The Big Con: Socialized Losses & Auto-Deleveraging — 7th August 2018
The recent debacle at OKex clearly demonstrates the need for a different, fairer type of Bitcoin futures exchange. Here’s a quick summary of what happened…
- On July 31st a trader bought a large number of Bitcoin Futures contracts on OKex.
- The market went against the trader and OKex was forced to liquidate/sell his position.
- Whilst trying to liquidate a large long position in a falling market, OKex suffered losses greater than the amount of money in the trader’s account.
- OKex covered their losses by taking the profits from their winning traders.
- Winning traders on OKex lost 50% of the profits they made.
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Does that sound right to you? As a fee charging exchange, OKex has all the upside but when it screws up the losses are passed on to its users. This introduces unknown upside and downside when entering into a futures trade which creates futures contracts that are fundamentally flawed. For example, how could you use such a futures contract to hedge your position of physical Bitcoins if your profit can be arbitrarily confiscated by the exchange if your position is profitable?
Auto-Deleveraging
On Bitmex this forced liquidation would have been handled differently, using their system of auto-deleveraging. This means that instead of trying to sell a large number of Bitcoin futures contracts in a falling market, Bitmex simply cancels the short position by settling the contracts at their desired stop price. The winning counterparties to the losing trader have their winning positions cancelled. Despite correctly predicting the direction of the market and then putting their capital at risk, the winning counterparties to the liquidated trader effectively have their profits cancelled to protect the exchange from incurring a loss.
Bitmex is a fee charging exchange that happily charges you commissions to enter highly leveraged trades. But they can cancel your winning position at any time to protect themselves from the fallout of giving traders too much leverage. Just like on OKex, this creates futures contracts that are fundamentally flawed because you have unknown upside. You need to make the big profits to cover your losing trades, but on OKex and Bitmex you can never be certain that your profit won’t simply be taken off you or your winning position cancelled.
The Digitex Solution
At Digitex there are no socialized losses and no auto-deleveraging. Traders can enter into futures positions in the certain knowledge that winning positions will not be cancelled or their profits garnished.
This is made possible by the fact that compared to other futures exchanges, Digitex is extremely well capitalized and is capable of honoring all positions just like futures exchanges are supposed to do. How is Digitex so well capitalized? Because all liquidation slippage losses will be denominated in DGTX and the exchange’s automated market maker bots have a trading bank of 200m DGTX tokens which is 20% of the total supply. With such a large trading bank the market makers ensure thick order books in all kinds of market conditions, which means less slippage when liquidating losing positions.
However, even with such a large trading bank there will be very volatile market conditions where the price collapses quickly and the Digitex Futures Exchange suffers losses larger than the balance of the losing traders who are being liquidated. And this is something the Digitex Futures Exchange must obviously avoid whenever possible. But it’s not possible to avoid those situations simply by taking back profits or cancelling winning trades. The exchange must honor all trades at all times. Period.
Guaranteeing your winning trades and guaranteeing you will be paid out when you take a risk and get it right is a basic, fundamental role of a futures exchange and there is no clever system we can put in place to protect ourselves from that basic principle. It’s absurd that OKex and Bitmex feel entitled to charge fees on leveraged trades but when it goes wrong they keep the money they’ve made and take it from their users. Only in the crypto world could this even happen or be accepted by traders.
Digitex will revolutionize crypto futures trading with zero trading fees but we will also level the playing field and make crypto futures trading much fairer. Traders on Digitex can open a Bitcoin futures position and be sure that it won’t simply be cancelled or their profits garnished if they actually win.
Stay tuned, as we will continue to keep you informed about our company news as well as the Digitex Futures Exchange development progress. If you haven’t already done so, be sure to join our waitlist to get early access to the zero-fee futures exchange launching at the end of this year.
