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Shorting USDT

I use aave to borrow usdt against my collateral and buy more eth and btc with my borrow usdt. In a way im shorting USDT here, since the collapse of usdt would make the loan I have to pay back minimal. Of all the top stables that can collapse, i’d say tether is the most likely. If USDT doesnt collapse, well then its ok cuz its just a normal loan then. This is why I went with this game plan of mine.

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I am now realizing tho that the variable apy of borrowing aave can increase RAPIDLY. It’s at 19% as I type this. That being said it make me wonder if this game plan of mine really isnt shorting usdt at all. Lets say USDT price falls to 0.9 USD. People will pull out their deposited USDT on AAVE, the APY of USDT borrowing will increase drastically since supply has gone down, and maybe it will hit 50%, or 100%, or 300%, or 1000%. I have no idea.

I’m writing to ask the experienced experts on here. Is the game plan of borrowing USDT on aave to short it useless since the variable APY will just screw you as USDT price falls (if that ever happens). Thank you!

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Note: if it is, I’d rather just borrow in DAI or USDC to avoid the high borrow APY

What do you think?

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42 Comments

  1. To me, the gain from this strategy in realistic scenarios seems really small. If Tether collapses, the entire crypto market is going to go through a similar crash just due to how heavily USDT is used.

    Another possible way to approach it, is to hold reserves of some other stablecoin. My expectation is that money in USDT would flow to USDC, Dai, etc. Those prices will inflate and you can buy the carnage.

  2. You should think bigger. Lets say the price of USDT falls to 50 cents and you originally borrowed 10K worth – that means now what you borrowed is 5K worth. However, as you alluded to the APY will shoot up, but you have to think about what kind of APY that would go to for you to start losing money on your short position. That number would have to be in the thousands.

  3. >Lets say USDT price falls to 0.9 USD. People will pull out their
    deposited USDT on AAVE, the APY of USDT borrowing will increase
    drastically since supply has gone down, and maybe it will hit 50%, or
    100%, or 300%, or 1000%. I have no idea.

    Hopefully you can pay off the loan right away though. Tether collapes > rates shoot up > you pay off the loan with cheap tether and only paid high borrowing rates for a day or two.

  4. My understanding is that if Tether drops the APY would go up, but you could then sell a small portion of your btc or Eth to put off the whole loan.

    The good thing is that if Tether drops it’ll be very quickly (such as an audit showing they haven’t matched 1:1 usd:usdt which means you’ll be able to pay it off before getting hit with the high APY. Is that right?

  5. This increase in borrowing APY happens occasionally. Look at the historical graph. This also happens to DAI and USDC, tho not as much as USDT. Not sure tho if it can go to +50% as you’ve said. If it de-pegs down to $0.90 I’ll instantly pay my loans.

  6. I feel like the lower price would offset the high interest by far. Unless you somehow missed the news that Tether bit the dust for a couple weeks or more and didn’t pay the loan back. It would be headlines everywhere though, so you’d have to be in a coma not to notice.

    Not financial advice lol

  7. Really interesting question! If USDT looses its peg, it’s likely lenders would withdraw it to instadump it to other assets. This would cause the borrowing rate to skyrocket. To add fuel to the fire you can’t borrow against USDT so lenders would have lower liquidation risk (causing them to dump faster).

    I don’t know the answer of your question. Most probably it depend on the maximum borrowing rate. I don’t know the maximum rate at USDT (lended) = USDT (borrowed). Is it 100%? Higher? What even happens if collateral in an specific asset equals the total of borrowed? Can lenders even withdraw then or would that be a black swan where AAVE stakers take the risk?

  8. One unique thing about the USD pegs is that they try to stay close to their peg, these kinds of scenarios provide opportunities for lenders to make some buck from the market as the window for this is usually short.

    So if it goes 50%, it might suggest that USDT seems to deviate far from its peg.

  9. >I am now realizing tho that the variable apy of borrowing aave can increase RAPIDLY. It’s at 19% as I type this. That being said it make me wonder if this game plan of mine really isnt shorting usdt at all. Lets say USDT price falls to 0.9 USD. People will pull out their deposited USDT on AAVE, the APY of USDT borrowing will increase drastically since supply has gone down, and maybe it will hit 50%, or 100%, or 300%, or 1000%. I have no idea.

    If USDT de-pegs and people are pulling out their USDT collateral from aave, it probably means they’re trying to panic sell it which means it’ll go down further.

    That means you can buy it back for much cheaper. I’d say a tether de-peg is pretty unlikely though and if it did happen, your eth and btc will probably go down 80-90%.

  10. Shorting Tehter by borrowing it is a nice strat like you’ve pointed out. However, it seems you’re not the only one thinking that way. I also preferred to take out the a loan in Tether against Dai collateral. I put the Tether into Curve stablecoin pool. So if Tether fails and curve becomes filled with only tethers. I could pay off the loan easy. However, the APYs went up quite high (but usually only for a few days tops each time), so I felt like this strat was probably just too crowded. Since borrowing tether could be better than borrowing other stablecoins in the event of tether depegging, it has higher demand and should have worse overall APYs

    Tldr; it’s a good strat but many others are thinking the same way. This in turn increases tether borrowing demand and apy. It depends on whether you think the high apy surges (usually) are worth it.

  11. Why is there a general consensus that there is a greater risk of tether depegging compared to other stablecoins like dai/usdc? In the event that tether depegs and drops to say 0.50, will that possibly lead to the depegging on the other stablecoins as well?

  12. Poor idea to short USDT. People new to crypto have been trying to short it since it began, and therefore are paying higher premiums. If USDT really crashed gas price would skyrocket to absurd levels, the entire crypto market would dump to hell, other stablecoins would lose peg, USDT margined futures would collapse, etc. Between all this you’re probably losing money even if USDT collapses and your short is successful. If you just wanna borrow stable coins against your BTC and ETH that’s cool but know that you’re likely paying a higher premium with USDT since so many people are borrowing it for shorts.

    Edit: I’m actually confident enough that Tether will maintain peg I’ve taken the other side of this trade with my stablecoin stack. Deposited USDT in a yield aggregator that primarily loans the USDT on various platforms, and then leveraged that stable position in a loop.

  13. Upvoting and saving this post – I like the way you think. Hopefully someone more knowledgeable comes around gives their take, cuz to me it sounds like a pretty smart idea

  14. I’m quite new to the cryptoverse, but nevertheless here are my two cents on shorting USDT: I understand Tether is quite shady, but it seems quite unlikely to dump anytime soon. The last six years it held its peg pretty well and central exchanges would also try to limit their exposure to Tether if it really were such a big hazard.

    I guess it still makes sense to avoid it, but I wouldn’t gamble on a dump. Especially since borrowing rates can go up pretty quickly, as you already mentioned yourself.

    I’d rather invest in some other things, e.g. some coins you’re bullish on, Stable LPs, promising protocols etc.

    As mentioned in the beginning, I’m also pretty much a noob, but still wanted to share my point of view.

  15. shorting USDT using aave is a bad idea, even using stable APY is a bad idea, as the usage rises above 99.9% aave doesn’t value stable APYs anymore, and will forcefully update it !

    if you really wanna do that, it’s better to do it using a TradFi platform, [coinloan.io](https://coinloan.io) or celsius (i prefer [coinloan.io](https://coinloan.io) for higher TVL and also easier management and support).

    saying that the APY doesn’t matter as you’ll pay your loans instantly, also doesn’t work that way, since markets can stay irrational longer than we can stay solvent :-), there might be a big fud that increases the demand for borrowing USDT, let’s imagine everyone wants to follow this strategy, and then USDT demand shoots to the moon, and APY goes to high 30s or even 50s, and it lasts for weeks and weeks, and in the end, the peg stays as it was, and things get back to normal.

  16. There are probably opportunities to safely short tether, but they all come at a cost, however with tether being a ticking time bomb it could very well be worth it.

    If you want to long something by borrowing a stable anyway and it’s between borrowing tether or another stable, I’d pick tether any day at a similar apy/cost since if it drops you’d pocket the difference.
    the yearly apy/cost would be negligible in the few hours or even days it may take you to react, obviously if your able to set up some kind of bot to automate your strategy it would be even better.

    That being said tether should have crashed years ago, any audit showing they have 1% cash reserves or whatever doesn’t seem to matter, so it may take a long time before something finally happens, and you’d probably be losing out on some potential gains in the meantime trying to short it.

  17. You should also consider that there are many arbitrage bots stabilising the price of stablecoins via Curve Finance, so if tether collapses, every other stable coin might be affected as well.

  18. It’s a good idea BUT USDT has mechanism to make it stable and it’s heavily used for remittance (read people trust it to be stable) either of this (mechanism/trust) can fail but failing both will be highly unlikely so, short something else.

  19. I am pretty sure that ETH and BTC would collapse much harder when USDT off peg to, say, 0.97. Then more likely than not, your position will be liquidated. This is an impossible drinking-ones-own-blood-to-energise strategy.

  20. Deposit usdc, get a loan for usdt, trade for more usdc and deposit again. Continue cycle until desired health factor, then wait for tether to bust. Assuming rates for usdt go back down, you should have positive cash flow. Wouldn’t put ETH, btc, etc as collateral for now since we’re likely Falling

  21. Fractional reserve is the standard in our traditional finance, you might as well short the banks instead.
    “Banks must hold that money as cash in vaults or as deposits with Federal Reserve banks. Until recently, for financial institutions with more than $124.2 million in liabilities, the reserve requirement was **10%**. In other words, those banks can lend $90 of every $100 their customers deposit. The Federal Reserve made history on March 26, 2020, when it dropped reserve requirements to **zero**”

    imo that is not ever going to happen, but as usual, difficult to say especially the crypto space has gone through so many different crashes in recent times.

  22. Even when tether was audited and found to have much less reserve than it stated, and the backing of every tether was no where what it was assumed (dec 2017), it didn’t collapse. It did contribute to the market crashing then, because investors worried about liquidity in the market. But tether didn’t collapse. It’s in a much stronger position now, I highly doubt your scenario would play out.
    Also throughout its history, if I’m not mistaken, the lowest it got was 0.96

  23. You fellas to check out the kucoin community chain. Just went live 2 weeks ago. Much faster than the bsc network and good entry points. Native token to the kcc is Kcs which can be purchased on kucoin. Definitely search on $kudo $koffee
    (Koffeeswap and kudoge)

  24. Yes , you are basically shorting USDT by taking a loan and using that to purchase more crypto. Should this happen however , it would drag the crypto market down with it anyways so it’s not like you’d make up the difference, you’d probably lose even more.

    Also, when you borrow, you are loaning your crypto assets to borrow the USDT. IF the price drops and it isn’t a stable coin anymore and causes a bank run , I highly doubt these DeFis wouldn’t liquidate the collateral you gave to pay their investors and leave you bag holding the USDT anyways.

    Betting on a USDT liquidation event isn’t the answer to profits. Your increased profit margins should come from borrowing the lowest APR stable coin you can find and hope your gains outpace the interest rate.

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