Blockchain

Binance – Customers Face Early Liquidation, Blame ADL System

Binance is in hot water with its customers again after they complained that the exchange’s auto deleveraging system (ADL) subjected them to unexpected liquidations, and was liquidating them from their positions early.

The news compounds a troubling 2019 for the Malta-based exchange, during which time it has been attacked by hackers who stole 7,000 bitcoin from the exchange’s hot wallet, faced a data breach in which hundreds of users’ private details including their names, photos and addresses, were leaked online, and faced accusations over the way it has handled two recent buybacks of its exchange token, Binance Coin (BNB).

The latest allegation stems from the operation of its ADL system, with users facing unexpected liquidations asking, why ADL was being used instead of the insurance fund.

So what’s going on?

When there are large liquidations in the futures market, and when an exchange’s insurance fund is unable to cover the losses, there are generally two methods a digital asset exchange can use.

The first is clawback, in which all profitable customers are subject to a clawback at the time their account is settled, the second method is to force the users with the most profitable and highest leveraged positions to take the liquidated orders, this is referred to as the ADL mechanism.

Different exchanges operate in different ways. 

For example OKEx, Deribit and Huobi, use the clawback method, while BitMex and Binance use an ADL method.

Binance has two extra rules to its ADL system:

  1. Auto-deleveraging occurs if the insurance fund decreases over 7.5 percent within eight hours. In contrast to other exchanges such as BitMEX and OKEx, Binance chooses to trigger auto-deleveraging before its insurance fund depletes. 
  2. If a liquidation order uses over 20 percent of the insurance fund, it will be auto-deleveraged directly without being covered by the insurance fund.

Data from Binance shows that its insurance fund balance increased by 45,660 USDT on October 24.

According to Binance’s website, its insurance fund now has a balance of 10M USDT. Since launching in early September, and is growing at a daily rate of around 22,000 USDT.

On the Binance website, it explains the maintenance margin must be at least half of the initial margin. Meaning when a user losses 50 percent of their margin, their position will be immediately liquidated.

This could explain why the insurance fund is growing at such a rate, by liquidating users early.

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