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
It will just cost you a few % APR to keep the position open
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.
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.
How long could this arbitrage oppportunity exist? It doesn't sound all that reasonable, in my opinion.
Nobody is lending us anything in the above example (well, Binance perps and CME futs have embedded leverage but that’s another story).
This is what I'm trying to figure out too.
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.
What did I miss?
Whatever the reason, no guarantee you can deposit collateral.
Unless I'm missing something in your math...
A more concrete example:
Buy $10k USDC, borrow $5K USDT on Aave, trade this for USDC on Uniswap
Net result: $15k USDC and -$5K USDT, if USDT crashes you gain $5k, if it doesn't, you pay ~4% APR on the $5K loan (current rate, variable)
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.
That doesn't make any sense. If I buy BTC with USD and then transfer it to an exchange with a BTC/USDT pair, I'm not suddenly "short USDT".
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
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.
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.
I may have just gotten it wrong.
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.
Why would AAVE blow up if USDT blows up?
https://beincrypto.com/coinbase-drops-guarantee-of-usdc-stab...
> "the assets in fact include commercial paper, corporate bonds and other assets."
You're right. Their latest attestation[0] does not yet reflect their move to only cash and treasuries[1].
0: https://www.centre.io/hubfs/pdfs/attestation/2021%20Circle%2...
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.
Took me all of 10 seconds to find this.
It should have been a huge story, but there seems nothing reported
https://www.google.com/search?q=kraken+usdt&tbs=cdr:1,cd_min...
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
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.
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.
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.
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.)
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.
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.
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.
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.
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.
[1] though arcticbull mentions a case where the value could be propped up for a similar kind of attack: https://news.ycombinator.com/item?id=28798110
> 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.
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.
Never been audited, only attestations
And what happens if Coinbase were unable to convert all the USDC because the demand exceeded their stockpile of USD?
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.
Also Coinbase is not so pristine or pure. They were misleading customers with a gentler version of the same thing Tether did. "Coinbase Vowed Token’s All-Cash Backing; That’s Not True". https://www.bloomberg.com/news/articles/2021-08-11/coinbase-...
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.
What you are missing is "counterparty" risk in the sense that Coinbases coffers are not infinite and certainly not 100% cash.
In the event of a bank run they would have to say "sorry we can't pay you right now...maybe later...maybe never...nobody knows".
That would effectively kill any trust in USDC and it's value plummets through the floor.
This architecture doesn't exist AFAIK - certainly no trustworthy parties are offering it (since why would they want Tethers?).