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".
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.