FCoin, a cryptocurrency exchange based in Singapore, has halted all trading and withdrawals on its platform following the discovery that it is short some 7,000 to 13,000 bitcoin—worth roughly $70 million to $130 million at press time—and doesn’t have the funds to pay back users.

The exchange wasn’t hacked. Rather, the shortage was the result of the cacophony of errors following the 2018 launch of a controversial incentive program called “trans-fee mining,” which led to supply problems and a rapid decline in value of the exchange’s native FCoin (FT) token.

Zhang Jian, the exchange’s founder, who is also the former CTO of Huobi, blamed the trouble on a “data error” plus a “decision error.” In a lengthy missive initially published in Chinese and later translated on Reddit, he explained that the problem was “a little too complicated to be explained in a single sentence, the time span is also large.”

In short, because the company was unable to spot the issue early on, the losses continued to mount, resulting in the current unthwarted disaster. Zhang likened the event to the Titanic hitting an iceberg, taking on water, and ultimately sinking two years later.

What is trans-fee mining?

Exchanges rely on transaction fees for most of the money they earn. Trans-fee mining flips that model on its head. In trans-fee mining, the exchange returns all of its transaction fees to traders in the form of a native token. FCoin didn’t invent the scheme. It simply popularized the idea when it went live in May 2018.

In lieu of an initial coin offering, along with all the headache and paperwork that requires, FCoin distributed 51% of its FT coins through reimbursements of transaction fees.

In simple terms, the scheme worked like this: For any transaction fees that traders paid in bitcoin or ethereum, they were fully reimbursed in the form of FT tokens. In addition, 80% of the exchange’s daily revenue from transaction fees were then paid back to users who held onto their FTs throughout the day, as opposed to selling them.

Despite criticisms—which stated that the model could allow an exchange to manipulate the price of the coin or that traders could use bots to create fake transactions in an effort to accumulate the exchange’s tokens—the reward model was adopted by others exchanges, such as CoinBene and Bit-Z, who were also looking to boost their trading volume.

As Zhang detailed in his blog post, the FCoin’s fast growth in 2018 created a “hurricane in the front desk [that] caused us to have no energy to deal with the background problems at all.” As a result, the exchange was overly zealous in doling out mining rewards. It also didn’t set up a proper accounting system to monitor its funds until a year later.

“Because the amount of daily dividends were very huge at that time, it was already hard to ensure the normal operation of the system, and then we were unable to continue to thoroughly investigate and locate the actual loss,” he wrote.

As the price of FT, which had skyrocket early on, continued to plummet, the exchange began to aggressively buy back coins, hoping to reduce the supply and lift the price. But when a large number of users began to sell off more than what should have had in their accounts, the result was a humongous loss of FCoin’s assets on its own balance sheet.

“All decisions are made by me, and I can’t blame others,” Zhang wrote apologetically. He went on to say that he will “switch tracks and start again,” hoping to use profits from the new project to compensate everyone for their losses, but noted that may take several years.