On March 5, Polkadot (DOT) experienced a flash crash in Binance Perpetual Futures that caused contract trading to be so low at $ 0.20. While this could have been an honest fat finger trading mistake, a number of indicators point to a planned attack.
While unequivocal evidence is likely to never be produced, the increase in open interest just 24 hours prior to the event suggests that an attacker could have made a profit of $ 8.3 million by manipulating Binance’s matching engine.
DOT Perpetual Futures March 4th, USD pricing. Source: Binance
As shown above, DOT contracts worth $ 20.4 million were traded during the 3-minute candle. Although the rapid downward move was a 99.5% flash crash, it did not result in cascading liquidations.
Liquidations of futures contracts are calculated using the price of cash exchanges. A flash crash exclusively at futures prices would therefore have no effect on most traders. According to Binance:
“The price index is a bucket of prices from the most important spot market exchanges, weighted according to their relative volume.”
According to Binance’s support website, Polkadot’s coin futures index price is made up of Kraken (DOT / USD), Binance (DOT / USD), Binance (DOT / BTC), OKEx (DOT / BTC), and Huobis (DOT / BTC) together. Market.
It’s worth noting that this specific contract is coin-edge instead of the more fluid contract with tethered settlement. Cointelegraph recently analyzed these differences and found that the tether-based contract “does not require active hedging to protect collateral (margin) risk, so it is a better choice for retailers.”
Data reveal the planned “attack”
In order for an attacker to set up this trade, the first step is to take a leveraged long position while creating a short exposure with another account.
In order to cause a flash crash while also risking the least amount possible, this event should preferably take place no longer than a few days before the planned “attack”.
DOT / USD Perpetual Futures Open Interest. Source: Binance
As shown above, open interest for perpetual DOT / USD futures rose from DOT 1.92 million to DOT 3.34 million 30 hours before the flash crash, an increase of $ 47 million.
To distinguish the attack from a regular leveraged long, the long-short ratio should be followed. In order to maximize the profits from the flash crash, the attacker would have created a much higher short leveraged amount, which affects the long-short ratio.
DOT / USD perpetual futures long-short ratio. Source: Binance
The above data shows that the average rate of 4.25 favoring longs was heavily influenced during the rise in open interest. This would confirm the coordinated attack theory.
How the trade is carried out
By holding a significantly larger net short position when the two accounts are combined, the attacker would benefit from a flash crash. All it takes for this company to initiate the event is to sell the net long position in the market. This move would trigger a significant sell order and crash the futures contract. In the meantime, the other account that was previously net short would score big.
762,000 DOT contracts traded during the 3-minute flash crash candle at an average price of $ 26.73. Given the change in the long-to-short ratio, the attack most likely resulted in a long position of $ 30 million. Meanwhile, the secondary account had a net short exposure of $ 10 million.
Though far from the 99.5% drop in prices, that 19% drop from $ 33 likely resulted in a gain of $ 9.5 million for the account holding the $ 10 million short exposure, if one 5x leverage was in the game. On the flip side, the collateral lost on the $ 30 million long position is $ 1.2 million due to the 25x leverage applied.
It is important to emphasize that holders of Binance DOT futures contracts were likely unaffected by the flash crash. Therefore, the attackers’ net long account should have a negative balance that the Binance insurance fund is likely to cover.
The above calculations are just speculations based on data provided by the exchange. As mentioned earlier, hard evidence of this attack is unlikely to ever emerge.
The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.
