Binance, which has faced a turbulent 2019, is being questioned again, this time for the rapid growth of its insurance fund, with allegations made this is being done at the expense of its customers.
As well as facing a controversial data breach which saw customer details including names, addresses, signatures and photos of its customers leaked online, the exchange was hit by hackers who stole 7,000 bitcoin from its hot wallet, and it also faced criticism over the way it conducted its most recent token burns.
Now, independent research has found customers are questioning the exchange’s auto-deleveraging system, and accusing the exchange of using it as a way to gradually boost its insurance fund, which the exchange’s own data shows has been growing at a rate of around 22,000 USDT every day for the past two weeks.
Insurance funds and ADL
When there are large liquidations in the futures market, and when the insurance fund is unable to cover the losses there are two ways exchange’s balance the books.
First, profitable users can be subject to clawback at the time of settlement. Second, users with the most profitable and highest leveraged positions are forced to take the liquidated orders, referred to as the automatic deleveraging mechanism (ADL).
Currently, OKEx, Deribit, Huobi and other exchanges use clawback, while Binance uses the ADL mechanism.
The automatic deleveraging (ADL) mechanism means when liquidation orders cannot be closed, the system will adjust the liquidation order price in order to close them.
The difference between the adjusted liquidation order price and the bankruptcy price is covered by the insurance fund.
If it’s not able to fully offset the margin call losses, the system will force the users who have the most profitable and highest leveraged positions to match with the liquidation orders in order to close out the margin call losses.
But researchers found the insurance fund balance was increased by 45,660 USDT from October 23-24, and some users reported their positions were auto deleveraged.
Its official staff also said during the volatility on October 23, some users are auto deleveraged.
The research found the insurance fund was not used to cover the margin call losses before triggering the auto deleveraging system, which is inconsistent with the official explanation.
According to its official explanation, auto deleveraging will only be triggered if the insurance fund loses more than 7.5 percent within eight hours.
The research found Binance is not protecting customers’ interests with such rules on the insurance fund, which is grown by the liquidation orders from users who are liquidated 50 percent earlier.
It is clear users are unhappy with the methods Binance is using.