Poloniex Pledges to Reimburse Flash Crash Losses, Victims Displeased

This was the case at the margin trading marketplace hosted by U.S.-based crypto exchange Poloniex toward the end of May, when the value of a lesser-known crypto asset, CLAM, experienced a sudden, sharp crash.

In what is its second attempt to make things right, Poloniex has said recently that, beginning later in August, it will start recovering the losses of the margin traders.

The given flash crash resulted in the loss of funds belonging to margin lenders, who typically placed a desired portion of their BTC up for margin traders to borrow in return for interest.

Poloniex has a lending pool, in which it aggregates funds that lenders have put up to match the orders from margin traders.

The first step that Poloniex took was to freeze the accounts of the borrowers - margin traders - who defaulted until they return the owed amount.

How is Poloniex dealing with it?Some users are displeased with how Poloniex generalized the loss, with some users claiming the exchange stole their funds because they didn't have active margin loans on the day of the crash.

"Based on an extensive analysis and deliberation, we came to the conclusion that given the way the Poloniex peer-to-peer margin lending system works, the most responsible way to realize the loss was to generalize it proportionally across lenders. In this system, like other P2P margin lending systems, lenders do not choose individual borrowers. Most lenders and borrowers participate in the market consistently over time with loans turning over rapidly within the pool. At any given time, which lenders and borrowers have been matched is arbitrary."

Improving as time goes onThe Poloniex crash and subsequent loss beg the question about how exchanges designate the margin trader status to users and the processes that surround the vetting procedures.

"Like other crypto exchanges, we don't have an additional approval process. However, we offer a low degree of leverage compared to peer exchanges and many of our users who trade on margin on Poloniex are heavy traders that use margin primarily to hedge their trading positions."

In traditional margin trading, refusing to meet a margin call could hurt the trader's credit report, making it hard to access credit elsewhere.