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I think the claim is that usdt crash will be highly correlated with all other crypto going to zero, so any crypto collaterized counterparty will fail. Ability t

by ivalm 4y ago

I think the claim is that usdt crash will be highly correlated with all other crypto going to zero, so any crypto collaterized counterparty will fail. Ability to payout USDT short relies on confidence in other crypto.

SilasX 4y ago
I got that part. But the claim here would be that your USDC collateral would go to zero. Yes, USDC is "a crypto" and if you lump it in with all crypto, you will casually think it will magically go to zero too, despite being backed with non-crypto assets and a level of conventional oversight from the financial markets. Or is the whole idea that it's somehow deeply insightful to not make this distinction?
- ivalm 4y ago
  You’re right that if the short is entirely usdc collaterized. But reading the blog: > 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).
  - SilasX 4y ago
    This comment[1] addresses counterparty risk better than I can: the risk is just that, in a crash, the collateral backing the USDC loans can't be liquidated fast enough. But remember, you're already borrowing 80% of the collateral and turning it back into USDC. Even if all of crypto dies tomorrow you keep that much, that's just a 20% loss. Further mitigated by however much of the collateral for the USDC loans can be converted into USDC. (The author reduces this value by levering up a cycle, but that's optional.) [1] https://news.ycombinator.com/item?id=34302128 https://news.ycombinator.com/item?id=34302128
    - ivalm 4y ago
      The money at play is the collateral he put up to maintain the position. Even though it is in USDC it is on the exchange which has pool liquidation. If the collateral isn’t on the platform then what would prevent people from just pulling usdc and never paying back their borrowed amount. 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.
      - SilasX 4y ago
        > 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%
        ivalm 4y ago
        It sounds exactly how I described in terms of risk. Effectively you are putting up 15 USDC for maintaining an 85 USDT short. Your money at play is 15 USDC, and you can lose 100% of that amount. 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).
        SilasX 4y ago
        Okay, but none of that translates into the "unusually high counterparty risk" you were talking about before. That's just regular unprofitability risk.

by ivalm 4y ago

SilasX 4y ago

I got that part. But the claim here would be that your USDC collateral would go to zero. Yes, USDC is "a crypto" and if you lump it in with all crypto, you will casually think it will magically go to zero too, despite being backed with non-crypto assets and a level of conventional oversight from the financial markets. Or is the whole idea that it's somehow deeply insightful to not make this distinction?

ivalm 4y ago
You’re right that if the short is entirely usdc collaterized. But reading the blog: > 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).
- SilasX 4y ago
  This comment[1] addresses counterparty risk better than I can: the risk is just that, in a crash, the collateral backing the USDC loans can't be liquidated fast enough. But remember, you're already borrowing 80% of the collateral and turning it back into USDC. Even if all of crypto dies tomorrow you keep that much, that's just a 20% loss. Further mitigated by however much of the collateral for the USDC loans can be converted into USDC. (The author reduces this value by levering up a cycle, but that's optional.) [1] https://news.ycombinator.com/item?id=34302128 https://news.ycombinator.com/item?id=34302128
  - ivalm 4y ago
    The money at play is the collateral he put up to maintain the position. Even though it is in USDC it is on the exchange which has pool liquidation. If the collateral isn’t on the platform then what would prevent people from just pulling usdc and never paying back their borrowed amount. 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.
    - SilasX 4y ago
      > 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%
      - ivalm 4y ago
        It sounds exactly how I described in terms of risk. Effectively you are putting up 15 USDC for maintaining an 85 USDT short. Your money at play is 15 USDC, and you can lose 100% of that amount. 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).
        SilasX 4y ago
        Okay, but none of that translates into the "unusually high counterparty risk" you were talking about before. That's just regular unprofitability risk.