Poloniex: Careful, This Can Happen When You Lend Your Crypto On Exchanges


Poloniex is an established cryptocurrency exchange. The exchange was launched in 2014 and was the largest by daily trading volume for some time. Even today, it is still one of the top 50 exchanges. The company has changed owners multiple times. Lately it was revealed that Tron’s Justin Sun entered Poloniex as an investor.

Poloniex offers the possibility to lend your coins for margin trading, and earn interest for it. Last year, it came to an incident on the platform. On the 26th of May 2019, the price of the cryptocurrency CLAM had a sudden crash. The price fell by a half within a few hours. Due to lack of liquidity, multiple borrowers couldn’t close their positions in time, causing a loss of 1,800 BTC.

Poloniex made the incident public on the 6th of June 2019, and told the lenders that the losses would be divided on all of the lenders for the time being:

Dear Poloniex customer,

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 generalized loss in the Poloniex BTC margin lending pool.

All BTC loans on Poloniex are lent in a common pool that is shared across all markets and borrowers. Today, we recognized the generalized loss across lenders in the BTC margin lending pool. As a result, the principal of all active BTC loans as of 14:00 UTC today has been reduced by 16.202%. As a lender in the pool, you will see the reduction in your account when you next log in.

We’re actively pursuing the defaulted borrowers for repayment of the BTC they owe to the lending pool. As we recover funds, we will return them to affected lenders. We’re also exploring other ways to help defray your losses. As this work proceeds, we will provide regular updates.

Poloniex statement on the 6th of June 2019

On the 14th of July 2019, Poloniex announced that they will repay 10% of the lost money, and do their best to fully compensate the losses. However there haven’t been any development on that subject so far. The crypto exchange stated that they would waive the trading fees for the victims of the CLAM crash, until their losses have been repaid.

But for many this solution wasn’t good enough, since a big chunk of the lenders were risk averse investors, who would rather lend out their crypto at less risk and lower returns, than accept the comparatively high risk of trading.

The last update regarding the incident came from Poloniex on the 15th of April 2020. It said that Poloniex understands the frustration of users and is still doing all it can to restitute the damage done to them. Furthermore, Poloniex asserted an additional time that they would waive the trading fees to equal the losses. Additionally, monthly updates were promised on the subject. However no updates have been made since April.

Is there any hope for the affected?

It’s now been over a year since the incident, and so far little has been done and the affected people have been left hanging. CryptoTicker’s requests for a statement have been unanswered as of the time of publishing. Which makes it seem like the exchange is trying to llet the whole affair die down. It’s hard to say whether the users will ever see their capital again, which Poloniex put at high risk and subsequently lost in a highly illiquid and obviously underinsured trading pair like CLAM. The question about whether some improvements have been made since to avoid similar incidents in the future, also went unanswered by the company.

Conclusion

Even the supposedly safe lending of crypto assets bares risks. It’s hard to tell with what precautions exchanges take to protect their customers’ funds, and if they take the management of assets that aren’t theirs seriously. Exchanges earn a bit of fees on lending operations as well. There are little differences in this case between Poloniex’ behavior and that of banks: profits are privatized and losses are socialized. Another exchange known for lending funds is Bitfinex, which hasn’t encountered any problems so far. After they were hacked in 2016, Bitfinex was loyal to its users and repaid every cent.

There’s a Telegram channel for those affected by the CLAM crash. Should you also have been affected, you can join the public channel here.

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