Everything crumbles when the margin calls

Leo Zhang

By Leo Zhang

"There are three ways to make a living in this business: be first, be smart, or cheat." --John Tuld, Margin Calls

"You know, the feeling that people experience when they stand on the edge like this isn't the fear of falling -- it's the fear that they might jump." --Will Emerson, Margin Calls

Introduction to futures contract
(OKEx)

"OKEx futures contract is a derivative launched by OKEx to trade contracts of digital assets such as BTC and LTC. Each contract represents USD100 of BTC, or USD10 of other digital assets (e.g. LTC, ETH etc.). Investors may open long to profit from the increase of a digital asset's price, or open short to profit from the decline of a digital asset's price. The available leverages for futures contract are 10x and 20x."

Earlier this year, a disturbing video clip went viral in Chinese cryptocurrency chat rooms. A trader who lost $10 million worths of Bitcoin as the result of a 40 percent Bitcoin futures price drop, stormed the heardquarters of the exchange and threatened to commit suicide in front of the company's CEO.

The exchange later launched an investigation into the abnormal price drop, and announced it would roll back trades from the future contracts market may have resulted from manipulation. However, OKEx's nightmare was far from over. On July 31st, after another user lost an outsized gamble on Bitcoin futures, the exchange was forced to clawback millions from the counterparties.

Regarding the forced liquidation incident on July 31, 2018
(OKEx)

"An enormous long position in BTC0928 futures contract was force-liquidated at 20:17:14 July 31, 2018 (Hong Kong Time, UTC+8). Due to the sheer size of the order, our risk management system may be triggered to activate the societal loss risk management mechanism."

In an article below, David Gerard, the author of Attack of the 50 Foot Blockchain discusses how and where OKEx's margin trading went wrong.

The OKEx margin trading disaster - how crypto margin trading goes wrong
(David Gerard)

"OKEX Futures uses a 'full account clawback' system to calculate the clawback rate. The system’s margin call losses from all three contracts will merged and clawbacks will be calculated according to each user’s entire account profit, instead of calculating each contract’s margin call loss and clawback separately. Only users that have a net profit across all three contracts for that week will be subject to clawbacks. Clawbacks will only occur if the insurance fund does not have enough funds to cover the system’s total margin call losses."

In the past year cryptocurrency exchanges were wildly profitable, and the competition for dominance is fiercer than ever. Exchanges launch margin trading to attract the most risk-taking players.

OKEx's future trading shortfall 'a valuable lesson' for cryptocurrency exchanges
(CoinTelegraph, by Darryn Pollock)

"Futures trading in Bitcoin, as well as other cryptocurrencies, still has a long road to go before it can be considered totally fail-safe -- and even then, there are bound to be mishaps. However, like Cheung says, there are lessons to be learned as the trading option matures in this new and volatile space."

What does the OKEx debacle mean for Bitcoin futures?
(Forbes, by Peter Tchir)

"This particular trade, and unwind seems to have affected bitcoin pricing globally and likely impacted trading of the U.S. listed contracts as well. Volumes and open interest seemed to have increased around the time of this large trade unwind. It could be a coincidence, though I suspect that some smart traders, aware of the situation, put short trades on in these future contracts to take advantage of the forced unwind."

Technical Updates

Debate between Charles Hoskinson and Vitalik Buterin on Ouroboros vs. Casper

New Even Faster Raven x16r/x16s Spmod-git #6 fork of ccminer Available
(Crypto Mining Blog)

"Performance wise the spmod-git #6 seems to be slightly faster than T-Rex and z-enemy 1.14, but could be just a bit slower (in some of the algorithms) behind the latest z-enemy 1.15a. However you should not forget that the z-enemy miner is a closed source one and comes with a built-in 1% developer fee, while the Raven x16r/x16s Spmod-git #6 miner is free, open source and with no dev fee so taking that into account the end result in terms of hashrate you get maybe is already pretty much the same."

Update on potential changes to ZenCash mining algorithm
(ZenCash, by Rolf Versluis)

"It’s also worthwhile to look, longer term, to change to an algorithm that is more balanced between CPU, GPU, FPGA, and ASIC. The most balanced algorithm between GPU and ASIC in production right now appears to be Ethash. There are other algorithms in development, including Prog-POW and Merkle Tree Proof (MTP), that may be even more balanced between CPU, GPU, FPGA, and ASIC. One of the reasons for making this change is to give as many different people the opportunity to mine ZenCash as possible, expanding the community. This type of algorithm might be a good one to change to at the same time that ZenCash potentially changes from blockchain to blockDAG."

Decred Journal- July 2018

Decred Journal – July 2018 from r/decred

For CTO: When is the time to pay technical debt?
(Hackernoon, by Oleksii Fedorov)

"PS: what can be improved with a small 'inline' refactoring during feature development, shouldn’t appear on the schedule. Make sure your developers have the freedom to make minor improvements during their feature work. Here we are talking about more substantial problems, that can’t be handled via simple refactoring."

Watch this 15-year-old hacker play DOOM on John McAfee's 'unhackable' crypto-wallet
(Hard Fork, by David Canellis)

"Keep in mind, Bitfi’s wallet is meant be the world’s first ‘unhackable’ device, supposedly doubling as a secure cryptocurrency storage solution. But as we already know, this is hardly the case."

News & Commentary

Stablecoins in the wild
(Hackernoon, by Gary Basin)

"When looking at measures of stability, we find it highly correlated with liquidity. However, while Dai and bitUSD have similar volumes and relatively low liquidity, we see bitUSD seems to be significantly less stable. Not only does it have much wider trading ranges (more outliers) but also does not even trade at an average price of $1.00 — the target for a USD stablecoin."

NBCU's latest online video idea: paying viewers
(The Information, by Tom Dotan and Jessica Toonkel)

"The tentative name for the service is Watch Back and it would feature episodes of TV shows and web series from NBCUniversal’s own TV networks—like NBC, USA and Bravo—as well as those from outside web sites. To entice people to watch, Watch Back viewers would earn points that could be redeemed for gift certificates, according to several people with knowledge of the plans."

The financial crisis hurts middle- and lower-income class the most