Traders lost money on margin tokens of the Binance exchange, although they expected to make a profit, writes CoinDesk. Binance confirmed that some customers suffered losses on DOWN tokens, which are meant to capitalize on market declines while the market was actually falling.
The exchange explains what happened by the actions of the algorithm, which behaved in full accordance with the established model during the market crash. She also notes that the risks of margin tokens were disclosed in advance.
The largest number of complaints is associated with the events of May 19, when the price of bitcoin dropped from $ 43,500 to $ 30,000. A number of users saw this as an opportunity to earn money and purchased inverse margin tokens BTCDOWN and ETHDOWN. However, instead of rising during a market decline, such tokens in some cases also went down, and their supply increased sharply.
According to Binance, along with the rise in the price of such tokens, their large volumes were redeemed by traders in a short time. This, in turn, led to a sharp decrease in the volume of capital allocated to provide them. As a result, the leverage exceeded the acceptable values, and the algorithm took measures to restore it. His actions led to an unexpected drop in the price of tokens.
This is how Binance explains it:
Let’s say there is a DOWN token with $ 100M in equity and $ 180M in futures position. The real leverage in this case is 1.8x.
When the DOWNUSDT perpetual futures price drops by 5%, the value of the futures position increases by $ 9 million to $ 189 million. The DOWN token brought in $ 9 million, and the available capital is now $ 109 million. The real leverage is 1.73x.
Now suppose the DOWNUSDT perpetual futures price drops another 120%. The futures position will increase by $ 226.8 million to $ 415.8 million, and available capital by $ 226.8 million to $ 335.8 million. Real leverage has decreased to 1.238x.
Since the real leverage is now outside the target range of 1.25 – 4x, a rebalancing is triggered and the algorithm adds a futures position to increase the real leverage to stay within the target range. For example, if the algorithm decides to rebalance from 1.238x to 1.7x, it will add a $ 155.06 million futures position, increasing the total futures position to $ 570.86 million, which is 1.7x equity.
As the algorithm gains futures positions, the DOWNUSDT perpetual futures price declines due to the large number of short positions. Now, suppose users have redeemed a large volume of DOWN tokens, reducing the available capital from $ 335.8 million to $ 130 million, which means that the leverage is now 4.39x.
Since the leverage is out of the target range, the algorithm should close short positions at a disadvantageous rate by buying long positions in a volatile and illiquid market, leading to a reduction in net worth. It may sound counterintuitive, but a reduction in futures positions can lead to further leverage in extreme market conditions.
This is why, despite our best efforts, there is no way to lower leverage until the subscription and redemption of tokens is stopped.
On its website, Binance says it does not publicly disclose leverage targets or rebalancing timing, as traders could take advantage of this information to gain an unfair advantage. Variable leverage is what differentiates Binance margin tokens from similar offerings from other exchanges. Thus, when trading them, users need to take into account not only the directions of the market movement, but also other, non-obvious factors.
The exchange also denied claims of unreasonable issuance of new tokens. “We only issue tokens based on user demand. We have no control over the offer. Everything is determined by demand, ”the company said.