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Can you explain what you mean by crypto's forced liquidation rules? Not familiar with how that works at all.

toomuchtodo 4y ago
When you get margin called in traditional/centralized finance, humans intervene and liquidation is not immediate (except Interactive Brokers, who are closer to how crypto manages margin, and will liquidate you without a margin call). Maybe you put up more collateral, maybe you borrow from a line of credit, there is a buffer. As an individual, you work with your broker. As a larger participant, you work with the clearinghouse (of meme stock fame). In crypto, there is no buffer. Auto liquidation of undercollateralized positions occurs. All of those humans in the loop, “unfair rules”, and settlement delays crypto proponents complain about are the very things that make traditional finance stable. This is why traditional finance doesn’t take seriously the idea of immediate settlement, and why end of day settlement is as good as it’ll get.
- gst 4y ago
  > In crypto, there is no buffer. Auto liquidation of undercollateralized positions occurs. All of those humans in the loop, “unfair rules”, and settlement delays crypto proponents complain about are the very things that make traditional finance stable. Is auto-liquidation a bad thing? It leads to more volatility in the short-term, but it seems that there might be long-term benefits of ensuring that players with unresponsible business practices will be forced out of the market. "Traditional" crypto holders will be affected too (the value of their investment goes down while people are forced to sell), but this looks more like a temporary impact. As long as they don't trade on margin they won't be forced to sell and as long as they hold their own keys they are unaffected if exchanges are crashing. From a "price" perspective the current events might be bad for the crypto ecosystem, but from a "health" perspective I think that they could be positive, as only the responsible players with healthy business practices are going to survive.
  - UncleMeat 4y ago
    The concern is propagation. If margin calls blow up individual organizations or institutions, that's bad but not a fundamental threat. The issue is that things are connected.
    - deleted 4y ago
      [deleted]
    - gst 4y ago
      But it's only an issues for other connected entities when they are using risky business practices themselves. A stablecoin that backs its assets in the currency that the stablecoin issues (for example a USD-based stablecoin that is backed by US treasuries) won't be affected by any disruption in the market. An exchange that is fully backed and does not allow margin trading won't be affected either. Regular holders who hold their own coins or use responsible exchanges also aren't affected. Yes - there's quite a bit of propagation. But all entities affected by that propagation didn't seem to have proper risk management and used business practices that work well when the market does well, but that fall apart in case of high volatility. Maybe I'm just biased because I'm not a fan of margin trading (and similar practices), but I don't consider it a disadvantage if an ecosystem is hostile to those types of business practices.
      - xeromal 4y ago
        >But it's only an issues for other connected entities when they are using risky business practices themselves. I think that's the thrust of the argument. We're about to find out how many DeFi companies are utilizing bad business practices.
      - pessimizer 4y ago
        The process by which you create a bubble is when you create mechanisms to ship risk as far away from the people who are knowledgeable about it as possible. The core might all be completely self-deluded or intentional scammers, but the second-degree people who invested/loaned to them intended to some degree to take a bit less risk than being directly involved in the scam, the third-degree people who rely on the second-degree people thought they were allowing a little innovation instead of missing out by playing it too safe, the fourth-degree people aren't even aware that they're invested in the core scam or delusion at all, and make fun of it online. There's a fifth-degree of people who have no idea that whether they eat depends on the scam (because the fourth-degree was a municipal bond issue, the city is now drowning in liabilities, so they had to cut food banks.) edit: The most recent crypto peak was largely fueled by a ton of normies who put their retirements into something that has gone down somewhere between 40% and 70% in value since they bought it. Other people depend on those people.
pawelduda 4y ago
Not sure if that's what parent is about, but the reference may be to on-chain lending solutions that use price oracles to determine liquidation prices based on amount of collateral deployed. There are 9-digit lending positions in $ of crypto collateral that will be forcefully sold into the market if BTC/ETH keep dropping. Unless more collateral will be deployed, which lowers the forced liquidation price.
bombcar 4y ago
As the other comment says, liquidation in tradfi has manual intervention - the loans will say things like "IF the collateral mark-to-market value drops below $X, the lender MAY call the loan and force sale of the collateral" - the key being the IF. In a case where there's contagion [549] the banks or even the government can work to negotiate what's happening, and slow down the collapse (or even prevent it) - an example being the subprime mortgage backed securities which got to the point that nobody knew how to value them, so the government bought them all (and eventually actually "made" money by riding it out). DEFI has algorithms that lock up the capital and will automatically liquidate it if certain parameters are met - which others can use to "attack" it - if the oracle sees bitcoin fall below $20k in a flash crash, it triggers the selling of ten thousand coins, say, which floods the price down further, you snap them up, the crash is over, you slowly sell at $25k or whatever. Bitcoin itself is pretty resistant to this, but the other coins, not so much, especially the side coins. As a side note, most US home loans do NOT have a "call" clause and the bank can only initiate liquidation after you've missed payments and gone delinquent for a certain number of days; this was instituted in the US after calling mortgages contributed to the Great Depression. Some business loans can be called after a period of time for any reason (usually, interest rates have gone up). [549]: https://en.wikipedia.org/wiki/Financial_contagion https://en.wikipedia.org/wiki/Financial_contagion
WJW 4y ago
Say you have 100 USD, but want to make a bigger bet on crypto than that. You borrow another 900 USD from a crypto lender and invest the 1000 USD in some cryptocurrency. If the currency you invested in goes down by 10%, your original position of 1000 USD will be worth 900 USD, and you will still owe the lender 900 USD so your original 100 USD stake has been lost completely. The lender will then protect their loan by forcing you to sell the 900 USD in crypto that you still have and repaying the loan. This is in itself not unique to crypto (google the term "margin call" if you want to know more), but crypto is usually more automated about it and exchanges will sell positions without manual intervention. This sell pressure can push the coin even lower, leading to a chain reaction of liquidated positions. Often, the lender is also the exchange through which people hold their crypto so they don't even have to contact the holder before they sell their holdings.
- FabHK 4y ago
  Two things to add: 1. The price of an asset need not be a nice continuous line. It can jump. 2. That's why liquidation occurs not at -10%, but at some point before that, to manage this gap risk. Might be at -7%, or whatever. This reduces, but does not eliminate gap risk. For that, the crypto exchanges have insurance funds.
blitzar 4y ago
DeFi - Contracts are code. TradFi - Your word is your bond.
- rawoke083600 4y ago
  This ! The "idea" of Defi was that w wouldn't need "regulations and rules" since we could 'just' look at the actual deployed code(eth contract for example) to see if you going to get screwed. Of course few ppl actually look at the code, or sometimes the code is just bad and you get bad actors willing to exploit this. That being said: In practice and real life there are a bunch of dodgy companies and badly written eth-contracts(code).
  - ShamelessC 4y ago
    I suspect most experienced software engineers would find that all rather obvious. Bugs are a fact of life. Even formal verification can't save you from this. Good software is built to be resilient to our own bugs, because they are simply inevitable. It's not about good or bad programming, every one has the ability to make a simple mistake resulting in huge consequences. It's basically a rite of passage to have crashed a service with a code push.
    - rawoke083600 4y ago
      I was more pointing to the fact/class of bugs we don't even know are bugs yet, like "re-entrant" bugs for eth.(logic bugs ?) The cost of having a bug in an eth contract is many many times higher than say a wordpress site getting hacked ! Or having a bug in your online-design tool. I've seen many a times, "business ppl" just go with lowest cost when wanting some software done. Try going for the "lowest cost bidder" when getting a web3 contract coded ! You right, bugs do and always will exists and we are all but human, but some bugs have a much higher cost than other - even if they are simpler.
archerabi 4y ago
Here's a concrete example. AAVE is a protocol that allows lenders to lend money to borrowers in a decentralized manner. So as a borrower, today, if you were to borrower 8000 USDC and deposit 10 ETH as collateral, the AAVE protocol would automatically sell your collateral if the ETH price went to 941$. So your position is "auto liquidated". https://aavecalculator.com/ https://aavecalculator.com/ AAVE currently has ~$9.9B in assets locked into its protocol.
- djbebs 4y ago
  That no different from any margin loan
  - colinmhayes 4y ago
    Yes it is. In traditional finance, especially at the big players, the bank will call the person about to be margin called to tell them they need to post more collateral, or if it looks like the market is being manipulated they’ll let the loan be undercollateralized for a short time. Defi auto liquidation makes it much easier to spiral due to unwinding after small losses.
  - archerabi 4y ago
    Somewhat, look at toomuchtodo's comment. In tradfi, there are humans involved and you might be able to avert liquidation.
    - bombcar 4y ago
      To be clear, there are humans involved if the amounts are large enough - if you're playing with stocks and margin in your brokerage account it'll probably liquidate automatically, but even when I got a "margin call" by accident they gave me three days to resolve it before liquidation would happen. Part of it depends on what the margin is used for - margin for VTX is going to be handled differently than forex margin.
  - blitzar 4y ago
    It is no different at all. However, in traditional finance that is called a "margin loan" in defi it is called a "crypto interest account paying 20% with 0 chance of losing all your money"

When you get margin called in traditional/centralized finance, humans intervene and liquidation is not immediate (except Interactive Brokers, who are closer to how crypto manages margin, and will liquidate you without a margin call). Maybe you put up more collateral, maybe you borrow from a line of credit, there is a buffer. As an individual, you work with your broker. As a larger participant, you work with the clearinghouse (of meme stock fame). In crypto, there is no buffer. Auto liquidation of undercollateralized positions occurs. All of those humans in the loop, “unfair rules”, and settlement delays crypto proponents complain about are the very things that make traditional finance stable. This is why traditional finance doesn’t take seriously the idea of immediate settlement, and why end of day settlement is as good as it’ll get.

gst 4y ago
> In crypto, there is no buffer. Auto liquidation of undercollateralized positions occurs. All of those humans in the loop, “unfair rules”, and settlement delays crypto proponents complain about are the very things that make traditional finance stable. Is auto-liquidation a bad thing? It leads to more volatility in the short-term, but it seems that there might be long-term benefits of ensuring that players with unresponsible business practices will be forced out of the market. "Traditional" crypto holders will be affected too (the value of their investment goes down while people are forced to sell), but this looks more like a temporary impact. As long as they don't trade on margin they won't be forced to sell and as long as they hold their own keys they are unaffected if exchanges are crashing. From a "price" perspective the current events might be bad for the crypto ecosystem, but from a "health" perspective I think that they could be positive, as only the responsible players with healthy business practices are going to survive.
- UncleMeat 4y ago
  The concern is propagation. If margin calls blow up individual organizations or institutions, that's bad but not a fundamental threat. The issue is that things are connected.
  - deleted 4y ago
    [deleted]
  - gst 4y ago
    But it's only an issues for other connected entities when they are using risky business practices themselves. A stablecoin that backs its assets in the currency that the stablecoin issues (for example a USD-based stablecoin that is backed by US treasuries) won't be affected by any disruption in the market. An exchange that is fully backed and does not allow margin trading won't be affected either. Regular holders who hold their own coins or use responsible exchanges also aren't affected. Yes - there's quite a bit of propagation. But all entities affected by that propagation didn't seem to have proper risk management and used business practices that work well when the market does well, but that fall apart in case of high volatility. Maybe I'm just biased because I'm not a fan of margin trading (and similar practices), but I don't consider it a disadvantage if an ecosystem is hostile to those types of business practices.
    - xeromal 4y ago
      >But it's only an issues for other connected entities when they are using risky business practices themselves. I think that's the thrust of the argument. We're about to find out how many DeFi companies are utilizing bad business practices.
    - pessimizer 4y ago
      The process by which you create a bubble is when you create mechanisms to ship risk as far away from the people who are knowledgeable about it as possible. The core might all be completely self-deluded or intentional scammers, but the second-degree people who invested/loaned to them intended to some degree to take a bit less risk than being directly involved in the scam, the third-degree people who rely on the second-degree people thought they were allowing a little innovation instead of missing out by playing it too safe, the fourth-degree people aren't even aware that they're invested in the core scam or delusion at all, and make fun of it online. There's a fifth-degree of people who have no idea that whether they eat depends on the scam (because the fourth-degree was a municipal bond issue, the city is now drowning in liabilities, so they had to cut food banks.) edit: The most recent crypto peak was largely fueled by a ton of normies who put their retirements into something that has gone down somewhere between 40% and 70% in value since they bought it. Other people depend on those people.

pawelduda 4y ago

Not sure if that's what parent is about, but the reference may be to on-chain lending solutions that use price oracles to determine liquidation prices based on amount of collateral deployed. There are 9-digit lending positions in $ of crypto collateral that will be forcefully sold into the market if BTC/ETH keep dropping. Unless more collateral will be deployed, which lowers the forced liquidation price.

bombcar 4y ago

As the other comment says, liquidation in tradfi has manual intervention - the loans will say things like "IF the collateral mark-to-market value drops below $X, the lender MAY call the loan and force sale of the collateral" - the key being the IF. In a case where there's contagion [549] the banks or even the government can work to negotiate what's happening, and slow down the collapse (or even prevent it) - an example being the subprime mortgage backed securities which got to the point that nobody knew how to value them, so the government bought them all (and eventually actually "made" money by riding it out). DEFI has algorithms that lock up the capital and will automatically liquidate it if certain parameters are met - which others can use to "attack" it - if the oracle sees bitcoin fall below $20k in a flash crash, it triggers the selling of ten thousand coins, say, which floods the price down further, you snap them up, the crash is over, you slowly sell at $25k or whatever. Bitcoin itself is pretty resistant to this, but the other coins, not so much, especially the side coins. As a side note, most US home loans do NOT have a "call" clause and the bank can only initiate liquidation after you've missed payments and gone delinquent for a certain number of days; this was instituted in the US after calling mortgages contributed to the Great Depression. Some business loans can be called after a period of time for any reason (usually, interest rates have gone up). [549]: https://en.wikipedia.org/wiki/Financial_contagion https://en.wikipedia.org/wiki/Financial_contagion

WJW 4y ago

Say you have 100 USD, but want to make a bigger bet on crypto than that. You borrow another 900 USD from a crypto lender and invest the 1000 USD in some cryptocurrency. If the currency you invested in goes down by 10%, your original position of 1000 USD will be worth 900 USD, and you will still owe the lender 900 USD so your original 100 USD stake has been lost completely. The lender will then protect their loan by forcing you to sell the 900 USD in crypto that you still have and repaying the loan. This is in itself not unique to crypto (google the term "margin call" if you want to know more), but crypto is usually more automated about it and exchanges will sell positions without manual intervention. This sell pressure can push the coin even lower, leading to a chain reaction of liquidated positions. Often, the lender is also the exchange through which people hold their crypto so they don't even have to contact the holder before they sell their holdings.

FabHK 4y ago
Two things to add: 1. The price of an asset need not be a nice continuous line. It can jump. 2. That's why liquidation occurs not at -10%, but at some point before that, to manage this gap risk. Might be at -7%, or whatever. This reduces, but does not eliminate gap risk. For that, the crypto exchanges have insurance funds.

blitzar 4y ago

DeFi - Contracts are code. TradFi - Your word is your bond.

rawoke083600 4y ago
This ! The "idea" of Defi was that w wouldn't need "regulations and rules" since we could 'just' look at the actual deployed code(eth contract for example) to see if you going to get screwed. Of course few ppl actually look at the code, or sometimes the code is just bad and you get bad actors willing to exploit this. That being said: In practice and real life there are a bunch of dodgy companies and badly written eth-contracts(code).
- ShamelessC 4y ago
  I suspect most experienced software engineers would find that all rather obvious. Bugs are a fact of life. Even formal verification can't save you from this. Good software is built to be resilient to our own bugs, because they are simply inevitable. It's not about good or bad programming, every one has the ability to make a simple mistake resulting in huge consequences. It's basically a rite of passage to have crashed a service with a code push.
  - rawoke083600 4y ago
    I was more pointing to the fact/class of bugs we don't even know are bugs yet, like "re-entrant" bugs for eth.(logic bugs ?) The cost of having a bug in an eth contract is many many times higher than say a wordpress site getting hacked ! Or having a bug in your online-design tool. I've seen many a times, "business ppl" just go with lowest cost when wanting some software done. Try going for the "lowest cost bidder" when getting a web3 contract coded ! You right, bugs do and always will exists and we are all but human, but some bugs have a much higher cost than other - even if they are simpler.

archerabi 4y ago

Here's a concrete example. AAVE is a protocol that allows lenders to lend money to borrowers in a decentralized manner. So as a borrower, today, if you were to borrower 8000 USDC and deposit 10 ETH as collateral, the AAVE protocol would automatically sell your collateral if the ETH price went to 941$. So your position is "auto liquidated". https://aavecalculator.com/ https://aavecalculator.com/ AAVE currently has ~$9.9B in assets locked into its protocol.

djbebs 4y ago
That no different from any margin loan
- colinmhayes 4y ago
  Yes it is. In traditional finance, especially at the big players, the bank will call the person about to be margin called to tell them they need to post more collateral, or if it looks like the market is being manipulated they’ll let the loan be undercollateralized for a short time. Defi auto liquidation makes it much easier to spiral due to unwinding after small losses.
- archerabi 4y ago
  Somewhat, look at toomuchtodo's comment. In tradfi, there are humans involved and you might be able to avert liquidation.
  - bombcar 4y ago
    To be clear, there are humans involved if the amounts are large enough - if you're playing with stocks and margin in your brokerage account it'll probably liquidate automatically, but even when I got a "margin call" by accident they gave me three days to resolve it before liquidation would happen. Part of it depends on what the margin is used for - margin for VTX is going to be handled differently than forex margin.
- blitzar 4y ago
  It is no different at all. However, in traditional finance that is called a "margin loan" in defi it is called a "crypto interest account paying 20% with 0 chance of losing all your money"