Crypto Settled Derivatives Platform Deribit Suffered A Flash Crash

The catalyst for the crash was an abrupt decline in the Deribit's BTC index prices
Drastic change in the index apparently triggered a slew of forced liquidations and stop losses
Crytpo and Bitcoin Market Cap Story of Day

Crytpo and Bitcoin Market Cap Story of Day





Last Thursday Afternoon One Of The Most Well-Known, Crypto-Settled Derivatives Platforms, Deribit, Suffered A Flash Crash - The Event Put The Venue In A Position Well Known To Traditional Exchanges - Ultimately, Deribit Management Made The Decision To Provide A Form Of Compensation For Affected Users - We Provide Context And Insights

The catalyst for the crash was an abrupt decline in the Deribit's BTC index prices. The drastic change in the index apparently triggered a slew of forced liquidations and erroneously triggered stop losses. According to a 'Letter From The Founders' published on the Deribit company blog, the index problem was the result of 'issues with the BTC calculation mechanism.' The letter points to an unnamed exchange which began to send erroneous prices to the index API. That said, the issue is just as much a Deribit operational issue as the company already had internal policies designed to deal with such a scenario. Their preexisting process is to exclude the top and bottom prices out of as many as 8 indices and disclude any exchange price deemed as 'offline.' This base-level process clearly failed on Deribit's side. While it is not entirely clear (FRNT and its affiliates have not been contacted directly by Deribit), to compensate affected users, the company appears to have returned stop-loss orders to near market-price executions. Management estimates the loss to Deribit to be roughly USD 1.3M.

Crypto Takeaway: So long as we have properly understood Deribit's public communication around the affected user compensation, this appears to have been done in a way that would be least disruptive to traders. As the founders point out, crypto markets are both fragmented and highly intertwined and an executed order on one venue often yields an opposite execution on another. Executed trades merely being canceled have the enormous potential to leave an arbitrageur with an unhedged position which could be extremely dangerous from a risk perspective.

Regardless of Deribit's remedy likely being the most favorable outcome for affected users, such action taken by a trading venue in traditional finance would be unusual. The TMX (parent of Toronto Stock Exchange) family of exchanges, for example, has a 'Trade Amendment Policy' which specifies that, 'In the event of a technical, systems, or access problem that, in the view of TSX, TSXV or TSXA, has substantially impaired or impacted access or trading, TSX, TSXV or TSXA, as the case may be, has the discretion to cancel an impacted trade without the consent of both parties.' It's worth noting that, while Deribit management has acted in good faith and taken ownership over the loss, their Terms of Service imply no such obligation and restrict them from any such liability. As a result, traders should be cautious in treating the company's course of action as a precedent for future cases.

About the Author

FRNT Financial is a technology and sales layer that offers institutional and accredited investors access to various forms of exposure to crypto-assets.