July 8th, 2019 at 7:23 pm UTC · 4 min read
During his recent AMA session Digitex CEO Adam Todd explained what the system entails and what the liquidation engine, insurance fund, and market maker losses represent.
The futures market requires exchanges to have a system for liquidating positions of highly leveraged traders who can’t keep their maintenance margins topped up.
Since this type of situation presents a high risk for a futures exchange, they must have a mechanism to ensure that they are always capable of meeting their duties as an operating exchange.
The new method represented by Digitex makes it possible to intervene with highly leveraged traders who have insufficient funds in their accounts when markets are volatile.
Similar to BitMEX, the Digitex liquidation engine will take over and force close the trader’s position and they will lose the initial margin they put down. This is then allocated to the Insurance Fund. But, with Digitex’s new proposal, they don’t just stay there.
During the AMA, Adam talked about three possible options on how this fund could be used.
The insurance fund could grow over time as in the case of BitMEX. However, he felt that this is not the best option as tokens simply sit idle and the insurance fund is rarely needed.
Another option, he said, would be token burning and minting. This would involve burning the excess tokens (further restricting the supply and increasing the token’s value) and minting tokens in the event that they were needed to cover a liquidation.
However, this was not very popular with the Digitex community, since the fund may not be able to mint tokens quickly enough to cover its losses and remain operational.
The third and best option according to Adam, is to create an insurance fund of 100 million DGTX (10% of the entire supply) and allocate the excess tokens from the insurance fund to the market makers to lose automatically, instead of burning or storing them.
Adam explained that the market makers losing money is a good idea as it allows the creation of an active market with a very high level of liquidity.
He said this move will attract more traders to the platform as they will get a chance to win the money that the market makers are programmed to lose. This could potentially draw in a massive net of traders which would produce much higher returns than leaving the excess tokens in an untouched insurance fund.
Adam said:
“Digitex will be the only exchange to actually work in favor of traders. What’s the effect of a million traders coming in? All of them have to buy DGTX to trade.”
During the AMA, Adam was also asked if the DGTX obtained through liquidations could be used to promote the exchange, for instance by funding a referral program.
The Digitex CEO didn’t reject the idea and suggested adding it as a proposal for the community to vote on when it becomes a DAO starting October 1st.
When asked if he should use the insurance fund as an insurance fund and not just a “cookie jar”, Adam said the intention was not to liquidate people, and reminded people that Digitex doesn’t make money on liquidations.
He repeated that giving the tokens to the market makers would result in much higher liquidity for all traders.
Digitex has 1.5 million people on its waiting list, a huge social media community, and its launch is eagerly awaited.
People trade and speculate to make money, and having a system in place that helps keep the market active will be a boon to regular traders.
Adding a method to increase liquidity for all active traders is expected to be well-received and may even set a precedent in the futures trading industry.