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All the people mindlessly saying "counterparty risk" clearly didn't read the article. He has thought about this carefully. His counterparty in this case is Aave
by darawk 4y ago
All the people mindlessly saying "counterparty risk" clearly didn't read the article. He has thought about this carefully. His counterparty in this case is Aave, a DeFi smart contract. Smart contracts famously get hacked frequently, of course, but Aave has been around a long time, and it's probably reasonable to be somewhat confident in its security, at this point.
The second thing you have to worry about is Aave's liquidation mechanism: under the market conditions implied by a Tether collapse, will Aave's liquidation mechanisms function efficiently and effectively? The answer to that question would depend on exactly how the collapse unfolded (i.e. how quickly it was certain, the degree of insolvency, how much the market moved how fast, etc). However, it is important to note that the only thing at risk here for him is the profit from his short plus the collateral factor haircut, not the entire principal. The trade he did was to deposit $x usdc on Aave, borrow $y usdt, and then sell that usdt back to usdc. That means he physically has CF * principal USDC in his possession, and no matter what happens, Aave can't take that away from him. Now, he looped this twice, so it's actually CF^2 * USDC that he has, but that's still not that big a risk.
Finally, he has to worry about the solvency of USDC. However, USDC is regulated in the US and has fairly real audits. Almost nobody seriously thinks USDC is insolvent. I think there is very little to worry about here.
Personally, I think Tether is pretty obviously at least mostly solvent, and I think shorting it is a dumb trade that will lose him money. But he's going to lose money paying the interest, not losing his principal. People have been predicting a Tether collapse for literally years now, and despite all the market stress and volatility which should have clearly exposed their supposed fraud, they're still standing, and the peg trades with solid liquidity at $1 today.
My own theory of what's actually going on here is that Tether is intentionally obtuse, because it allows them to make seignorage profits against their own users. If you issue a stablecoin and you know you are solvent, then you can hint to the market that maybe you're not, and buy (your own) assets that you know are worth $1 at a discount, making a tidy profit in the process. I think this is their real strategy, always has been, and they've gotten very rich doing it. It's possible they've been under-collateralized at various times, and maybe are even slightly so now, but I seriously doubt they are currently insolvent to the degree people like this think.
- hiq 4y ago> My own theory of what's actually going on here is that Tether is intentionally obtuse, because it allows them to make seignorage profits against their own users. From https://www.bloomberg.com/news/articles/2022-12-14/hedge-funds-drawn-to-crypto-s-big-short-tether-after-ftx-reveals-cracks https://www.bloomberg.com/news/articles/2022-12-14/hedge-fun...: > Tether concealed the loss of more than $850 million of reserves to a Panamanian entity called Crypto Capital Corp. as recently as 2018, the New York Attorney General found. In a separate case, the Commodity Futures Trading Commission found Tether didn’t have enough fiat reserves to back circulating tokens more than two-thirds of the time, in a period between 2016 and 2018. so it's more than just being obtuse. I don't think they're playing with the trust of their own stablecoin to get cheap USDT, it'd be better for them to be more trustworthy and have more USD to invest in safe investments with low interests, but they're probably losing some market share to more trustworthy (US-based) stablecoins because of how shady they look.
- darawk 4y ago> I don't think they're playing with the trust of their own stablecoin to get cheap USDT, it'd be better for them to be more trustworthy and have more USD to invest in safe investments with low interests, but they're probably losing some market share to more trustworthy (US-based) stablecoins because of how shady they look. I think as of today that is a true statement, because yields on safe investments are now so high. But for the last decade I think it has been quite false. If Tether had only been investing in treasuries and had no other revenue strategy for the past 10 years, their profits would not be nearly as high as if they had pursued the strategy I suggested. And remember, for many years they were literally the only game in town, they had no competition to worry about.
- notahacker 4y ago> If you issue a stablecoin and you know you are solvent, then you can hint to the market that maybe you're not, and buy (your own) assets that you know are worth $1 at a discount, making a tidy profit in the process This doesn't seem like a particularly great strategy, compared with the alternative of running a stablecoin and exchange that doesn't look dodgy (or indeed an actual fraud which is at least insanely lucrative). Don't think earning the spread on deviations from the peg (which Tether-believers compete with you for) is really all that great compared with the returns from having a lot more trusting customers paying a lot more in fees to use your exchange and the returns from safely investing a lot more USD given to you in exchange for Tether. And that's before taking into account the downsides of running something that looks like a criminal operation, like dealing with investigators