It's trivially easy for anyone to short tether, simply take out a DeFi loan of tether backed by any other crypto collateral (including e.g. USDC so you don't have liquidation risk).
It will just cost you a few % APR to keep the position open
Absolutely do not do this. Do not bet against the house inside casino walls.
If you have enough capital to weather potential dislocations, the only real way to play this is to be long off shore (perps, probably) and short CME. This position is long BTC/USDT vs short BTC/USD, the net of which is short USDT/USD. The reason for doing it this way is if it doesn’t play out, or goes to 100k first, you’re just wearing a bit of spread and funding risk, but let’s call it delta neutral. OTOH, if Tether nukes, crypto will explode in Tether terms (since it’s worthless) and implode in USD terms. Now, you won’t actually get paid on your offshore long because the house is bust, so you’ll have a paper cut there (keep as little margin as possible). But your CME short will pay you nice, hard, centrally cleared greenbacks.
I don't entirely understand this; could you provide a concrete example, or actual trades, that could be involved in such a position? (I'm just curious how it would actually look like in practice.)
CME: short $1m BTC futures (which are dollar settled and thus BTC/USD)
On Binance you are long BTC, and short USDT. On CME you are short BTC and long USD (implicitly on the fiat legs).
So if we add that up, the BTC positions net off and you’re just left with short USDT and long USD which is the desired outcome.
In practice, if Tether implodes I would expect everyone to sell Tether (by buying crypto with it) and then due to panic, to send that crypto to exchanges with fiat off ramps where they will then sell it. So the price of BTC on Binance goes to the moon, and the price on CME collapses. You will likely lose whatever money you had on Binance (your profit is denominated in worthless USDT and Binance is probably bankrupt at this point) however you should make multiples of that with your CME short.
This is all of course not investment advice and extremely hypothetical.
I'm not quite sure I follow - in the event that Tether implodes, if you expect the long $1m BTC/USDT exposure to be worthless (assuming you lose the money you had on Binance, and Binance goes under), and your short BTC/USD exposure to make money (since it's a short position, you can only make 100% gain at maximum), doesn't that net out to zero PnL (-$1m loss in long BTC/USDT, and +1m gain in short BTC/USD)?
The difficult part seems to be getting someone lending you $1m in USDT, isn't it? From their POV, you're getting exposed to BTC volatility, and the collateral is likely to be too high to make this practical.
Basically, how do you buy $1m worth of BTC/USDT perps without depositing $1m of USD into Binance? Let's say if we put in $100k USD with a 1:10 leverage, it means the position on Binance is wiped out if BTC drops by more than 10%. So the only way for this to work is to deposit $1mil of USD into Binance and opening the position. But this means we lost a whole $1m when Binance implodes, cancelling our gain in the short position.
Otherwise, we need to borrow $1mil of USDT to open the Binance BTC/USDT position.
On May 19th, Binance froze up and prevented people from adding margin. Lawsuit about it now. The claims are that Binance was insolvent and redid the trades to stabilize themselves. See Frances Kim for info or an FT article about the lawsuit.
Whatever the reason, no guarantee you can deposit collateral.
No, this doesn’t work. You’re not short USDT/USD in the above which is what people really mean when they say short Tether (since we’re talking about losing the peg).
You’re already short USDT anytime you buy crypto in USDT terms (i.e. BTC/USDT). But if Tether nukes, and you’re long BTC/USDT you will likely lose a lot of money, even if BTC/USDT goes to the moon. Why? Because BTC in terms of all other fiat (BTC/USD) will implode.
You must have a short crypto vs long fiat leg to net off and leave you with a true Tether vs fiat structure.
> If I buy BTC with USD and then transfer it to an exchange with a BTC/USDT pair, I'm not suddenly "short USDT".
It does, it just doesn’t make you short against USD which is what you’re thinking of. It only makes you short vs. BTC which we expect to collapse in price as well. This is why you need the other leg.
> So I don't see why buying BTC with USDT directly makes me short USDT either if I didn't borrow the USDT but bought it with USD
Which is why I keep talking about margin and perpetual swaps. Since we expect to lose our shirt on Binance, we need a levered position which means borrowing the USDT which will ultimately become worthless. This borrowing happens implicitly in a swap or future.
Back to your first question, when you buy something, you’re going to denominate that in some unit of account. We usually write this price as saying asset A is $X or asset B is €Y. But in reality every market is two asset pairs, no different to FX or crypto. We could have talked in terms of A/USD being X or B/EUR being Y. It’s just a different convention.
So when we talk about (for instance) the price of AAPL stock, what we really mean is AAPL/USD. Or when we talk about the price of crude oil we really mean CL/USD. I am buying AAPL, selling USD. Or I am selling crude oil, buying dollars.
To illustrate let’s say that you’re long AAPL (AAPL/USD). If shortly after you buy AAPL, the dollar loses purchasing power versus all other currencies, net net we would expect AAPL to go up in price (otherwise known as inflation). It’s not that AAPL became more valuable, it’s that the USD became less valuable. So you’re implicitly short the dollar. You sell your AAPL, and pocket your profit. You could frame this as being short USD and then covering your short. Same thing.
The opposite also holds true. Let’s say you short AAPL (remember: AAPL/USD). This leaves you long USD. If the purchasing power of USD increases, ceteris paribus, the price of AAPL should fall (otherwise known as deflation). You cover your short, and pocket your profit. You can view that as being short AAPL and AAPL going down, or you can view that as being long USD and the dollar going up. It’s the same thing.
>So when we talk about (for instance) the price of AAPL stock, what we really mean is AAPL/USD. Or when we talk about the price of crude oil we really mean CL/USD. I am buying AAPL, selling USD. Or I am selling crude oil, buying dollars.
This sounds eminently reasonable to me.
However, it immediately reminds me of all the people (I haven't seen one in a while though) who go on about the geopolitical significance of what currency oil or other commodities is denominated in.
I'm just not sure how numerous and influential the latter sort of view is, and it unsettles me at times when they appear to be everywhere and the things you say aren't.
I appreciate you have some sort of issue with me from our other comments, and for that I'm sorry.
It's not always clear when talking about complex domains, what is obvious and what isn't. My first comment in this thread explained why a simple USDT/USD short is not a good idea. I thought I had explained it in very simple terms, to help people with less experience understand.
HN has a wide spectrum of users, and obviously some people still needed more info, which I was happy to provide. I thought I had explained it plainly but obviously I hadn't. It's easier said than done to imagine a good explanation for something like this without having any experience in the area.
Nope, occasionally exchanges will manipulate the price up to liquidate shorts - for instance the highest recorded trade price of USDT was about $1000 and dexes leave you at risk of flashbots and smart contract bugs.
Can you cite this? I have seen some pictures of Kraken wicks but not liquidations on Aave and not trades on FTX USDT quarterly futures above $1.10 or whatever.
I haven't just cited it! I said I saw a screenshot. I don't have a date or whatever, but if someone has a date then I can download the ticks from that day and check it out.
Without a date I can't compare the short interest at Kraken to e.g. the $100,000,000 OI in USD-settled USDT futures at FTX today.
If something that weird (a USDT price spike to $1000) really did happen, somehow nobody noticed and nobody was affected, in spite of millions of dollars of daily trades in that market at that time
It's probably a glitch in Kraken's historical chart
Many people noticed. It’s not a big deal because the market is mostly wash trading.
It’s not a glitch. How you can say it’s “probably” a glitch is beyond me, you have zero evidence to support that. There have been other instances of Tether spiking well above $1, that is simply the most egregious.
Can you find any contemporary report of that May 11, 2019 USDT price spike incident at all? Because, if 'many people noticed' it, as you claim, then that should be easy
But I'll tell you now, to save you time: there are no such reports, because it did not happen.
I don't know anything about 'other instances', I only assume that spike on the Kraken chart that you linked to must be a glitch, because I found zero corroborating evidence for it. As you yourself have implied, such an insane price spike would have been a significant incident so it could hardly have gone unnoticed.
Your arguments would be more persuasive if you based them on facts.
DeFi exchanges operate algorithmically with published smartcontracts, so they can't be deliberately manipulated like that[1] -- can you link the example of the DeFi where USDT traded at $1000?
Or were you just equivocating between DeFi and centralized exchanges in response to a comment that specifically suggested DeFi?
[1] Which is not to say they can't be manipulated at all, but you'd have to go after the entire market or exploit some existing bug; it's different from the ones where centralized exchanges pull arbitrary shenanigans on their own platforms.
OP is obviously talking about CEX since it’s not possible for a DEX to have a USD market (like the above mentioned USDT/USD).
As for DEXs being manipulated, absolutely not sure why you believe that’s the case? This has nothing to do with DEXs and everything to do with margin (which is coming to DEXs).
DEXs and AMMs make it much more expensive to provide liquidity in terms of capital efficiency versus CEXs, and thus more vulnerable to manipulation. But without margin, there’s not much economic benefit for a bad actor.
Certainly -- I agree OP (arcticbull) was replying to a comment about DeFI by explaining the dangers of a centralized exchange! That makes it a confused, unhelpful response, not one that "obviously" meant something coherent if you squint hard enough and practice sufficiently strained exegesis.
>As for DEXs being manipulated, absolutely not sure why you believe that’s the case? This has nothing to do with DEXs and everything to do with margin (which are coming to DEXs).
Margin has "come to" DEX the moment smartcontracts offer collateralized DeFi lending, which they have, so I'm not sure what you mean here.
>DEXs and AMMs make it much more expensive to provide liquidity in terms of capital efficiency versus CEXs, and thus more vulnerable to manipulation.
The reason (I'm claiming) centralized exchanges are more vulnerable is that
a) they own the platform and are the word of god on it -- whence the stories of people getting margin called at flash-crash prices that don't exist on other platforms. If they say prices are trading at some level, you just have to deal with it. That's not possible when you have to trade how the algorithm says.
b) If someone "stupidly" buys in one direction on a DEX, "for manipulation", they've vulnerable to the entire universe of arbitrageurs who can exploit the resultant price differences. Inter-[centralized] exchange arbitrage is much harder.
I brought up the point simply to emphasize that, to the extent that there's manipulation, it does not look like the manipulation you'd see on CEX, which was how OP was basing his argument.
Furthermore, even the issue of more expensive liquidity from transaction fees wouldn't be true for the far-cheaper L2 sidechains.
(Btw, you might want to use the terms in their unabbreviated forms at least once just to make it easy on people who aren't up to speed.)
> Margin has "come to" DEX the moment smartcontracts offer collateralized DeFi lending, which they have, so I'm not sure what you mean here.
Ok, fair. What I mean is high leverage, which is the fuel for the type of manipulation I’m referring to.
To your point about CEX lying about price, that’s a very risky proposition for the arbitrage reasons you mention (CEX arbitrage actually easier for a number of reasons, but I understand why you’d think DEX is easier).
If I run a CEX, unless I collude with every other venue I risk all the arbitrageurs buying/selling my fake prices which means it’s not fake, I’ve just traded against them.
> Furthermore, even the issue of more expensive liquidity from transaction fees wouldn't be true for the far-cheaper L2 sidechains.
No, I said capital efficiency, not execution cost. DEX costs are crazy, but that’s by choice, whereas the capital efficiency is a structural issue. If I want to provide liquidity on 100 CEX markets, I only need enough capital to wear the orders I actually get filled on at any given point in time. As an AMM I’d have have enough capital to be in a 100 different LPs.
To illustrate: let’s say I want to provide $1m of resting liquidity in 100 CEX markets. Let’s say that in doing this, I end up having positions at any point in time that require $10m of capital. If I want to provide the same $1m of liquidity in 100 DEX markets, I need $100m.
So a CEX ends up being 10x more efficient from a capital use perspective.
>Ok, fair. What I mean is high leverage, which is the fuel for the type of manipulation I’m referring to.
Why does that make a difference? And how is it any more coherent to talk about margin "coming to" DEX? The moment anyone can borrow on margin, it has "come to" DEX. You keep speaking with a mental model of DEX that doesn't jibe with reality, like they're walled gardens rather than platforms open to anyone with little friction other than gas fees.
>To your point about CEX lying about price, that’s a very risky proposition for the arbitrage reasons you mention (CEX arbitrage actually easier for a number of reasons, but I understand why you’d think DEX is easier).
It's fun to idly speculate about this, but we know for a fact that flash crashes have happened on centralized exchanges, which is stronger evidence than any of your assertions of superior understanding of how they work. Furthermore, people have had their margin liquidated on those CEXes at the fake prices.
>No, I said capital efficiency, not execution cost. DEX costs are crazy, but that’s by choice, whereas the capital efficiency is a structural issue. If I want to provide liquidity on 100 CEX markets, I only need enough capital to wear the orders I actually get filled on at any given point in time. As an AMM I’d have have enough capital to be in a 100 different LPs.
If that's what you meant, then it's coming from the same dubious mental model I complained about above -- when you enter into a liquidity pool, you are providing liquidity to the entire cryptocurrency's network, not just people who are "on" that DEX (which isn't a coherent concept). Anyone and everyone has the option to accept that offer (sorry, "remove that liquidity"). Several protocols look at the entire DEX market to find the best (combination of) price(s). You do not need to be in multiple liquidity pools (which, again, not a coherent concept).
LPs are not something you have to "be in"; you as a trader are free to accept the offers (sorry, "remove the liquidity") of any LP in existence.
> If that's what you meant, then it's coming from the same dubious mental model I complained about above
It’s not, because I’m saying something different than you think I am.
> when you enter into a liquidity pool, you are providing liquidity to the entire cryptocurrency's network, not just people who are "on" that DEX (which isn't a coherent concept).
Um, what?!? I’m really not sure you understand how this works. What do you think it means to be an LP?
> Several protocols look at the entire DEX market to find the best (combination of) price(s). You do not need to be in multiple liquidity pools (which, again, not a coherent concept).
No, just no. You keep saying it’s not coherent but I don’t think you understand how it works. You might be in an optimizer that moves your capital around, but a given unit of capital can only be providing liquidity for one LP at a time.
> LPs are not something you have to "be in";
Uh, if you’re not in it, then you’re not providing liquidity. This whole conversation is premised on providing $X liquidity to Y market. In a DEX that requires $X, whereas in a CEX, it requires a maximum of $X and in practice a fraction of $X.
>Uh, if you’re not in it, then you’re not providing liquidity.
Why did you cut off the rest of that sentence, which clarifies that I was referring to traders not having to be in an LP to accept an offer (sorry, "remove liquidity")?
People who really have some deep, coherent insight don't have to resort to that.
Furthermore, the point was that, even though you provide liquidity "to" a liquidity pool, that liquidity is available to the entire cryptocurrency's market, so "being in" the LP isn't a meaningful concept (with respect to whether you can buy from it -- though you'll still probably cut this off).
>I’m saying something different than you think I am.
The great thing about a discussion forum is that you can point to specifically where someone misinterpreted what you said and correct it. If you're just going to assert that someone totally misinterpreted you, but never clarify what you claim that deep insight was, then I'm not sure what you think you're adding to the conversation.
>Um, what?!? I’m really not sure you understand how this works. What do you think it means to be an LP?
It means that a) you have locked up tokens in the pool, and b) you receive a fraction of the fees when someone trades with it. You're still working from the (incorrect) mental model that thinks a DeFi LP is some walled off garden. This is in error. The LP is available to trade with everyone using that cryptocurrency's blockchain. So it's not very meaningful to speak of traders who can't trade with you because they're not "in" "your" LP. Once your liquidity is in any LP, everyone can access it. You do not need to provide it to more than one pool, as your premise requires.
Alright, last attempt. I never said anything about other traders being in the same liquidity pool or whatever you think I said. Let me spell it out.
Let’s say I want to be a market maker on Binance, in both BTC/USD and ETH/USD. Let’s say that I have a strategy where I can provide $5m in liquidity to each of those markets (i.e. $5m of orders for other traders to aggress) for a total of $10m of liquidity. But because most of the time those orders are just resting unexecuted, it turns out I actually only need $1m in capital to run my market making algos.
In the DEX example, if I want to provide $5m liquidity to a BTC/USDT LP and $5m to an ETH/USDT LP, I need $10m to do this.
So to run my $10m liquidity provider on a CEX I only need $1m whereas in order for an AMM to provide $10m in liquidity, it needs $10m in capital.
That ... isn't your last attempt, actually. It's your first; you haven't said anything like this before, even though it would have been the natural thing to bring up in any of your three previous replies. Why you didn't, I can't tell.
Now that I see what you're saying, it still doesn't prove what you think it does. If you can remember back to the original point, the question was whether DEXes can be manipulated to the point of forcing margin calls. I was skeptical, since we have seen localized flash crashes on CEXes (when you insist are not possible because of super-easy inter-CEX arbitrage) that forced liquidations, while we have not seen that on DEXes [1].
I further expressed skepticism since any manipulation would have to be via "stupidly" overpaying in one direction on one LP, which would just draw traders -- from the entire market -- in to exploit the price difference, and correct it.
You kept appealing to the MM capital-inefficiency issue, but that isn't relevant because my point was that the counteracting force is from liquidity consumers, not providers -- the traders that accept the LPs' (formulaic) offers, and profit from the attempts to artificially push the price one direction across the entire market.
Your latest reply feels like a further confusion, because (AFAICT) you're effectively saying, "Don't worry, CEXes are more manipulation-resistant because I can falsely represent myself as being able to trade in $10m when I only have $1m".
If anything, that would mean they're more vulnerable to false signals about price support/resistance: If you can't actually put in $10m, you weren't really providing $1m of liquidity, and DEXes simply make this transparent.
Btw, re: DEXs I was thinking specifically of flash loan manips that exploited a number of platforms a few months ago. These involved briefly breaking the peg of stable coins on DEXs via short-term loans. [1] I think it's brilliant.
> One of the most notorious flash loan attacks to have ever hit the space is the exploit on DeFi protocol bZx, where the attackers borrowed funds from the platform and quickly swapped them with stablecoins (sUSD). Since the stablecoin is governed by a smart contract, the attacker had manipulated its price by placing a large buy order on sUSD, which pushed the price of the stablecoin to $2, doubling its pegged value. Then, the attacker took a larger loan from the higher-priced sUSD, repaid his loans, and took the profit with him.
It's relevant here because stable coin prices can be manipulated at DEXs too, or at least have been in the past. I'm not sure there's a long enough track record to guarantee it won't happen again before things go pear shaped if you're trying to take your short structured this way via DEX. There's smart contract bug risk, counter-party risk in the stable coin collateral and peg risk. Also regulatory risk.
The relevant question is whether the peg can be broken long enough for the loan to get margin called (by someone else exploiting the smartcontract to liquidate collateral). Lasting for the length of a flash loan isn’t enough.
Flash loans have to be paid back in the same block or everything the flash loan funded reverts. And to ensure this happens, it usually is all wrapped up on the same transaction bundle.
But liquidations are only triggered on oracle updates. And those happen at fixed intervals (measured in time or price movement), and can only happen a block at a time, in blocks after the flash loan has been closed.
Here's a question, how do you guarantee that every USDT was backed by a dollar at origination? Say USDT holds a bond that defaults, what do they sell to offset the risk? Where does the 5% yield on tether even come from? This is the most plausible form of manipulation: unbacked liquidity. The only way you'll ever find out is with a bank run, and with massive yields and a hyped crypto space, it may be a while before that happens.
I'm not sure I follow your short structure but you're mentioning other cryptocurrencies. Is there a clean bet where I sell Tethers and get dollars? (USDC are not dollars.)
Short version is no unless you actually get someone to loan you their tethers under contract, and you sell them to someone else for USD with the promise you'll return them.
This architecture doesn't exist AFAIK - certainly no trustworthy parties are offering it (since why would they want Tethers?).
In the event Tether busts, the entire crypto markets will freeze up, and it’s plausible usdc will not be redeemable or face a run. USDC aren’t dollars and have been opaque about their backing. The bulk of their assets are in “cash and cash equivalents” which sound good, except they include less than 90 day commercial paper here! They also don’t state its quality or say how much of their cash/equivalents are CP rather than cash or treasuries.
Yeah but where do they run to? I could see dark money having to run into BTC and ETH because real dollar redemption is a problem if you operate out of China for example.
It’s called leverage. Every player in the financial system uses it; some have cut deals with the government to socialize catastrophic losses so we pretend the leverage doesn’t exist but there it is. As long as Coinbase allows on-demand redemptions nobody is going to care about an audit because it’s trivially easy to just convert all your USDC to real dollars almost immediately. Can’t say the same for Tether.
> As long as Coinbase allows on-demand redemptions nobody is going to care about an audit because it’s trivially easy to just convert all your USDC to real dollars almost immediately.
And what happens if Coinbase were unable to convert all the USDC because the demand exceeded their stockpile of USD?
It's like people didn't live through 2008 and discover the magic phrase "counterparty risk", or something. I guess that was 13 years ago, so maybe they didn't.
And USDC can be converted back into actual dollars, on demand, not via a market transaction but literally a 1:1 conversion, through a variety of exchanges. You cannot say the same of Tether.
Today they will, for a few people, for small amounts.
The problem being discussed here is that they can't every day for arbitrary numbers of people and amounts, because they don't have enough USD on hand.
Yes, but no money market fund (which is how any centralised stable coin is structured) can face extremely high redemptions (which a collapse of Tether would likely trigger) without breaking the buck.
…okay, so if I deposit USDC at Coinbase, I can instantly convert the entire balance into USD, and then withdraw that USD to my bank account. The statement that “USDC is not USD” means nothing to anyone who has access to instant and reliable conversion between the two.
Are you serious? When there's a run on something, like Tether, by definition everybody is going to be trying to dump their crypto simultaneously and cash it out for dollars. And the entire problem here is that the system does not have $69B cold hard cash floating around, meaning that the vast majority of people will be left with nothing if (when) the crash happens.
USDC is backed by Coinbase (USDC are issued by Centre, a joint venture of Coinbase and Circle if I'm not mistaken). And Coinbase is an HN unicorn.
Everybody at Coinbase is known, it's operated from the US.
Coinbase ain't anywhere, not even remotely, like tether/bitfinex. There totally exists a world in which USDT goes to 0 while USDC is still worth 1 USD.
Doesn’t matter that much whether it’s “100% backed” or whatever. The time it takes to (1) send USDC to Coinbase, (2) convert that USDC to USD, and (3) withdraw the USD to a bank account is short enough (less than a day by wire transfer) that the counterparty risk is pretty darn minimal.
Until it's not. Part 1 and 2 of your list require Coinbase's implicit consent and cooperation, and if there is a bank run on USDT, that cooperation may be in short supply.
I would bet money that Coinbase has a button on their admin panel that says "Pause redemption of USDC" or equivalent, so you're just hoping they don't push that button in extremis. I find that silly, if what we're hypothetically betting on is that the crypto system will be in extremis.
No, the logic is that it is less likely. Anyways, Coinbase allows on-demand conversion of USDC to USD so you really only have to hold the USDC (and Coinbase’s counterparty risk) for about a day for that process to complete. At some point that window might close but given that Coinbase is a publicly traded stock in the US and must report financials, there is quite a bit less risk compared to Tether.
Agreed, the risk that it goes bust by itself is less than that Tether goes bust. However, what we are taking about is repercussions of Tether going bust: how will it affect Coinbase if suddenly 69B are trying to get cashed out?
It will just cost you a few % APR to keep the position open