Conspiracy theories, an accident, planning … All are possibilities after seeing how the Polkadot (DOT) futures on Binance fell 99.5%. Certainly there are those who surely benefited, but what we want to discuss in this article is whether it was genuinely an accident or something premeditated.
First of all, on March 5 Polkadot (DOT) experienced a sudden drop in Binance perpetual futures that resulted in the contract trading for as low as $ 0.20. What evidence or clues do we have?
The Mysterious Fall of Polkadot Futures (DOT)
It is important to emphasize that Binance DOT futures contract holders were likely unaffected by the sudden drop.
If we told you that there is solid and irrefutable evidence, we would be lying, there is not. Nonetheless, the surge in open interest just 24 hours before the event indicates that an attacker could have made a profit of US $ 8.3 million by tampering with Binance’s matchmaking engine.
Also, the open interest of DOT / USD perpetual futures grew from 1.92 million DOT to 3.34 million about 30 hours before the sudden drop. This equates to an increase of $ 47 million.
According to the graph below, during a 3-minute candle, US $ 20.4 million in DOT contracts were traded. Although the quick move to the downside was a sudden 99.5% drop, it did not result in cascading sell-offs. An opportunity that only a few fleetingly took advantage of.
Futures contract settlements are calculated using the spot exchange price. Therefore, a sudden drop exclusively in futures prices would not affect most traders. According to Binance: “The price index is a group of prices of the major exchanges in the spot market, weighted by their relative volume.”
Binance details on its website the price of the Polkadot currency margin futures index is made up of Kraken (DOT / USD), Binance (DOT / USD), Binance (DOT / BTC), OKEx (DOT / BTC) and Huobi (DOT / BTC).
Possible strategy executed
The strategy for an attack like this is a bit complex, but we will try to reflect it here. According to CoinTelegraph there is a possible explanation. First of all, the first step for an attacker to establish this trade would be to build a leveraged long position and at the same time create a short exposure with another account.
To create a sudden accident by risking as little as possible, this should preferably happen no more than a couple of days before the planned ‘attack’. Here it is worth mentioning that to maximize the gains from the sudden drop, the attacker would have created a substantially higher short leveraged amount, which would affect the long-to-short ratio.
This is why it is important to keep track of the relationship between long and short to differentiate the attack from a regular leverage long. More or less strong evidence that it could be a planned attack is that the data shows that the average index of 4.25, which favors long trades, was severely affected during the surge in open interest.
By holding a considerably higher net short position when both accounts are combined, the attacker would benefit from a sudden drop. All that this entity needs to start the event is to sell the net long position in the market. This move would trigger a substantial sell order, collapsing the futures contract. Meanwhile, the other account, previously clearly short, would obtain great results.
Specific data of the execution of the planned fall
In this scenario, 762,000 DOT contracts were traded during the 3-minute slump candle at an average price of $ 26.73. Taking into account the change in the ratio from long to short, the attack probably created a long position of US $ 30 million. Meanwhile, the secondary account had a net short exposure of US $ 10 million.
Although far from the 99.5% price drop, this 19% drop from US $ 33 likely generated a profit of US $ 9.5 million for the account with the short exposure of US $ 10 million if the leverage of 5x was up for grabs.
On the other hand, the collateral lost for the long position of US $ 30 million amounts to US $ 1.2 million if a leverage of 25x was deployed. Therefore, the attackers’ net long account should have a negative balance, which will likely cover Binance’s insurance fund.
However, we will never know with 100% certainty if it was a planned attack because the data does not allow it. But that it is possible, it certainly is. If you think there is other data that could help better understand the picture of this decline in DOT futures, leave them in the comments.