In late March, the bitcoin exchange Binance removed from listing credit tokens FTX site. Then Chanpen CZ Zhao stressed that users do not understand these tools, so Binance forced to defend them. On 12 may, she added in a listing similar tokens under its brand.
Shortly before the delisting, the group of customers Binance lost more than $1 million on the liquidation of credit tokens. Users believe that the problem was on the side of the court.
ForkLog understand what a credit token, what happened to Binance and why exchange in the end changed its position.
«We’re sorry to hear of your loss»
Operator derivative exchange is a company FTX FTX Trading LTD registered in Antigua and Barbuda (offshore area, in which you can online gambling). Its founder is a former trader Jane Street Capital, Sam Bankman-fried. In 2017, he founded the cryptocurrency Alameda Research firm, currently managing a portfolio of digital assets at more than $100 million From the FTX also has a U.S. branch, but the credit tokens left.
Credit tokens BULL, BEAR, and ETHBULL ETHBEAR from FTX appeared in the listing Binance in January 2020. They are allowed to earn the triple x’s on the rise or fall of exchange rate of bitcoin and Ethereum. For example, each 1% of growth/fall rate of the BTC BULL/BEAR accordingly grew by 3%. Later was added the same token to EOS and XRP.
However, on 12 March about 15:00 GMT tokens are no longer correlated with BTC, ETH, EOS and XRP in proportion and x3 dropped in price from 30% to 65%, which led to the liquidation of positions at a number of clients.
They told ForkLog that with the growth EOSBEAR from $32 to $177 (in 5.5 times), EOSBULL fell to 46 times from $72 to $1,57. The price of the underlying asset EOS changed only in 2.4 times, from $3,60 to $1,50. Similar reports can be found in Twitter.
BULL/USDT fell more than 40% when the underlying asset BTC have changed in just a couple of percent. ETHBULL declined by more than 65% when the change ETH 9%. XRPBULL lost more than 31% by reducing the price of XRP is less than 2%.
Affected users have created a Telegram-chat in which discuss ways of solving problems and the possibility of obtaining compensation. At the time of publication it is 96 users. Estimates of the owner of the Telegram-chat, at least 200 people lost more than $1 million.
«In most cases, a lost an average of $5000-6000. I lost about $30 thousand. There are people, the damage of which amounted to $86 thousand, $100 thousand», – he said in comments ForkLog.
After user complaints Binance attached warning message for each pair with FTX, focusing on the dangers of trading on those markets. Also from the site site disappeared mention strict adherence to FTX tokens for the price of the underlying asset in a ratio of X3.
Users managed to make a screen copy of the message on the listing in the online archive, but at the moment, this snapshot is unavailable. If you compare the text in the image and the current version of ads, in the last paragraph about missing price moves in strict proportion x3.
A screenshot of the version page of 7 March 2020
A screenshot of the current version of the page
The customer service representative in response to the appeal of one of the victims said that the price of credit tokens depends on the «trading behavior of all users» and not from price movement of the underlying asset as it was stated originally.
A letter from the representative Binance one of the clients of the exchange
«We’re sorry to hear of your loss. However, the price depends on the trading behavior of all users, which can be seen in the result of the fact that they buy/sell orders ordered, or depends on the Maker and the Taker in our platform».
March 28, two weeks after the incident, Binance has delistyle all tokens FTX. Chanpen Zhao explained the decision by saying that users do not understand the principles of operation of the asset.
«We found that many users do not understand the specifics of the data token and don’t pay attention to pop UPS with a warning. FTX-tokens are among the most actively traded, but to protect users in the first place».
CZ added that although these tokens «rarely lead to the elimination, they eventually depreciate and therefore are not intended for long-term storage».
In response to the request of the affected technical support FTX announced that the credit tokens do not work as a static leverage x3 and sometimes their price is no longer correlated with the price of the underlying asset. In FTX noted that knew about the problem with 2019.
In FTX explained that retention of the leverage and avoid liquidations in need of rebalancing. If ETH is growing at 10%, the credit token will increase 2.53 times. If ETH will fall by 10%, the credit token will fall by 3.85 times. For rebalancing are made of purchase/sale of ETH, this allows you to control risk and to return to three time the shoulder, said representatives of the exchange.
The rebalancing occurs daily at 00:02 UTC or during the day if leverage exceeded x4. Thus, depending on the time of the last rebalancing, the movement of credit tokens can deviate from the stated shoulder.
New or well forgotten old?
12 may Binance has announced the launch of its own credit and token BTCUP BTCDOWN. On the American site Binance US these tools are not available.
«Binance Leveraged Tokens (BLVT) was developed after careful consideration of the requests of users and evaluation of existing credit products. They provide lower risk and fee than other tokens with a credit shoulder.»
New tokens drew the attention of the crypto analyst edition The Block Larry Cermak:
«We’re not going to talk about what Binance salistie your own credit tokens, six weeks after the delisting of credit tokens FTX? And that, according to CZ, it was done to protect users?»
Cermak noted that the listing BLVT was made on 11 may, the day of Kalinga.
«Tokens were quietly released on the day of halving to avoid unnecessary conversations, and CZ was ashamed to even tweet about it», – said Cermak.
According to Binance, tokens BTCUP and BTCDOWN do not support fixed leverage and adapt to changes in the nominal value of positions indefinite contracts in the range of values between x1. 5 and x3. This property of the asset supposedly allows you to «reduce the influence of a lateral trend and not allow the price to exceed the market fluctuations.»
«Target leverage is constantly changing and is hidden from external observation», – said in a press release.
On the day of start-up credit tokens Binance representatives FTX condemned the opaque mechanisms of the exchange:
«Maintaining an open financial ecosystem with competitive markets and transparent products is critical to their effectiveness. Nothing is perfect, but sometimes it means the difference between a product that is sold at a reasonable price, and the product of undue cost or the difference between a product that you can use to your advantage, and that which is not.»
This view was supported by a well-known researcher su-Ju:
«The recently launched credit tokens Binance have indefinite rules of rebalancing, and this may be the cause of the accident. A third-party company will not be able to carry out the arbitration regarding the fact, true or false has been implemented rebalancing», said Zhu.
Administrator Whalepool.io conducted a comparative analysis of credit tokens Binance and FTX. He noted that every time when the underlying Fund is rebalancing, with the position fee is charged for financing, which reduces the net asset value (NAV) for its holder.
The expert added that because of the poor methodology of rebalancing is impossible to check the accuracy of tracking the net value of the asset, making it difficult for traders.
Comparative table of credit tokens from the Binance and FTX
«The worst in the credit Binance tokens that you just depend on the algorithm. You can’t check whether Binance charge any hidden fees – you just have to trust the algorithm. Binance is the sole Issuer of BLVT, that makes you wonder whether the low fee for the management of that exchange makes a market-making, and the opacity of rebalancing?»
Compensation and confidentiality agreement
In response to the request ForkLog representatives Binance announced that on March 12, the strong volatility of the market triggered a rebalancing token BULL/BEAR: they have deviated from their fair value and adjusted to the correct value with a delay.
The exchange asserts that, due to the considerable overload of Ethereum liquidity providers were not able to translate Binance credit tokens, so the demand for some trading pairs was not satisfied.
«Exchange FTX has agreed to pay a certain amount to users Binance who were holders or traded tokens BULL/BEAR that day. In accordance with this decision within 14 days Binance was credited to the users account tokens BUSD in the amount equivalent to the cost of credit token in the accounts at the time of delisting», – reported in Binance.
They also added that it had repeatedly warned clients of the high risk of transactions with the credit tokens.
«We always inform users about the necessity of careful transactions. However, users must understand the risks and take responsibility for their losses as a result of their trading strategy and changes in the market price of the underlying asset».
The owner of the Telegram chat for the affected traders told ForkLog that users have received offer from Binance compensation in the amount of 10% -30% of the losses and the provision for one or two months of VIP access to the services of the exchange.
Later Binance sent to the victims of its representative, ostensibly to resolve the problems. Customers were asked to fill in a form with data ticket, the amount of loss, email address and nickname in the Telegram. According to the interlocutor ForkLog, they promised 100% refund.
«From the Binance were set conditions that we must sign a non-disclosure agreement (NDA) after the adoption of the adjustments. Many participants began to quiet, a request to delete the ticket number from our list, we realized that they signed the contract.»
The representative of the Binance in Russia Gleb Kostarev ForkLog confirmed the presence of NDA agreements:
«Yes, the users were asked to sign an NDA to confirm their consent to the settlement of the situation and the amount of compensation».
The user initially received a letter from the representative of the exchange offer to compensate him 5000 USDT, but subsequently this amount was reduced in 10 times – up to 545 USDT. The total damage of the user from incorrect rebalancing of credit tokens according to him, amounted to approximately $30 thousand.
A screenshot of the letter from the representative of Binance client exchange
A screenshot of the letter from the representative of Binance client exchange 2
At the moment the client has not received any compensation:
«There have been many instances in the group: people first took an intermediate gift, and then they were sent. I didn’t get anything: if I do accept it will lose the right to claim the full amount».