It never hurts to know more. The Bitcoin and Ethereum derivatives exchange, Deribit, has announced the launch of a publication called “Deribit Insights.” The new weekly report reviews crypto-related events, analyses market developments, and explores future advancements of the industry.
To produce the publication, Deribit is teaming up with two respected figures in the industry, Su Zhu and Hasu. Su Zhu is the Singapore-based CEO of Three Arrows Capital and Co-Founder of Sensus Markets. Hasu is an independent researcher and investor with a background in game theory.
The Deribit exchange’s founding vision was to create an efficient and fair marketplace for connecting traders of all backgrounds and trading styles. In keeping with the same rationale, the goal of Deribit Insights is to offer a range of topics on a weekly basis that appeal to both beginners and advanced cryptocurrency users.
Original Work On Derivative Subjects
In the first Insights report, the team digs into liquidation mechanisms used by derivatives exchanges. When a trader fails to respond to a margin call in traditional markets, brokers normally manage the liquidation process in order to prevent manipulation and severe flash crashes.
Faced with similar scenarios, cryptocurrency derivatives markets use automated processes instead of brokers to keep things relatively stable, but with only mixed success. These auto-liquidation processes currently exhibit some limitations, the report explains.
Citing examples of liquidation mechanisms from a number of derivatives services including BitMEX, OKEx, Kraken, Huobi DM, and of course, Deribit, the report suggests a number of recommendations for the prevention of manipulation and the improvement of market liquidity.
The publication delves into the problems associated with current solutions to automated liquidation, explaining, “Losses from a trader’s position can be larger than the entire margin collateral if the market moves beyond the bankruptcy level of the account.” In traditional markets, brokers can stop the bleeding, but in crypto markets, it’s a common problem that is sometimes difficult to control. “This frequently happens in crypto markets,” the report states, “due to high volatility.”
In particular, the report examines a flash crash incident that took place on Bitstamp on May 19, 2019. The analysis dives into the details of how the rapid $30 million BTC sell-off on Bitstamp — which formed half the BitMEX index at the time — triggered liquidations worth more than $200 million on the derivatives platform.
The usual “defenses” against such a crash failed due to insufficient fiat balances and the problem was exacerbated by delays in sending and receiving Bitcoin between arbitraged exchanges. Basically, traders simply could not buy or sell quickly enough from one exchange to another to balance things out before prices crashed dramatically.
The report uses this example to illustrate how new industry standards would prevent such an incident from happening again. A more fluid arbitrage system between exchanges “would blunt the price impact of a massive sell on one exchange by redistributing the liquidity across exchanges that were not affected.”
Leveraged spot trading and federated transfer of BTC between exchanges would help alleviate the problem. Circuit breakers, incremental liquidation, and liquidity backstop systems were also among the recommended approaches to solving the liquidation conundrum.
To examine the full details of the free Insights report for yourself, head over to www.blog.deribit.com