The Art of Liquidation: Part II – The Polo-$CLAM-Chowder
If an asset is very illiquid this can lead to great volatility. The order books are thin and medium or even small market orders move the market. Everybody who tried to accumulate microcaps before knows how difficult it is to build or dump a position that is bigger than the orderbooks. With microcaps already small buys or sells can lead to massive slippage. Shitcoin Margin Trading wih illiquid “shitcoins” is a recipe for deseaster.
Poloniex offers a peer-to-peer-system for margin-lending on its exchange. And it offers trading on margin for extremely illiquid tokens. This opens a possibility for whales to accumulate a bigger position of this shitcoin, short it with high leverage and then start dumping the coin to crash the price. Flash Crash and Haircut On the 26th of may the was an incident on Poloniex.
CLAM Flash Crash
$CLAM Token, an illiquid “shitcoin”, had a flash crash. Within an hour the token lost over 75% of its worth. This crash caused a chain reaktion and led to the default of a high number of margin loans. A loss of about 1800 Bitcoin.
On May 26, a sudden, severe price crash in the CLAM market caused a number of margin loans to default, resulting in a roughly 1800 BTC loss in the Poloniex BTC margin lending pool for non-US customers.— Poloniex Exchange (@Poloniex) June 6, 2019
The exchange reacted with socializing the losses. The loss was spread over all margin lenders and all active loans had to take a haircut of about 16,2%.
Dangers of Manipulation
The system of socialized losses is known from the OKEx-whale (or the bailout of the banks) but on Polonioex there is the addional danger of a flash crash with illiquid tokens. Expecially bigger players have an easy way to manipulate and they will use it eventually. Even with the pretty liquid Bitcoin the underlying indizes are being manipulated. So surely smaller token with less liquidity, which are moved with a lot less capital, are being manipulated, too.