Cryptocurrency exchange Poloniex revealed in a post Thursday that lenders in its Bitcoin margin lending pool suffered a loss of 1800 BTC due to a flash crash in the Clams (CLAM) spot market on May 26.
On May 26, the Clams (CLAM) market dropped by 77% in value in just 45 minutes on Poloniex. Since CLAM is also available for margin trading on the platform, it caused a flurry of liquidations designed to cut losses in order to repay lenders.
The high number of defaults drained the lending pool with 1800 BTC remaining un-repaid by borrowers. In order to mitigate the loss, Poloniex socialized it among Bitcoin margin traders. The platform took 16.2% from the principal of all currently active Bitcoin loans.
Poloniex’s peer-to-peer margin system includes both lenders and borrowers, the lenders of which are pooled together and rewarded in interest for lending out their funds. In order for a user to borrow the margin funds, they must hold a certain amount of collateral in case of liquidations.
However, the magnitude of the crash was too severe for Poloniex’s automatic liquidation system to function properly due to the low liquidity of the CLAM market.
In the post, Poloniex stated:
“The velocity of the crash and the lack of liquidity in the CLAM market made it impossible for all of the automatic liquidations of CLAM margin positions to process as they normally would in a liquid market.”
Unfortunately for both lenders and borrowers in this case, much of the collateral provided by the borrowers was in the CLAM cryptocurrency itself. Since CLAM is now trading at an 80 percent discount than moments before the crash, it’s unlikely the borrowers are capable of repaying that debt.
Subsequently, the exchange froze all of the defaulted borrowers’ accounts and will keep them frozen until the borrowers repay their loans. Poloniex also claims that it will return the funds to affected lenders as soon as it recovers the lost money. Further, Poloniex said that it is seeking to contact those that defaulted on the loans in question.
“We’re pursuing the defaulted borrowers to get them to repay the BTC they owe to lenders. As we recover funds, we will return them to affected lenders. We’re also exploring other ways to help defray margin lender losses,”
To combat another situation like this going forward, Poloniex is taking steps to protect its margin users including removing illiquid markets such as BTS, CLAM, FCT, and MAID, add adding layers of processes and protections to monitor the risk in its margin markets.