The whole ecosystem currently remains a giant confidence game, as Matt Levine described well in a recent article. This doesn't mean there isn't a lot of money to be made - casinos make a lot of money at an activity with no direct economic value - but right now you are best served only putting in money you can easily lose.
There are no broker that will survive to close the short, and you need a broker to short.
(Presumably there is a price at which they do, but also at which nobody's remained interested.)
It has been more than 5 years since they were audited. By their own admission, they have 10 billion of their 66 billion dollars in unsecured loans and "other investments".
An org whose entire raison d' etre is to hold money should be pretty open to outside audits. It should actually be a pretty easy audit.
Why have they been foot-dragging so long?
Money is also a giant confidence game. Any human system is that. It’s all made up.
Even for contemporary fiat currencies today this is neither historically nor theoretically true. Currencies gain their value largely from being convenient in settling trades and being a measure of value when calculating costs, risks and profits. Ultimately, it does not really matter what this money is based on e.g. gold, paper or digital information.
For anybody interested in this perspective and in a more general criticism of fiat money I strongly recommend reading "Ethics of Money Production" by Jörg Guido Hülsmann. (1)
(1) https://books.google.de/books/about/Ethics_of_Money_Producti...
Just because we made something up doesn't mean there aren't different levels of stability for that made up model, or different levels of real world results from acting on those models.
I know for my part, I made non-trivial money on Compound shorting MKR, LINK, and UNI (the Uniswap token) with BTC/ETH as collateral.
Or is the whole idea that it's somehow deeply insightful to not make this distinction?
> Still, just over half the collateral on Aave is ETH or stETH, and another 13% is wBTC. Aave’s designed to liquidate positions before the become under-collateralized. Let’s hope that happens fast enough if Tether depegs.
That sounds like you still have counterparty risk with regular crypto going to 0 due to pool liquidation (your collateral is not custodially held, but is in a pool).
(The author reduces this value by levering up a cycle, but that's optional.)
Like the way the short works is you put in $20 usdc, borrow $100usdt, transform it to $120usdc. But those $120usdc can’t leave the platform as otherwise you could just never pay back the $100usdt loan.
Huh? With the way Compound and Aave work, the borrowed amount is already off the platform and can leave and forget about the debt (and collateral). Though you wouldn’t be able to borrow at that ratio.
If you put up 100 USDC, then 85 USDT can be removed from the platform and converted to 85 USDC. So yes, you’re still down 15% in the case of total platform colapse, but not 100%
The fact that it sounds like you have to show 100usdc to do the trade is irrelevant as you can do this trade multiple times to build whatever position. In a traditional equities setting they skip the “show 100 USDC then remove 85 usdc” by just saying that margin maintenance for an 85 usdt short is 15 usdc. When people talk about potential losses it is the 15 USDC that matters, not the 100 USDC you need to cycle (because 100 USDC is more of a mechanical inconvenience of not having a real brokerage offered short, not money at play).
If confidence collapses, tether will collapse and the rest of these ‘defi’ platforms will turn out not to be as decentralised as they thought, as they also depend on the confidence game.
How does "loss of confidence" translate into the smartcontract no longer working, and the USDC not being redeemable for anything of value? Those are completely orthogonal dynamics.
The entire argument is based on this magic thinking of "it will all go up in flames at the same time for the same reason because it's all correlated, man".
That is the exact opposite of the reality (and misses the entire point of the article).
The point is that shorting tether is likely to be enormously profitable, but you won't be able to collect your profits
This is because no well capitalized and stable broker or exchange will touch Tether, and the only counterparties who might lend you the Tether to short are extremely likely to go bankrupt when Tether does collapse.
So, you'll put your millions of dollars at risk on deposit, pay your interest, and end up with a $100 million or whatever profit, owed to you by a now-bankrupt exchange, so your profit will never arrive at your bank account, and your best case is suing the husk of a bankrupt exchange whose shady owners absconded to a non-extradition country.
The trade is bad because only disreputable and insufficiently capitalized counter-parties will touch it, not because Tether is great in any way.
Absolutely not. I think tether is garbage that benefits almost noone except its creators.
I'm just amused by the fact that stability of a bad thing is increased because betting against it is worse than for it.
> The point is that shorting tether is likely to be enormously profitable, but you won't be able to collect your profits.
Hence not profitable at all. :-)
Betting for it is risky, betting against it is risky. Maybe that's a huge part of its stability? Like stability on the edge of the knife held over lava pit. Nobody benefits from going to either side despite equilibrium being uncomfortable?
Also the question is, do people really want to call them on their promises. That's another thing noone would benefit from.
The most likely theory at this point is that most of it is FTX-style IOUs from other crypto companies marked at absurd pre -crypto winter valuations, which will collapse like a house of cards the instant they are touched or even exposed to light.
what's your source for that? Tether itself admitted that isn't true: https://cointelegraph.com/news/tether-to-reduce-secured-loan...
They announced they are curbing this activity so maybe it brought them more loss than gain?
They still probably didn't leak mucj tether this way. But I now see that it's not that 66 bln of dollars changed hands, but most of it in crypto valued at bull market prices. So if people wanted to cash out into dollars they would probably collapse. But why would people want to cash out into dollars en masse and pay tax on that?
And if they want to cash out into crypto there's no problem becuse the crypto is cheap now so tether doesn't need to give away much for each USDT they redeem.
Because they think Tether will collapse. It will happen slowly, then all at once.
Because they see it as a likely loss, and would rather get some return than nothing. A taxable gain is always better than a loss.
Even if the gains were in other crypto and are now being cashed out via Tether to $USD, it's better to realize those gains in $USD and pay 0%, 15%, or 20% capital gains taxes (depending on your income bracket), rather than lose it all due to Tether becoming worthless. Manageable but certain cost vs unpredictable likely total loss.
Yes I agree that those forces are minimal for Tether (and crypto in general) vs other investments. But it seems at most like a minor second- or third-order effect; technically existing but not practically moving (or stabilizing) the markets.
I'll take the long side of the Tether bet for 30% a year (I'll buy one-year Tether forwards at 70c).
I'm not as creditworthy as Goldman, but for small amounts, it's pretty close. I could collateralize the trade with my house, and in any case I don't have the kind of correlated portfolio that means if Tether goes bust, I can't pay you. But enough about me - some trader at Goldman will absolutely do the same deal! Maybe they can even do it for 72c.
There is a market-clearing price for this trade if done between two creditworthy parties. I don't know what that price is because there isn't a big public market for it, but if you shop the trade around, you'll find a price.
The people bemoaning they can't short Tether mean they can't short it at what looks like it should be the right price, say, paying 5% a year to borrow it. But that's not the right price! That's the price that already includes you taking a lot of wrong-way counterparty risk. Against Goldman, the price is 20% or 30% or something, and you can do the trade, but you don't want to.
So the fair price of one-year Tether forwards is 75c or whatever, but the spot price is clearly $1.00. How do you reconcile this in financial markets terms, that the prices don't converge? Same reason other commodity futures might have backwardation - holding Tether provides some value to its owners. Like having steel today allows you to build a skyscraper and start collecting rent, so spot steel trades higher than future steel if the construction business is good. In Tether's case, that value is the freedom to participate in other crypto trades, or perhaps to escape even riskier assets in China, or something else.
> What does that mean? Essentially that we’re exposed to the risk of something going wrong with Aave itself and not being able to get our money back. (Aave’s own explanation of its risks is here.) In order to withdraw our money from Aave, Aave actually needs to have the money we want to withdraw. When we deposited USDC collateral on Aave, Aave lends out that USDC to other users who deposit their own collateral on Aave. At the time of this writing, about 53% of Aave’s USDC is lent out.
Author states that they only have "a couple hundred dollars" risked on this trade. Seems that they're just looking to win Internet points by being able to say that they shorted Tether.