OKX lending of FLOKI mysteriously liquidated! OKX responds: Lending is a C2C market, the platform only facilitates matching

Early this morning, Taiwan cryptocurrency influencer CryptoWilson tweeted that he faced an inexplicable liquidation of his meme coin collateralized lending positions on the OKX exchange. He received a total of 51 pages of notifications for automatic coin swaps for both buying and selling. The buy prices for the meme coin FLOKI were all higher than the market prices, causing FLOKI on OKX to decouple in the short term. CryptoWilson expressed confusion as to why his lending positions were healthy and the FLOKI price had not fluctuated significantly, yet he faced an unexpected liquidation. He hopes that OKX will provide an explanation and compensation for the losses. OKX founder Xu Mingxing also explained OKX's lending mechanism on Twitter at 1:35 pm today.

Leveraged Position Seemingly Secure, Suspected Platform Overload Leads to Liquidation

CryptoWilson mentioned that due to Binance's Simon's Cat airdrop, he placed multi-coin collateral orders for FLOKI and USDT on the OKX exchange. It is noted that users holding over 400,000 FLOKI can share 390 million CAT tokens.

Upon receiving a risk control notification from OKX, CryptoWilson was puzzled as his position health had been consistently maintained between 69-72%, and there were no significant fluctuations in FLOKI price, giving no reason for the collateralized position to face liquidation.

He discovered in the 51-page automatic coin exchange notification that the purchase price of FLOKI was higher than the market price, indicating that the exchange was forcing users to buy expensive FLOKI to repay their loans when the position health was secure. After contacting customer service, he noticed the platform's automatic coin exchange clause:

"When the lending amount of a specific digital currency exceeds the limit, automatic coin exchange will occur. In this case, the system will automatically sell the pledged currency to repay the loan, ensuring that the loan-to-value ratio returns to a safe level. For example, if the lending limit for ETH is 100,000, but the total amount borrowed by loan users reaches 150,000 ETH, if you pledge BTC to borrow ETH, the system will sell your BTC to buy ETH and settle your loan."

Therefore, he concluded that the total FLOKI lending amount on the platform had exceeded its capacity, leading to the forced liquidation of some users to maintain a safe level. He raised three questions regarding this issue:

1. If all users were within OKX's maximum lending limit at the time of borrowing, why did OKX not halt the creation of new lending positions to maintain safety?
2. He mentioned that some users in the community were forced to buy expensive FLOKI, while others did not encounter this issue, and he wanted to understand the criteria OKX used to select users for coin exchange.
3. Lastly, he pointed out that similar to general lending agreements, OKX would prompt users with warning collateralization rates and liquidation collateral rates, reminding them to add margin or repay to protect their positions. Why was the threshold for automatic coin exchange not notified in advance?

Another affected individual, KOL Hedda, revealed his 52% collateralization rate and stated: "In summary: Even if OKX shows low risk, you may still face liquidation,and this is the mechanism of the normal model.Because you may already be on the front line of liquidation across the platform without knowing it,and unable to know."

Xu Mingxing: Lending is C2C, OKX Only Provides Matching Services and Must Adhere to 100% Collateralization Principle

Subsequently, OKX founder Xu Mingxing explained the so-called coin exchange lending mechanism on Twitter, stating that spot lending is essentially a C2C market, and OKX only serves as a platform for matching services. In a C2C market, a large number of redemptions by depositors during liquidation triggers the 100% collateralization benchmark, leading to the occurrence of coin exchange liquidation. He reiterated the principle of 100% collateralization, meaning that the total amount of deposits must be greater than or equal to the amount borrowed, and triggering this principle may result in coin exchange liquidation for borrowers. He also indicated that the health of the collateral is an indicator of whether the collateral is sufficient and is related to the coin price. As for the selection of coin exchange users, it will be responded to by OKX officials.

CryptoWilson, in response to Xu Mingxing's post, affirmed OKX's proactive handling and suggested adding explanations on collateralized borrowing rules. He mentioned that the risk warning only appears in spot leveraged trading and contract opening losses, not on the collateralized borrowing page. The instances of automatic coin exchange did not mention collateralized borrowing, so from the perspective of collateralized users, risk management can only be based on position health.

Analysis: OKX Lending Liquidation Highlights Four Issues

The incident highlights four issues. Firstly, it is necessary to continue tracking how the platform selects coin exchange users. Secondly, considering that lending is entirely C2C and centralized exchanges only provide matching platforms, we may not optimistically assume that collateralized borrowing in traditional finance is a similar function.

After all, banks will not inform you that some users have terminated fixed deposits, so we need to liquidate your position. Of course, this incident occurred because FLOKI is not as liquid as fiat currencies.

The third issue is that adhering to the 100% collateralization principle is correct, but how can situations where borrowers buy back at high prices due to redemptions by depositors, even when the overall market is within the lending limit, be avoided? Measures like setting up redemption buffer periods and notifying borrowers to act promptly could be considered.

Lastly, the most practical aspect is that users need to clearly understand the current lending water level on the borrowing page to assess overall lending risks.