Derivatives trading platform Huobi DM has announced a new feature designed to “minimize user exposure during times of severe market volatility” in digital assets.
When users trade on margin—using borrowed money to increase holdings with a view to amplifying profits—positions are often liquidated automatically and in full when the value of their margin collateral plummets to a set percentage of the loan.
According to Huobi DM, extreme fluctuations in market prices, especially in the crypto markets, can cause “extensive user losses” as a result of liquidations. Its solution is to unveil a new mechanism that performs liquidation gradually. A circuit breaker function also halts liquidation entirely when there are substantial deviations in the price of a digital asset.
Introducing partial liquidation
Ciara Sun, the vice president of global business at Huobi Group, the platform’s parent company, said volatility can create arbitrage opportunities, but added: “Our goal is to safeguard our users’ assets while providing a robust trading experience, so we’re using this partial liquidation mechanism to minimize the downside without diluting the potential upside.”
The new feature is available across all digital assets and leverage levels, and is being made available to traders without additional fees.
Another measure being taken is to reduce the frequency of liquidation events—lowering its named maintenance margin ratio which results in positions being exited in the first place.
Later this month, Huobi DM plans to launch perpetual swaps—an open-ended futures contract—with up to 125X leverage, beginning with BTC swaps, the release added.
It’s not a theoretical problem. Huobi DM’s new measures come after ether prices crashed last week, causing a crisis at the decentralized finance giant MakerDAO.
A “brutal storm of external factors” meant cryptocurrency held as collateral was automatically liquidated when prices collapsed—but the Maker Protocol’s auction process couldn’t keep up with demand.
Nor is the automatic liquidation problem limited to “black swan” events like the coronavirus-inspired Black Thursday market crash. In May 2019, margin borrowers using CLAM tokens as collateral on the Poloniex exchange lost a combined 1,800 bitcoins when CLAMs suffered a flash crash, losing two-thirds of its value in a single day.