacks.
As compared to other industry leaders, Deribit suffered an insurance depletion, but they acted quickly and injected 500 BTC of their own capital to protect traders. In the darkest hours of the Friday morning, much like S&P500’s circuit breaker triggers when the market drops a lot, BitMEX’s went down for maintenance and stopped the industry-wide liquidation from continuing.
Rumors had it that the maintenance was a manual move to stop BitMEX’s liquidation engine from cascading liquidating all users while their liquidity was thin. If BitMEX had not gone down, liquidations could have easily continued to drive down Bitcoin prices to three digits levels due to the inverse nature of their futures.
However, I do not believe it was intentional, and the industry should be thankful for how it panned out. If the market didn’t take a breather, it would really have gotten into a black swan level event. An afterthought was that it was very likely that BitMEX suffered a DDoS attack from its competitors, just like what happened to OKEx.
The worst situation seemed to happen on Binance, who suffered an approx. 50% depletion of their insurance fund. Their insurance fund works in a rather interesting way. For most exchanges, unless the insurance fund is completely depleted, the exchange will not enact any clawbacks nor auto deleveraging; but in the run down, Binance lost about $6.5m of their fund. Even with $6m remaining, they unwound winning trader’s positions by auto deleveraging (ADL), causing outrage on Twitter as expected. It was unclear that if the system was being fair or if privileged market makers that are not obliged to this auto deleveraging were involved. ADL is devastating to traders in these circumstances, if a user was using futures to hedge another position, he would have lost a significant amount on his other leg. Take for example, when the market crashed from 6000 to 5000 on Friday morning and if you were deleveraged, you were almost certain to suffer a 20% loss. While at OKEx, everyone plays by the same rules, clawback is only applied when insurance fund is depleted.
When all the dust settled, OKEx’s system withstood the volatility, and our turnover and liquidity was in the lead during the critical 24 hours. We might not be perfect and there is still room for improvement, but we promise that we shall continue to work tirelessly behind the scene to safeguard users’ assets.
Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
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